2001 PRE-WEEK REVIEW NOTES

TAXATION
By
Prof. Abelardo T. Domondon
GENERAL PRINCIPLES OF TAXATION
*** 1. When may the power to tax include the power to destroy? When is exercise of the
power to tax not destructive of taxpayers property?

SUGGESTED ANSWER:
The power to tax includes the power to destroy, where the tax is a valid tax. This is so
because a taxpayer could not seek the nullification of the valid tax solely upon the premise that the
tax will impoverish him.
The exercise of the power to tax is not destructive of taxpayers property where it is an
invalid tax, which violates the inherent or constitutional limitations. This is so because there is a
sympathetic court that shall come to the succor of the taxpayer and declare such tax as invalid.
2. Discuss the concept of interpretation of tax laws as differentiated from the concept
of interpretation of tax exemption laws.
SUGGESTED ANSWER: A tax cannot be imposed unless it is supported by the clear and
express language of a statute. (Davao Gulf Lumber Corporation v. Commissioner of Internal
Revenue, et al., 293 SCRA 76, 88) In short, in case of doubt, tax laws must be construed strictly
against the State and liberally in favor of the taxpayer. This is because taxes, as burdens which
must be endured by the taxpayer, should not be presumed to go beyond what the law expressly
and clearly declares. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et
al., 293 SCRA 92, 99)
On the other hand, when a tax is unquestionably imposed, a claim of exemption form tax
payments must be clearly shown and based on language in the law too plain to be mistaken.
(Davao Gulf Lumber Corporation, supra)
NOTES AND COMMENTS: The above concepts are also the holding in (Commissioner of
Internal Revenue v. Court of Appeals, et al., G.R. No. 107135, prom. February 23, 1999) This is the
CENVOCO case.
Furthermore, a reversal of a BIR ruling favorable to a taxpayer would not necessarily create
a perpetual exemption in his favor, for after all the government is never estopped from collecting
taxes because of mistakes or errors on the part of its agents. (Ibid.)
*** 3. What do you understand by the inherent and constitutional limitations as being
restrictive of the otherwise unlimited and plenary power of taxation?

SUGGESTED ANSWER:
The inherent and constitutional limitations to the power of taxation are safeguards which
would prevent abuse in the exercise of this otherwise unlimited and plenary power.
*** 4. What are the inherent limitations to the power of taxation?

SUGGESTED ANSWER:
a. PUBLIC PURPOSE. The tax revenues must be utilized for the benefit of the community
in general. An alternative meaning is that tax proceeds should be utilized only to attain the
objectives of government.
b. NO IMPROPER DELEGATION OF LEGISLATIVE AUTHORITY. The power of taxation is
exercised by the legislature whose members are the mere delegates of the people. This power
could not therefore be delegated by the legislature to other departments of government, like the
executive.
c. TERRITORIALITY. The power to tax should be exercised only within the territorial
boundaries of the taxing authority.
d. GOVERNMENT EXEMPTION SHOULD BE RECOGNIZED. This is so in order to reduce
the amount of money the government is handling. There is verity in the maxim, For the
government, exemption is the rule and taxation is the exception.

e. COMITY. Respect should be accorded to other sovereign nations. The power of taxation
is a high prerogative of sovereignty. The properties of other sovereign nations within the territory of
the taxing authority should not be subject to taxation as a measure of respect to a co-equal.
*** 5. What are the constitutional limitations on the power of taxation?

SUGGESTED ANSWER:
*** GENERAL OR INDIRECT CONSTITUTIONAL LIMITATIONS:
a. Due process clause;
b. Equal protection clause;
c. Freedom of the press;
d. Religious freedom;
e. Non-impairment clause;
f. Law-making process:
1) Bill should embrace only one subject expressed in the title thereof;
2) Three (3) readings on three separate days;
3) Printed copies in final form distributed three (3) days before passage.
g. Presidential power to grant reprieves, commutations and pardons and remittal of fines
and forfeiture after conviction by final judgment.
*** SPECIFIC OR DIRECT CONSTITUTIONAL LIMITATIONS:
a. No imprisonment for non-payment of a poll tax;
b. Taxation shall be uniform and equitable;
c. Congress shall evolve a progressive system of taxation;
d. All appropriation, revenue or tariff bills shall originate exclusively in the House of
Representatives, but the Senate may propose and concur with amendments;
e. The President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does
not object;
f. Delegated power of the President to impose tariff rates, import and export quotas,
tonnage and wharfage dues:
1) Delegation by Congress
2) Through a law
3) Subject to Congressional limits and restrictions
4) Within the framework of national development program.
g. Tax exemption of charitable institutions, churches, parsonages and convents
appurtenant thereto, mosques, and all lands, buildings and improvements of all kinds
actually, directly and exclusively used for religious, charitable or educational purposes;
h. No tax exemption without the concurrence of majority vote of all members of Congress;
i. No use of public money or property for religious purposes except if priest is assigned to
the armed forces, penal institutions, government orphanage or leprosarium;
j. Money collected on tax levied for a special purpose to be used only for such purpose,
balance if any, to general funds;
k. The Supreme Court's power to review judgments or orders of lower courts in all cases
involving the legality of any tax, impose, assessment or toll or the legality of any penalty imposed in
relation to the above;
l. Authority of local government units to create their own sources of revenue, to levy
taxes, fees and other charges subject to guidelines and limitations imposed by Congress
consistent with the basic policy of local autonomy;
m. Automatic release of local government's just share in national taxes;
n. Tax exemption of all revenues and assets of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purposes;
o. Tax exemption of all revenues and assets of proprietary or cooperative educational
institutions subject to limitations provided by law including restrictions on dividends and
provisions for reinvestment of profits;
p. Tax exemption of grants, endowments, donations or contributions used actually,
directly and exclusively for educational purposes subject to conditions prescribed by law.
6. Republic Act No. 7227 created the Subic Special Economic Zone (SSEZ), and
provides that the SSEZ shall be managed as a separate customs territory with such
incentives as tax and duty-free importations of raw materials, capital and equipment. It
further provides that no taxes, local and national, shall be imposed within the SSEZ, but in
lieu thereof, 3% of the gross income earned by businesses therein shall be remitted to the
National Government with 1% each to the local government units affected by the declaration
of the zone in proportion to their population area and other factors.
In addition, a
development fund of 1% of the gross income earned by all businesses within the SSEZ shall

be utilized for the development of municipalities outside Olongapo City and the Municipality
of Subic and other municipalities contiguous to the base areas.
On June 10, 1993, President Ramos issued Executive Order No. 97 clarifying that tax
and import duty-free importations shall apply only to raw materials, capital goods and
equipment brought in by business enterprises in the SSEZ. On June 19, 1993, President
Ramos issued Executive Order No, 97-A specifying that the secured areas that shall be
completely tax and duty-free in the SSEZFPZ consists of the presently fenced-in former
Subic Naval Base.
Executive No. 97-A is challenged for being violative of the equal protection of the law
clause because of its bias in favor of big investors. Is there merit in the challenge ? Explain
briefly.
SUGGESTED ANSWER: No. Equal protection of the law clause is subject to reasonable
classification.
If the groupings are characterized by substantial distinctions that make real
differences, one class may be treated and regulated differently from another. The classification
must also be germane to the purpose of the law and must apply to all those belonging to the same
class.
*** Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the
purpose of the law, (3) not be limited to existing conditions only, and (4) apply equally to all
members of the same class.
In issuing E.O. No. 97-A delimiting incentives within the confines of the former Subic military
base, the President reasonably made a classification that is germane to the purpose of Republic Act
No. 7227. The purpose of Republic Act No. 7227 is to accelerate the conversion of military
reservations into productive uses. It was reasonable for the President to have delimited the
application of some incentives to the confines of the former Subic military base. The classification
is therefore germane to the purposes of the law.
There are substantial differences between big investors being enticed to the secured area
and the business operators outside that are in accord with the equal protection clause that does not
require territorial uniformity of laws. Of course the outsiders, possessing the requisite investment
capital can always avail of the same benefits by channeling their resources or business operations
into the fenced-off free port zone.
The classification set forth by E.O. No. 97-A does not merely apply to existing conditions. As
laid down in R.A. No. 7227, the objective is to establish a self-sustaining, industrial, commercial,
financial and investment center in the area. There will, therefore, be a long-term difference
between such investment center and the areas outside it.
The classification applies equally to al the resident individuals and businesses within the
secured area. The residents, being in like circumstances o contributing directly to the
achievement of the end purpose of the law, are not categorized further. Instead, they are similarly
treated, both in privileges granted and obligations required. (Tiu, et al., v. Court of Appeals, et al.,
G.R. No. 127410, January 20, 1999)
7. On July 1, 1993, or a month after the enactment and two days before the effectivity
of Republic Act No. 7654, the BIR issued RMC No. 37-93 which considered Hope Luxury,
Premium More and Champion cigarettes being manufactured by Fortune Tobacco
corporation as locally manufactured cigarettes bearing a foreign brand subject to the higher
55% ad valorem tax on cigarettes.
The following day, on July 2, 1993, at about 5:50 p.m., the BIR sent via fax a copy of
RMC No. 37-93 to Fortune Tobacco but was addressed to no one in particular. On July 15,
1993 Fortune Tobacco received, by ordinary mail, a certified xerox copy of RMC No. 37-93.
Fortune Tobacco now claims that its constitutional right to due process was violated
because there was no hearing before BIR issued RMC No. 37-93. Do your agree ? Explain.

SUGGESTED ANSWER:
Yes. There was a violation of Fortune Tobaccos right to due process.
BIR issued RMC No. 37-93 for the purpose of placing Hope Luxury, Premium More and
Champion within the scope of the amendatory law and subject them to the increased tax rate.
In so doing, the BIR did not simply interpret the law, it issued a legislative rule which is in the
nature of subordinate legislation, designed to implement a primary legislation by providing the
details thereof. In the same way that laws must have the benefit of public hearing, it is generally
required that before a legislative rule is adopted there must be a hearing and publication as
required under the Administrative Code.
On the other hand, if what is issued is merely an interpretative rule (which is not the rule
issued in this case),no hearing or publication is required since an interpretative rule is designed
merely to provide guidelines of the law which the administrative agency is in charge of enforcing.
(Commissioner of Internal Revenue v. Court of Appeals, et al., 261 SCRA 236 )

8. It is contended that Expanded Value-Added Tax is violative of the constitutional

rule that taxes should be uniform and equitable. It is likewise advanced that the EVAT is
oppressive, discriminatory, and unjust. How were these objections disposed of in the
case of Tolentino v. Secretary of Finance and companion cases, 249 SCRA 628 (1995) ?

SUGGESTED ANSWER:
*** a. It is inherent in the power to tax that the state be free to select the subjects of taxation
and it has been repeatedly held that inequalities which result from a singling out of one particular
class for taxation, or exemption infringe no constitutional limitation. Thus, the EVAT on certain
goods and services only, but not on others, do not violate the rule on uniformity and equitableness.
*** b. Equality and uniformity of taxation means that all taxable articles or kinds of property of
the same class be taxed at the same rate. The taxing power has the authority to make reasonable
and natural classifications for purposes of taxation. To satisfy the requirement of uniformity and
equitableness, it is enough that the statute or ordinance applies equally to all persons, forms and
organizations placed in a similar situation.
c. The EVAT is uniform because the tax is applied similarly on all goods and services sold to
the public, which is not exempt, at the constant rate of 0% or 10%.
d. The EVAT is equitable because it is imposed only on sale of goods and services by
persons engaged in business with an annual gross sales as determined by the law.
Small corner sari-sari stores are consequently exempt from its application. Likewise exempt
from the tax are sales of farm and marine products. Thus, the cost of basic food and other
necessities, spared as they are from EVAT, are expected to be relatively lower and within the reach
of the general public.
9. On August 5, 1998, BIR agents acting upon a regularly issued Mission Order
examined the books of account of various jewelers engaged in the manufacture of jewelry
and allied undertakings were examined and investigated for excise tax purposes. Among
these firms were Hans, Miladay, Mercelles, etc.
Subsequently, the jewelers and their association filed with the Regional Trial Court a
petition for declaratory relief praying that certain provisions of the NIRC imposing 20%
excise tax on jewelry, pearls and other precious stones, and provisions of the Tariff and
Customs Code imposing three to ten percent (3% to 10%) tariff and customs duty on natural
and cultured pearls and precious or semi-precious stones, be declared unconstitutional and
null and void.
The jewelers likewise presented an exhaustive study on the tax rates on jewelry levied
by different Asian countries.
The trial court declared the questioned provisions as inoperative and without force
and effect insofar as the jewelers are concerned. The trial court made the observation that
indeed government tax policy treats jewelry as non-essential items, and therefore, taxed
heavily; that the present tariff and tax structure increase manufacturing cost and renders the
local jewelry manufacturers uncompetitive against other countries. Was there legal basis for
the trial court's declaration ? Explain.
SUGGESTED ANSWER: No. There was no legal basis for the following reasons:
a. The trial judge encroached upon matters properly falling within the province of legislative
functions. In making the aforesaid observations, the trial judge overlooked the fact that such
matters are not for him to decide. There are reasons why jewelry, a non-essential item, is taxed as
it is in this country and these reasons, deliberated upon by the legislature are beyond the reach of
judicial questioning.
b. The trial court is not the proper forum for the ventilation of the issues raised by the
jewelers. It is the legislature to which relief must be sought, because with the legislature primarily
lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects)
and situs (place) of taxation. The judiciary cannot freely delve into those matters which, by
constitutional fiat, rightly rest on legislative judgment.
c. The tax rates of other countries should not be used as a yardstick, in determining what
may be the proper subjects of taxation in our own country. It should be pointed out that in imposing
the aforementioned taxes and duties, the State, acting though the legislative and executive
branches, is exercising its sovereign prerogative. It is inherent in the power to tax that the State be
free to select the subjects of taxation, and it has been repeatedly held that, "inequalities which result
from a singling out of one particular class of taxation, or exemption, infringe no constitutional
limitation." (Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA 617)
*** 10. A fixed annual license fee on those engaged in the business of general enterprise
was also imposed on the sale of bibles by a religious sect. Is this valid ?
SUGGESTED ANSWER: No, because it violates the constitutionally guaranteed freedom of
the press, and of religion..

As a license fee is fixed in amount and unrelated to the receipts of the taxpayer, such a
license fee, when applied to a religious sect is actually imposed as a condition for the free exercise
of religion. A license fee restrains in advance those constitutional liberties of press and religion and
inevitably tends to suppress their exercise.
***11. The EVAT Law imposes a VAT registration fee of P1,000.00 on non-VAT enterprises
which includes among others, religious sects which sells and distributes religious literature.
Is this violative of religious freedom ?
SUGGESTED ANSWER: No. The P1,000.00 VAT registration fee, although a fixed amount
is not imposed for the exercise of a privilege but only for the purpose of defraying part of the cost of
registration.
The registration requirement is a central feature of the VAT system. It is designed to provide
a record of tax credits because any person who is subject to the payment of the VAT pays an input
tax, even as he collects an output tax on sales made or services rendered. The registration fee is
thus more of an administrative fee, one not imposed on the exercise of a privilege, much less a
constitutional right. (Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA
630)
*** 12. Airlines, Inc. was granted a legislative franchise to operate scheduled flight
services between Manila and Cebu and vice-versa. It was subject to a franchise tax of 2%
qualified by the magic words, which shall be in lieu of all taxes. Subsequently,
Congress enacted Republic Act No. 7716, the Expanded Value-Added Tax (EVAT) Law which
imposes a 10% VAT on all services offered by Airlines, Inc.
Airlines, Inc. assails the validity of R.A. No. 7716 for being violative of the nonimpairment clause. It cites Commissioner of Internal Revenue v. Lingayen Gulf Electric
Power Co., Inc., et al., 164 SCRA 27 (1988) where it was held that the imposition of a tax on
franchise holders with the magic words is violative of the non-impairment clause.
The Supreme Court in the Lingayen Gulf case held that charters or special laws
granted by the legislature are in the nature of private contracts. Rule on the contention of
Airlines, Inc.
SUGGESTED ANSWER: The EVAT does not violate the non-impairment clause. Tolentino
v. Secretary of Finance and its companion cases, 235 SCRA 630, 249 SCRA.628, provides the
reasons why there is no violation:
a. Article XII, Sec. 11 of the Constitution provides that the grant of a franchise for the
operation of a public utility is subject to amendment. alteration or repeal by Congress when the
common good requires;
b. Not only existing laws but also the reservation of essential attributes of sovereignty is
read into contracts as a postulate of the legal order;
c. Contracts must be understood as having been made in reference to the possible exercise
of the rightful authority of the government and no obligation of contract can extend to defeat that
authority;
d. A lawful tax on a new subject, or an increased tax on an old one, does not interfere with a
contract or impairs its obligation, within the meaning of the constitution. Even though such taxation
may affect particular contracts, as it may increase the debt of one person and lessen the security of
another, or may impose additional burdens upon one class and release the burdens of another, still
the tax must be paid unless prohibited by the constitution, nor can it be said that it impairs the
obligations of any existing contract in its true and legal sense.
*** 13. Meralco was granted a franchise to operate an electric light and power service in
Calamba, Laguna sometime in 1983 under P.D. No. 551. Under the franchise Meralco pays
2% franchise tax on of its gross receipts and any law to the contrary notwithstanding be in
lieu of all taxes and assessments of whatever nature imposed by any national or local
authority or earnings, receipts, income and privilege of generation, distribution and sale of
electric current. Pursuant to the Local Government Code, the province of Laguna enacted
an ordinance imposing a franchise of 50% of 1% of the gross annual receipts of business
enjoying a franchise realized during the preceding calendar year within the province
including cities located therein. Rule on the validity of the tax ordinance.
SUGGESTED ANSWER: The tax ordinance is valid. Under the now prevailing Constitution,
where there is neither a grant nor prohibition by statute, the tax power must be deemed to exist
although Congress may provide statutory limitations and guidelines. The basic rationale for the
current rule is to safeguard the viability and self-sufficiency of local government units by directly
granting them general and broad tax powers.
The Local Government Code explicitly authorizes provinces and cities, notwithstanding any
exemption granted by any law or other special law to impose a tax on businesses enjoying a
franchise. Indicative of the legislative intent to carry out the constitutional mandate of vesting broad

tax powers to local government units, the Local Government Code has withdrawn tax exemptions or
incentives theretofore enjoyed by certain entities.
In addition, the Local Government Code contains a general repealing clause. The phrase in
lieu of all taxes has to give way to the peremptory language of the Local Government Code which
specifically provides for the withdrawal of all exemptions. The Court has viewed its previous rulings
as laying stress on the legislative intent of the amendatory law whether the tax exemption privilege
is to be withdrawn or not rather than on whether the law can or cannot withdraw the tax exemption,
without violating the constitution. (Manila Electric Company v. Province of Laguna, et al., G.R. No.
131359, May 5, 1999)
The Local Government Code provisions on withdrawal of tax exemptions prescribes the
general rule, viz. the tax exemptions or incentives granted to or presently enjoyed by natural or
juridical persons are withdrawn with the effectivity of the Local Government Code except with
respect to those expressly enumerated. (City Government of San Pablo, Laguna, et al., v. Reyes, et
al., G.R. No. 127708, March 25, 1999)
NOTES AND COMMENTS: It is possible that the Bar question might come from one of the
following areas:
*** Power of local governments to tax. Local governments do not have the inherent power to
tax except to the extent that such power might be delegated to them either by the basic law or
statute. Presently, under Article X of the 1987 Constitution a general delegation of that power has
been given in favor of local government units.
Nevertheless, the fundamental law did not intend the delegation to be absolute and
unconditional, the constitutional objective obviously is to ensure that, while local government units
are being strengthened and made more autonomous, the legislature must still see to it that:
a. the taxpayer will not be over-burdened or saddled with multiple and unreasonable
impositions;
b. each local government unit will have its fair share of available resources;
c. the resources of the national government will be unduly disturbed; and
d. local taxation will be fair, uniform and just. (Manila Electric Company v. Province of
Laguna, et al., G.R. No. 131359, May 5, 1999)
The Manila Electric Company case doctrine reversed the holding in City Government of San
Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999 that municipal corporations
are vested by the Constitution with the power to tax. It may be exercised by local legislative bodies,
no longer by virtue of a valid delegation as before, but pursuant to direct authority conferred by the
Constitution.
The non-impairment clause. Questionable ruling. The non-impairment clause cannot be
invoked by franchises, as franchises are always subject to police power, as well as the power to tax
(?), which like police power cannot be contracted away (?). (City Government of San Pablo,
Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999) The author considers this ruling
to be questionable because the taxing power is inferior to the nonimpairment clause.
While the Court has, not too infrequently, referred to tax exemptions contained in special
franchises as being in the nature of contracts and a part of the inducement for carrying out the
franchise, these exemptions, nevertheless far from being strictly contractual in nature.
*** Constitutional tax exemptions, in the real sense of the term and where the non-impairment
clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in
contracts, such as those contained in government bonds or debentures, lawfully entered into by
them under enabling laws in which the government, acting in its private capacity sheds its cloak of
authority and waives its government immunity.
Truly, tax exemptions of this kind may not be revoked without impairing the obligations of
contracts. A franchise partakes of the nature of a grant which is not beyond the purview of the nonimpairment clause. Indeed the 1987 Constitution like its precursors the 1935 and the 1973
Constitutions is explicit that no franchise for the operation of a public utility shall be granted except
under the condition that such privilege shall be subject to amendment, alteration or repeal by
Congress as and when the common good so requires. (Manila Electric Company v. Province of
Laguna, et al., G.R. No. 131359, May 5, 1999)
The reader should take note of the conflicting doctrines espoused by the Manila Electric case
and the City Government of San Pablo, Laguna case. It may interest the reader also to know that
the ponente in the Manila Electric case is Justice Jose Vitug, while the ponente in the City
Government of San Pablo, Laguna is Justice Minerva Gonzaga-Reyes.
*** 14. What is the concept of double taxation ?
a. MEANING. In its generic sense, this means taxing the same subject or object twice
during the same taxable period. In its particular sense, it may mean direct duplicate taxation, which
is prohibited under the constitution because it violates the concept of equal protection, uniformity
and equitableness of taxation. Indirect duplicate taxation is not anathemized by the above
constitutional limitations.

b. ELEMENTS OF DIRECT DUPLICATE TAXATION:

1) Same
a) Subject or object is taxed twice
b) Taxing authority
c) Taxing purpose
d) Taxing period
2) Taxing all of the subjects or objects for the first time without taxing all
of them for the second time.
If any of the elements are absent then there is indirect duplicate taxation which
is
not prohibited by the constitution.
NOTES AND COMMENTS: There may be a problem on double taxation, including
compensation and set-off.
*** 15. Define international juridical double taxation.
SUGGESTED ANSWER: The imposition of comparable taxes in two or more states on the
same taxpayer in respect of the same subject matter and for identical grounds.
Double taxation usually takes place when a person is a resident of a contracting state and
derives income from or owns capital in, the other contracting state and both states impose tax on
that income or capital. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al.,
G.R. No. 127105, prom. June 25, 1999
*** 16. What are the methods for avoidance of double taxation ? Explain each briefly but
comprehensively.
SUGGESTED ANSWER: The following are the methods of avoiding double taxation:
a. Tax treaties which exempts foreign nationals from local taxation and local nationals from
foreign taxation under the principle of reciprocity.
b. Tax credits where foreign taxes are allowed as deductions from local taxes that are due to
be paid.
c. Allowing foreign taxes as a deduction from gross income.
NOTES AND COMMENTS:
a. Purpose of tax treaties. To reconcile the national fiscal legislations of the contracting
parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More
precisely, the tax conventions are drafted with a view towards the elimination of international
juridical double taxation.
b. Rationale for avoiding double taxation. To encourage the free flow of goods and
services and the movement of capital, technology and persons between countries, conditions
deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate.
*** c. Methods resorted to by a tax treaty in order to eliminate double taxation:
First Method: It sets out the respective rights to tax of the state of source or situs and of the
state of residence with regard to certain classes of income or capital. In some cases, an exclusive
right to tax is conferred on one of the contracting states; however, for other items of income or
capital, both states are given the right to tax, although the amount of tax that may be imposed by
the state of source is limited.
Second Method: The state of source is given a full or limited right to tax together with the
state of residence. In this case, the treaties make it incumbent upon the state of residence to allow
relief in order to avoid double taxation. Two methods of relief are used:
1) The exemption method the income or capital which is taxable in the state of
source or situs is exempted in the state of residence, although in some instances it may be
taken into account in determining the rate of tax applicable to the taxpayers remaining
income or capital.
2) The credit method although the income or capital which is taxed in the state of
source is still taxable in the state of residence, the tax paid in the former is credited against
the tax levied in the latter. (Commissioner of Internal Revenue v. S.C. Johnson and Son,
Inc., et al., G.R. No. 127105, prom. June 25, 1999)
Difference between the exemption method and the credit method. The exemption method
focuses on income or capital itself while the credit method focuses upon the tax. . (Commissioner
of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, prom. June 25, 1999)
*** 17. The RP-West Germany Tax Treaty provides a 10% tax on royalties. but expressly
allows against German income and corporate tax of 20% of the gross royalties paid under
the law of the Philippines. On the other hand the RP-US Tax Treaty does not provide for a
similar tax crediting. Thus, the tax on royalties earned by U.S. firms in the Philippines may
either be of three rates: 25 percent of the gross amount of the royalties; 15 percent when

the royalties are paid by a corporation registered with the Philippine Board of Investments
and engaged in preferred areas of activities; or the lowest rate of Philippine tax that may be
imposed on royalties of the same kind paid under similar circumstances to a resident of a
third state.
May U.S. Corporations claim entitlement to the most favored nation tax rate of 10%
on royalties as provided in the RP-US Tax Treaty in relation to the RP-West Germany Tax
Treaty ? Explain with reasons.
SUGGESTED ANSWER: No. The entitlement of the 10% rate by U.S. firms despite the
absence of a matching credit (20% for royalties) would derogate from the design behind the most
favored nation clause to grant equality of international treatment since the tax burden laid upon the
income of the investor is not the same in the two countries. The similarity in the circumstances of
payment of taxes is a condition for the enjoyment of the most favored nation treatment precisely to
underscore the need for equality of treatment. (Commissioner of Internal Revenue v. S.C. Johnson
and Son, Inc., et al., G.R. No. 127105, prom. June 25, 1999)
NOTES AND COMMENTS:
a. Intention behind adoption of provision on relief from double taxation. The
intention should be considered in the light of the purpose behind the most favored nation (MFN)
clause which is to grant to the contracting party treatment not less favorable than which has been or
may be granted to the most favored among other countries.
The MFN is intended to establish the principle of equality of international treatment by
providing that the citizens or subjects of the contracting nations may enjoy privileges accorded by
either party to those of the most favored nation. The essence of the principle is to allow the
taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the
country of residence of such taxpayer is also a party provided that the subject matter of taxation is
the same as that in the tax treaty under which the taxpayer is liable. (Commissioner of Internal
Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, prom. June 25, 1999)
18. The Expanded Value-Added Tax Law is an indirect tax which may be considered
as regressive in character. It is a fixed tax therefore the lower is the income the taxes that
are paid are proportionately higher. Is this violative of the constitution which mandates that
Congress shall evolve a progressive system of taxation ? Explain.
SUGGESTED ANSWER: There is no violation of the constitutional mandate for the
following reasons:
a. The mandate to Congress is not to prescribe but to evolve a progressive system of
taxation. Otherwise, sales taxes which perhaps are the oldest form of indirect taxes, would have
been prohibited with the proclamation of the constitutional provision. Sales taxes are also
regressive.
b. The Constitution does not really prohibit the imposition of indirect taxes which, like the
VAT, are regressive. The constitutional provision means simply that indirect taxes should be
minimized.
c. Resort to indirect taxes should be minimized but not avoided entirely because it is difficult,
if not impossible, to avoid imposing such taxes according to the taxpayers ability to pay.
In the case of VAT, the law minimizes the regressive effects of this imposition by providing for
zero rating of certain transactions while granting exemptions to other transactions. The
transactions which are subject to VAT are those which involve goods and services which are used
or availed of mainly by higher income groups. (Tolentino v. Secretary of Finance and companion
cases, 249 SCRA 628)
***19. The Constitution requires that all revenue bills shall originate exclusively from the
House of Representatives. Was this violated when the EVAT bill that originated from the
House did not become the EVAT law ? Explain.
a. The Constitution simply means that the initiative for filing revenue, tariff or tax bills must
come from the House of Representatives on the theory that, elected as they are from the districts,
the Members of the House can be expected to be more sensitive to the local needs and problems.
b. It is not the law - but the revenue bill - which is required by the Constitution to originate
exclusively in the House of Representatives because a bill originating in the House may undergo
such extensive changes in the Senate that the result may be a rewriting of the whole, and a distinct
bill may be produced.
c. To insist that a revenue statute - not only the bill which initiated the legislative process
culminating in the enactment of the law - must substantially be the same as the House bill would be
to deny the Senates power not only to concur with amendments but also to propose
amendment. It would be to violate the coequality of legislative power of the two houses of
Congress and in fact make the House superior to the Senate.

Given the power of the Senate to propose amendments, it can propose its own version even
with respect to bills which are required by the Constitution to originate in the House.
d. Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation
of its receipt of the bill from the House, so long as action by the Senate as a body is withheld
pending receipt of the House bill. (Tolentino v. Secretary of Finance and companion cases, 235
SCRA 630)
20. A petition for certiorari and/or prohibition challenging the validity of Republic Act
No. 8240, amending certain provisions of the NIRC by imposing so-called "sin taxes"
(actually specific taxes) on the manufacture of beer and cigarettes.
Rep. Arroyo charges that (1) in violation of Rule VIII, Sec. 35 and Rule XVII, Sec. 103 of
the rules of the House of Representatives, the Chair, in submitting the conference committee
report to the House, did not call for the yeas and nays, but simply asked for its approval by
motion in order to prevent Rep. Arroyo from questioning the presence of a quorum; (2) in
violation of Rule XIX, Sec. 112, the Chair deliberately ignored Rep. Arroyo's question, "What
is that ... Mr. Speaker ?" and did not repeal Rep. Albano's motion to approve or ratify; (3) in
violation of Rule XX, Secs. 121-122, Rule XXI, Sec. 123, and Rule XVIII, Sec. 109, the Chair
suspended the session without first ruling on Rep. Arroyo's question which, it is alleged, is a
point of order or a privileged motion. It is argued that Rep. Arroyo's query should have been
resolved upon the resumption of the session on November 28, 1996, because the
parliamentary situation at the time of the adjournment remained upon the resumption of the
session.
On the same day, November 21, 1996, the bill was signed by the Speaker of the House
of Representatives and the President of the Senate and certified by the respective
secretaries of both Houses of Congress as having been formally passed by the House of
Representatives and he Senate on November 21, 1996. The enrolled bill was signed into law
by President Ramos on November 22, 1996.
It is now charged that the session was hastily adjourned at 3:40 p.m. on November 21,
1996 and the bill certified by Speaker de Venecia to prevent Rep. Arroyo from formally
challenging the existence of a quorum and asking for a reconsideration. Rule on the
controversy.
SUGGESTED ANSWER: There is no basis for the procedure being bruited as having been
violated.
Under the enrolled bill doctrine, the signing of the bill by the Speaker and the Senate
President and the certification by the Secretaries of both Houses are conclusive of its due
enactment. (Arroyo, et al., v. de Venecia, et al., 277 SCRA 268)
21. Manila Golf & Country Club, Inc. is a non-stock corporation. It maintains a golf
course and operates a clubhouse with a lounge, bar and dining room, but these facilities are
for the exclusive use of its members and accompanied guests, and it charges on cost-plusexpense basis.
The club now claims that Section 42 inserting a new Section 191-A in the National
Internal Revenue Code was vetoed by the President. On the other hand, the BIR maintains
that Section 42 was not entirely vetoed but merely the words hotels, motels, resthouses
on the ground that it might restrain the development of hotels which is essential to the
tourism industry.
Rule on the conflicting contentions.
SUGGESTED ANSWER: The BIR is correct. The inclusion of hotels, motels, and
resthouses are considered as items within the meaning of no. (2), Sec. 27, Art. VI of the 1987
Constitution that, the President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does
not object.
In the case of Commissioner of Internal Revenue v. Court of Tax Appeals and Manila Golf &
Country Club, G.R. No. 47421, May 14, 1990 it was held that hotels, motels and resthouses are
considered as items which the President has the power to veto.
An item in a revenue bill does not refer to an entire section imposing a particular kind of tax,
but rather to the subject of the tax and the tax rate. In the portion of a revenue bill which actually
imposes a tax, a section identifies the tax and enumerates the persons liable therefore with the
corresponding tax rate.
To construe the word item as referring to the whole section would tie the Presidents hand
in choosing either to approve the whole section at the expense of also approving a provision therein
which he deems unacceptable or veto the entire section at the expense of foregoing the collection
of the kind of tax altogether.

10

The evil which was sought to be prevented in giving the President the power to disapprove
items in a revenue bill would be perpetrated rendering that power inutile. (Commonwealth ex. rel.
Elkin v. Barnett, 199 Pa. 161, 55 LRA 882 (1913)
*** 22. Mr. Gaerlan is the owner of a 5,000 sq. m. parcel of land located in the city limits of
San Fernando City. He leased the property for P50,000.00 a year to a religious congregation
for a period of fifteen (15) years (1990-2005). The religious congregation built on a 1,000 sq.
m. portion a seminary and a chapel which it used in connection with its religious activities.
It constructed a ten (10) story building on the remaining 4,000 sq. m. which it rented out to
various commercial establishments, the proceeds of which go to the support of its various
seminaries located throughout the Philippines. These seminaries are organized as nonprofit and non-stock educational institutions.
Is Mr. Gaerlan exempt from the payment of real property taxes ? What about the
religious congregation ? Explain. Is the religious congregation exempt from the payment of
income taxes on the rental receipts ? Explain.

SUGGESTED ANSWER:
Mr. Gaerlan is exempt from the payment of real property taxes on the 1,000 sq. m. portion of
his 5,000 sq. m. lot, as well as on the remaining 4,000 sq.m. On the other hand the religious
congregation should pay real property taxes on the 4,000 sq. m. parcel of land and the 10-story
building.
Mr. Gaerlan is exempt from real property taxation, whether on the 1,000 sq.m. or on the
4,000 sq. m. because the basis for taxation of real property is use and not ownership. The religious
congregation is exempt from real property taxes on the 1,000 sq. m. parcel of land as well as on
the improvements the chapel and the seminary. This is so be cause they are actually, directly and
exclusively used for religious purposes. The treatment is different with regard to the 4,000 sq. m. lot
and its improvement the 10 storey building. While it is true that the proceeds are used for the
support of its seminaries, this is at the most indirect use, hence not subject to the tax exemption.
The religious congregation is subject to income taxation. (For reasons, refer to question no.
23, infra) While it is true that all the seminaries are organized as non-profit non-stock educational
institutions, it is not their incomes which is the subject of the problem but that of the religious
congregation which is not a non-profit non-stock educational institution.
*** 23. YMCA was established as a welfare, educational and charitable non-profit
corporation earned an income of P600 thousand from leasing out a portion of its premises
to small shop owners, like restaurants an canteen operators, and P44 thousand from parking
fees collected from non-members. It was subjected to an assessment for non-payment of
income taxes on the foregoing income.
YMCA claims that it is tax exempt claiming for the reason that the leasing to small
shop owners and the operation of the parking lot are reasonably necessary for the
accomplishment of its objectives. It premises its claim on the provisions of the 1987
Constitution. Is the income derived from rentals of the real property subject to income tax ?
Reason out your answer.
SUGGESTED ANSWER: Yes, the income is subject to income tax. The NIRC recognizes
the exemption from tax of the incomes of civic leagues or organizations not organized for profit but
operated exclusively for the promotion of social welfare, as well as clubs organized and operated
exclusively for pleasure, recreation, and other non-profitable purposes where no part of the net
income inures to the benefit of any private stockholder or member.
However, the tax exemption so recognized does not flow to income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit, regardless of the disposition made of such income, which shall
be subject to income taxes.
Furthermore, the constitutional tax exemptions refer only to real property that are actually,
directly and exclusively used for religious, charitable or educational purposes, and that the only
constitutionally recognized exemption from taxation of revenues are those earned by non-profit,
non-stock educational institutions which are actually, directly and exclusively used for educational
purposes. YMCA is not an educational institution embraced under this particular concept.
(Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83)
*** 24. Asean Kiddie School, Inc., is a non-profit, non-stock educational institution. It
owns a one hectare lot, one-half of which is occupied by the school campus and the other
half is leased to Agri-Farms, Inc., for use as a flower garden to meet the export requirements
of Agri-Farms, Inc. The rentals collected from Agri-Farms are used by Asean to pay for the
salaries of its school teachers. Anticipating higher expenditures for operating the school
during the school year 1997-98, the school increased its tuition fees and started collecting
the increased fees as early as April 1997. The advanced collections were in the meantime

11

deposited in a local bank where it earns interest. An international organization donated

US$10,000.00 on the solitary condition that it should be used to upgrade the salaries of the
school administrators. The school also wants to import some computers for the use of its
students.
You are now consulted to explain the tax implications of the above and give your
advice. What shall you say ?
SUGGESTED ANSWER:
a. The school is exempt from the payment of real property taxes on the one-half portion of
its
one
hectare
lot
which
is
being
used
as
the
school
campus.
This is so because the same is actually, directly and exclusively used for educational purposes.
Agri-Farms is subject to the payment of real property taxes on the remaining one-half that it
leases from Asean for the reason that the said portion is used for commercial purposes and not
actually, directly and exclusively for educational purposes. Aseans tax exemption privilege does
not flow to Agri-Farms because real property taxation is based on use and not on ownership. While
it is true that the rental income is devoted to educational purposes, it has no bearing in the case as
it is the land that should the actually, directly and exclusively used for educational purposes.
b. The income derived from the tuition fees is exempt from the income taxes as these are to
be actually, directly and exclusively used for educational purposes being devoted to meet the
increased school operational expenditures.
c. The passive income in the form of interests on bank deposits may be exempt from income
taxes and the withholding taxes of 20% if they are reflected on the schools annual information
returns and duly audited financial statements, supported by a certification from the depository bank
as to the amount of interest income earned from passive investments not subject to the 20% final
withholding tax, a resolution of the schools Board of Trustees on the proposed projects to be
funded out of the money deposited in the bank, and a certification of actual utilization of said
interest income for actual, direct and exclusive use for educational purposes. (Finance Department
Order No. 149-95, issued November 24, 1995 amending Department Order No. 137-87 as
amended by Department Order No. 92-88).
d. While it is true that the US$10,000.00 is to be utilized for administration purposes, and
under Sec. 94(A-3) of the NIRC, may be subject to tax, it is to be noted that Republic Act No. 7798
which amended B.P. Blg. 232 provides that, Taxes shall not be due on donations to educational
institutions. It is to be noted that exemptions to educational institutions are not subject to the socalled strictissimi juris strict interpretation against the taxpayer and liberally in favor of the
government.
e. The computers could be imported, exempt from the payment of customs duties and
value-added tax as there is showing of their actual, direct and exclusive use for educational
purposes.
25. Why is it important to know the distinctions between a tax and a debt. What are
the distinctions between a tax and a debt ?
SUGGESTED ANSWER: It is important to know the distinctions because non-payment of a
tax (except a poll tax) could subject a person to imprisonment while no person could be imprisoned
for non-payment of a debt. Furthermore, a debt could be compensated by another debt, but a debt
or another tax could not be compensated for a tax in accordance with the lifeblood doctrine.
*** Distinctions between a tax and a debt:
a. BASIS. Tax is based on law WHILE debt is based on contract or judgment.
b. FAILURE TO PAY. Failure to pay a tax (except a poll tax) may result in imprisonment
WHILE there is no imprisonment for failure to pay a debt.
c. MODE OF PAYMENT. Tax is generally payable in money WHILE debt may be payable in
money, property or services.
d. ASSIGNABILITY. A tax is not assignable WHILE a debt is assignable.
e. INTEREST. A tax does not draw interest unless delinquent WHILE a debt draws interest
if stipulated or delayed.
f. AUTHORITY. Taxes are imposed by public authority WHILE debt can be imposed by
private individuals.
g. PRESCRIPTION. Prescriptive periods for tax are determined under the NIRC WHILE
debt, under the Civil Code.
26. Are there distinctions between a tax and a license fee ? Why is it important to
know the distinctions ?
SUGGESTED ANSWERS: The following are the distinctions between a tax and a license
fee:
a. PURPOSE:A tax is imposed for revenue purposes WHILE a license fee is imposed for
regulatory purposes.

12

b. BASIS: A tax is imposed under the power of taxation WHILE a license fee is imposed
under police power.
c. AMOUNT: There is no limit as to the amount of a tax WHILE the amount of license fee
that could be collected is limited to the cost of the license and the expenses of police surveillance
and regulation.
d. TIME OF PAYMENT: Taxes are normally paid after the start of a business WHILE a
license fee before the commencement of business.
e. EFFECT OF NON-PAYMENT: Failure to pay a tax does not make the business illegal
WHILE failure to pay a license fee makes the business illegal.
f. SURRENDER: Taxes being the lifeblood of the state, cannot be surrendered except for
lawful consideration WHILE a license fee may be surrendered with or without consideration.
It is important to know the distinctions because the limitations for one may not be applied to
the other except in the instance where regulatory taxes are imposed thus, the power to tax is
exercised cojointly with the police power. Furthermore, exemption from taxes does not include
exemption from the payment of license fees and vice-versa.
NOTES AND COMMENTS: Recall the distinctions between the power of taxation and police
power with respect to: Purpose, amount, compensation, property taken, what is done with the
property taken, relation to the non-impairment clause.

THE COURT OF TAX APPEALS AND TAX REMEDIES

27. What is the Court of Tax Appeals ? What is the nature of the Court of Tax
Appeals ? Why was it created ?
SUGGESTED ANSWER:
a. The Court of Tax Appeals is the special tax court created under Republic Act No. 1125
composed of a Presiding Judge and Two Associate Judges, appointed by the President of the
Philippines from nominees of the Judicial and Bar Council.
b. It is not a mere administrative agency or tribunal but a regular court vested with exclusive
appellate jurisdiction over cases arising under the National Internal Revenue Code and the Tariff
and Customs Code.
*** c. The Court of Tax Appeals was created:
1) To prevent delay in the disposition of tax cases by the then Courts of
First Instance (now RTCs), in view of the backlog of civil, criminal, and cadastral cases accumulating in the dockets of such courts; and
2) To have a body with special knowledge which ordinary Judges of the
then Courts of First Instance (now RTCs), are not likely to possess, thus providing for an adequate remedy for a speedy determination of tax cases.
*** 28. What is the jurisdiction of the Court of Tax Appeals ?
SUGGESTED ANSWER:
a. The Court of Tax Appeals has jurisdiction over decisions of the Commissioner of Internal
Revenue over:
1) Cases involving:
a) Disputed assessments;
b) Refund of internal revenue taxes, fees or other charges;
c) Penalties imposed in relation thereto.
2) Other matters arising under:
a) The National Internal Revenue Code, or
b) Other law or part of law administered by the Bureau of Internal
Revenue.
The appeal to the Court of Tax Appeals must be filed within 30 days from receipt of the
Commissioners adverse decision. If there is no decision, the appeal should be dismissed for lack
of jurisdiction.
b. The Court of Tax Appeals has jurisdiction over decisions of the Commissioner of Customs
over:
1) Cases involving:
a) Liability for customs duties, fees or other money charges,
b) Seizures, detention or release of property affected,
c) Fines, forfeitures and other penalties imposed in relation thereto;
2) Other matters arising under:
a) the customs law, or
b) Other law or part of law administered by the Bureau of Customs

13

The appeal to the Court of Tax Appeals must be filed within 30 days from receipt of the
Commissioners adverse decision. If there is no decision, the appeal should be dismissed for lack
of jurisdiction.
*** c. Instances where the Court of Tax Appeals would have jurisdiction even if there is no
decision yet of the Commissioner of Internal Revenue:
1) Where the Commissioner has not acted on the disputed assessment after a period
of 180 days from submission of complete supporting documents, the taxpayer has a period
of 30 days from the expiration of the 180 day period within which to appeal to the Court of
Tax Appeals. (last par., Sec. 228 (e), NIRC of 1997)
2) Where the Commissioner has not acted on an application for refund or credit and
the two year period from the time of payment is about to expire, the taxpayer has to file his
appeal with the Court of Tax Appeals before the expiration of two years from the time the tax
was paid.
*** d. Instances where the Court of Tax Appeals would have jurisdiction even if there is no
decision of the Commissioner of Customs:
1) Decisions of the Secretary of Trade and Industry or the Secretary of Agriculture in
anti-dumping and countervailing duty cases are appealable to the Court of Tax Appeals
within thirty (30) days from receipt of such decisions.
2) In case of automatic review by the Secretary of Finance in seizure or forfeiture
cases where the value of the importation exceeds P5 million or where the decision of the
Collector of Customs which fully or partially releases the shipment seized is affirmed by the
Commissioner of Customs.
*** 29. Only Commissioners final decision denying the dispute is subject of appeal.
Words to the effect that the matter would be referred to the Collection Enforcement Division for the
issuance of a warrant of levy and distraint is not a final decision appealable to CTA (Solid Cement
Corporation vs. Court of Tax Appeals, et al., CA-GR SP No. 33516, February 28, 1995). Even the
actual issuance of a warrant of distraint and levy in certain cases still cannot be considered
a final decision on a disputed assessment. (Commissioner of Internal Revenue v. Union
Shipping Corp., 185 SCRA 547)
NOTES AND COMMENTS:
*** a. Acts of BIR Commissioner considered as denial of protest which serve as basis for
appeal to the Court of Tax Appeals:
1) Filing by the BIR of a civil suit for collection of the deficiency tax is considered a
denial of the request for reconsideration. (Commissioner of Internal Revenue v. Union
Shipping Corporation, 185 SCRA 547)
2) An indication to the taxpayer by the Commissioner in clear and unequivocal
language of his final denial not the issuance of the warrant of distraint and levy. What is the
subject of the appeal is the final decision not the warrant of distraint. Commissioner of
Internal Revenue v. Union Shipping Corporation, 185 SCRA 547)
3) A BIR demand letter sent to the taxpayer after his protest of the assessment notice
is considered as the final decision of the Commissioner on the protest. (Surigao Electric Co.,
Inc. v. Court of Tax Appeals, et al., 57 SCRA 523)
4) A letter of the BIR Commissioner reiterating to a taxpayer his previous demand to
pay an assessment is considered a denial of the request for reconsideration or protest and is
appealable to the Court of Tax Appeals. (Commissioner v. Ayala Securities Corporation, 70
SCRA 204)
*** b. Requisites for validity of the Commissioners decision on the dispute. The decision
of the Commissioner or his duly authorized representative shall (a) state the facts, the applicable
law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the
decision shall be void, in which case the same shall not be considered a decision on the disputed
assessment; and (b) that the same is his final decision. (Sec. 3.1.6, Rev. Regs. 12-99)
*** 30. The BIR Commissioner discovered that a taxpayer keeps no records or that
whatever records kept are inadequate, or that there is strong suspicion that the taxpayer has
received income from undisclosed sources, or that no return was filed or the return filed was
false and fraudulent. What methods have been developed by the BIR in order to determine
the income of the taxpayer which should be subject to tax ? Explain each method briefly but
comprehensively.
SUGGESTED ANSWER: The following are the general methods developed by the Bureau
of Internal Revenue for reconstructing a taxpayers income:
a. Percentage method. The computed amount of revenues based on the percentage
computation is compared to the amount of revenues reflected on the return. The percentages used
may be obtained from the taxpayer, industry publication, prior years audit results, or third parties.
The comparison will provide an indication on the possibility of revenue being understated.

14

Among the significant ratios and trends to be analyzed are the percentage mark-up, gross
profits ratio or gross margin percentage, profit margin, total assets turnover, and inventory turnover.
b. Net worth method. A method of reconstructing income which is based on the theory that if
the taxpayers net worth has increased in a given year in an amount larger than his reported
income, he has understated his income for that year. The net worth on a fixed starting date is
compared with the net worth on a fixed ending date. Any increase in net worth is presumed to be
income not declared for tax purposes.
The difficulty of establishing the opening net worth of a tax payer has led to the Cohan
Rule which means the use estimates or approximations of the amount of cash and other asserts
where the taxpayer lacks adequate records.
c. Bank deposit method. The bank records of the taxpayer are analyzed and the BIR
estimates income on the basis of the total bank deposits after eliminating non-income items. This
method stands on the premise that deposits represent taxable income unless otherwise explained
as being non-taxable items. This method may be used only where the BIR has been legally
allowed access to the taxpayers bank records.
d. Cash expenditure method. This method assumes that the excess of a taxpayers
expenditures during the tax period over his reported income for that period is taxable to the extent
not disproved otherwise.
e. Unit and value method. The determination or verification of gross receipts may be
computed by applying price and profit figures to the known ascertainable quality of business of the
taxpayer. For example, in order to determine the gross receipts of a pizza parlor, multiply the
pounds of flour used by the number of pizzas per pound which in turn would then be multiplied by
the average price per pizza.
f. Third party information or access to records method. The BIR may require third parties,
public or private to supply information to the BIR.
g. Surveillance and assessment method. (Chapter XIII. Indirect Approach to Investigation,
Handbook on Audit Procedures and Techniques Volume I, pp. 68-74)
*** 31. The BIR discovered that Elvie, a businesswoman, did not file her income tax
returns for the taxable years 1998 and 1999. A pre-assessment notice for back taxes was
then issued in the amount of P2 million which ultimately matured into an assessment notice.
The BIR arrived at the additional tax due after using the net worth method and access to
Elvies purchases from her suppliers of raw materials. She now disputes the assessment for
lack of legal basis because of the use of the net worth which is not authorized under the
Tax Code, and for violation of her constitutional rights when her purchase records were
accessed from her suppliers. Rule on her dispute.
SUGGESTED ANSWER: Elvies contentions are bereft of merit. Since Elvie did not file her
income tax returns, which reports are required by law as a basis for assessment, then the BIR
Commissioner shall assess the tax on the best evidence available. The BIR Commissioner is
authorized to secure records from public or private entities to assist him in the assessment.
Furrthermore, the BIR may use such method as in the opinion of the Commissioner clearly reflects
the income.
NOTES AND COMMENTS:
a. General Rule. The taxable income shall be computed upon the basis of the taxpayers
annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the
method of accounting regularly employed in keeping the books of such taxpayer; but if no such
method of accounting has been so employed, or if the method employed does not clearly reflect the
income, the computation shall be in accordance with such method as in the opinion of the
Commissioner clearly reflects the income. (Sec. 43, NIRC of 1997)
b. Failure to Submit Required Returns, Statements, Reports or Other Documents.
When a report required by law as a basis for the assessment of any national internal revenue tax
shall not be forthcoming within the time fixed by laws or rules and regulations or when there is
reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall
assess the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the time prescribed by
law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner
shall make or amend the return from his own knowledge and from such information as he can
obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal
purposes. [Sec. 6 (B), NIRC of 1997]
*** c. Power of the Commissioner to Obtain Information. In ascertaining the correctness of any
return, or in making a return when none has been made, or in determining the liability of a person
for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, the
Commissioner is authorized: xxx
To obtain on a regular basis from any person other than the person whose internal revenue
tax laibility is subject to audit or investigation, or from any office or officer of the national and local

15

governments, government agencies and instrumentalities including the Bangko Sentral ng Pilipinas
and government-owned or controlled corporations, any information such as, but not limited to,
costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names ,
addresses, and financial statements of corporations, mutual fund companies, insurance companies,
regional operating headquarters or multinational companies, joint accounts, associations, joint
ventures or consortia and registered partnerships, and their members; xxx [Sec. 5 (B), NIRC of
1997)
32. What is a pre-assessment notice and what is its importance ?
SUGGESTED ANSWER: A pre-assessment notice is a a letter sent by the Bureau of
Internal Revenue to a taxpayer asking him to explain within a period of fifteen (15) days from receipt
why he should not be the subject of an assessment notice.
As a general rule, the BIR could not issue an assessment notice without first issuing a preassessment notice because it is part of the due process rights of a taxpayer to be given notice in
the form of a pre-assessment notice, and for him to explain why he should be the subject of an
assessment notice.
*** NOTES AND COMMENTS: Instances where a pre-assessment notice is not required
before a notice of assessment is sent to the taxpayer:
a. When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or
b. When a discrepancy has been determined between the tax withheld and the amount
actually remitted by the withholding agent; or
c. When a taxpayer opted to claim a refund or tax credit of excess creditable withholding tax
for a taxable period was determined to have carried over and automatically applied the same
amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the
succeeding table year; or
d. When the excess tax due on excisable articles has not been paid; or
e. When an article locally purchased or imported by an exempt person, such as, but not
limited to vehicles, capital equipment, machineries and spare parts, has been sold, trade or
transferred to non-exempt persons. (Sec. 228, NIRC of 1997)
33. On the basis of a Letter of Authority, for the examination of the books of accounts
and other accounting records of Pascor Realty and Development Corporation (PRDC), BIR
examiners recommended the issuance of an assessment notice in the amounts of P7 million
and P 3 million for the years 1986 and 1987 respectively.
On March 1, 1995, the BIR filed a criminal complaint with the Department of Justice
against PRDC, its President and Treasurer alleging evasion of taxes in the total amount of
P10 million. This was supported by an affidavit-report of the examiners detailing the
computation of the alleged tax evasion. PRDC, its President and Treasurer filed an Urgent
Request for Reconsideration/Reinvestigation disputing the tax assessment and tax liability.
On March 23, 1995, PRDC and its President and Treasurer received a subpoena in
connection with the criminal complaint filed by the BIR against them.
In a letter dated May 17, 1995, the Commissioner denied the urgent request for
reconsideration/reinvestigation filed by PRDC and its officers on the ground that formal
assessment has as yet not been issued by the Commissioner.
Do you agree with the decision of the Commissioner ? Explain briefly.
SUGGESTED ANSWER: Yes, the affidavit-report of the examiners does not constitute an
assessment that may be the subject of a motion for reconsideration/reinvestigation. The affidavitreport merely contained a computation of the liabilities. It did not state a demand or a period for
payment. It was not addressed to the taxpayers but to the Department of Justice.
That the affidavit-report contained details of the tax liabilities does not ipso facto make the
same an assessment. Its purpose was merely to support the criminal complaint for assessment.
Clearly, it was not meant to be a notice of the tax due and a demand for the payment thereof.
The fact that the complaint itself was specifically directed and sent to the Department of
Justice and not to the taxpayer shows that the intent of the BIR was to file a criminal complaint for
tax evasion, not to issue an assessment. Although the revenue officers recommended the issuance
of an assessment, the commissioner instead opted to file a criminal complaint. What was received
by the taxpayer was notice of the filing of the criminal case not a notice that the BIR had made an
assessment. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et
al., G.R. No. 128315, prom. June 29, 1999)
NOTES AND COMMENTS: The NIRC defines the specific functions and effects of an
assessment. To consider the affidavit-report attached to the criminal complaint as a proper
assessment is to subvert the nature of an assessment and to set a bad precedent that will prejudice
innocent taxpayers.

16

While an assessment informs the taxpayer that he or she has tax liabilities, not all
documents coming from the BIR containing a computation of the tax liability can be deemed
assessments.
To start with, an assessment must be sent to and received by a taxpayer and must demand
the payment of the taxes therein within a specific period. Thus, the NIRC imposes a 25% penalty,
in addition to the tax due, in case the taxpayer fails to pay the deficiency tax within the time
prescribed for its payment in the notice of assessment. Likewise, an interest of 20% per annum, or
such higher rate as may be prescribed by rules and regulations, is to be collected from the date
prescribed for its payment until full payment.
The issuance of an assessment is vital in determining the period of limitation regarding its
proper issuance and the period within which to protest it. Necessarily, the taxpayer must be certain
that a specific document constitutes an assessment. Otherwise, confusion would arise regarding
the period within which to make an assessment or to protest the same; or whether interest and
penalty may accrue thereon.
It should also be stressed that the said document is a notice duly sent to the taxpayer.
Indeed, an assessment is deemed made only when the BIR releases, mails or sends such notice to
the taxpayer. Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et
al., G.R. No. 128315, prom. June 29, 1999)
Pascor has also defined assessment as laying a tax.
NOTES AND COMMENTS: The word assessment when used in connection with taxation,
may have more than one meaning. The ultimate purpose of an assessment to such a connection is
to ascertain the amount that each taxpayer is to pay. More commonly the word assessment
means the official valuation of a taxpayers property for purpose of taxation. The above definition of
assessment finds application under internal revenue taxation, tariff and customs taxation as well as
local government taxation.
For real property taxation, there may be a special meaning to the burdens that are imposed
upon real properties that have been benefited by a public works expenditure of a local government.
It is sometimes called a special assessment or a special levy.
The prescriptive periods for making assessments are three (3) years from the last day
within which to file a return or when the return was actually filed and ten years from discovery of the
failure to file the tax return or discovery of falsity or fraud in the return.
*** 34. What is meant by jeopardy assessment ?
SUGGESTED ANSWER: A delinquency tax assessment which was assessed without the
benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that
the assessment and collection of a deficiency tax will be jeopardized by delay because of the
taxpayers failure to comply with the audit and investigation requirements to present his books of
accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or
credits claimed in his return. [Sec. 3.1 (a), Rev. Regs. No. 6-2000)
NOTES AND COMMENTS:
a. Jeopardy assessment is an indication of the doubtful validity of the assessment, hence it
may be subject to a compromise. [Sec. 3.1 (a), Rev. REgs. No. 6-2000]
*** b. Requirements for validity of formal letter of demand and assessment notice. The
letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state the facts,
the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the
formal letter of demand and assessment notice shall be void. (Sec. 3.1.4, Rev. Regs. No. 12-99)
*** 35. X Corporation filed its income tax returns in January, 1995 for its income for the
year 1994. In October, 1997, March, 1998 and May, 1998, X through its authorized
representative signed three (3) separate waivers of the Statute of Limitations under the
NIRC. The waivers were not signed by the BIR Commissioner or his agents.
In 1999, the BIR issued letters of demand, accompanied by assessment notices asking
the corporation to pay the deficiency internal revenue taxes for its income for the year 1994.
X disputed the assessment and requested a reinvestigation. The BIR Commissioner
denied the protest. X appealed to the Court of Tax Appeals, on the ground of prescription.
Decide.
SUGGESTED ANSWER: The BIRs authority to assess already prescribed. The three (3)
waivers did not suspend the running of the prescriptive period.
The only agreement that could suspend the running of the prescriptive period for the
collection of the tax in question is a written agreement between X corporation an the BIR entered
into before the expiration of the three (3) year prescriptive period. extending the said period.
Since, what is required is the signatures of both the Commissioner and the taxpayer, a
unilateral waiver on the part of the taxpayer does not suspend the prescriptive period.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 115712, February 25, 1999
(Carnation case)

17

NOTES AND COMMENTS:

Grounds for suspending statute of limitations or
prescriptive periods for assessment, beginning or distraint or levy or proceeding in court.
The holding in Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No.
115712, February 25, 1999 (Carnation case) that the waiver of the period for assessment must be
in writing and have the written consent of the BIR Commissioner is still doctrinal because of the
provisions of Sec. 223, NIRC of 1997 which provides:
a. When the Commissioner is prohibited from making the assessment, or beginning
distraint, or levy or proceeding in court and for sixty (60) days thereafter;
b. When the taxpayer requests for and is granted a reinvestigation by the commissioner;
c. When the commissioner could not be located in the address given by him in the return
filed upon which the tax is being assessed or collected;
d. When the warrant of distraint and levy is duly served upon the taxpayer, his authorized
representative, or a member of his household with sufficient discretion, and no property could be
located; and
e. When the taxpayer is out of the Philippines.
Law on prescription should be liberally construed in favor of the taxpayer. For the purpose of
safeguarding taxpayers from an unreasonable examination, investigation or assessment, our tax
law provides a statute of limitation on the collection of taxes.
Thus, the law on prescription, being a remedial measure, should be liberally construed in
order to afford such protection. As a corollary, the exceptions to the law on prescription should
perforce be strictly construed. (Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., et
al., G.R. No. 104171, February 24, 1999)
Requirements for validity of taxpayers protest. The taxpayer shall state the facts, the
applicable law, rules and regulations, or jurisprudence on which his protest is based, otherwise, his
protest shall be considered void and without force and effect. If therer are several issues involved
in the disputed assessment and the taxpayer fails to state the facts, the applicable law, rules and
regulations, or jurisprudence in support of his protest against some of the several issues on which
the assessment is based, the same shall be considered undisputed issue or issues, in which case,
the taxpayer shall be required to pay the corresponding deficiency tax or taxes attributable thereto.
(Sec. 3.1.5, Rev. Regs. 12-99)
36. B.F. Goodrich availing of the Parity Amendment to the Constitution purchased
various parcels of land. When the Parity Amendment expired in 1974, it sold the parcels for
P500,000.00 payable in installments and leased back the properties for 25 years. It filed its
1974 return reporting the sale. A BIR assessment on its income for 1974 was paid. In 1980 it
was assessed donors tax because the BIR considered the consideration for the sale
insufficient, and the difference between the fair market value and the actual purchase price,
a taxable donation. Subsequently, on April 9, 1981 the BIR increased the assessment.
Was there a false and fraudulent return within the context of the Tax Code which
would allow assessment beyond the five year [under the present Tax Code, three (3) years ?
SUGGESTED ANSWER: No, the fact that B.F. Goodrich sold the property for a price lower
than its declared fair market value did not constitute a false return which contains wrong
information due to mistake, carelessness or ignorance. It is possible that real property may be sold
for less than adequate consideration for a bona fide business purpose, in such event, the sale
remains an arms length transaction. In the case at bar, B.F. Goodrich was trying to minimize its
loss because of the expiration of the Parity Amendment. Besides, the 25 year lease was another
consideration.
B.F. Goodrich declared the sale in its 1974 return submitted to the BIR
Within the
prescriptive period, the BIR could have made the assessment because the declared fair market
value of said property was of public record.
That part of the sale transaction was actually a donation, did not erase the fact that the
income had already been reported. B.F. Goodrich already reported its income by filing an income
tax return. Even though a donors tax is different from capital gains tax, a tax on the gain from the
sale of the taxpayers property forming part of capital assets, the tax return filed by B.F. Goodrich to
report its income for the year 1974 was sufficient compliance with the legal requirement to file a
return.
The BIRs oversight on the issue of prescription cannot prejudice the taxpayer. REASON:
The prescriptive period was precisely intended to give the taxpayers peace of mind. (Commissioner
of Internal Revenue v. B.F. Goodrich Phils., Inc., et al., G.R. No. 104171, February 24, 1999)
37. Assessment and refund cases could not be consolidated. Reason:
doctrine. If there a pending assessment, refund should not be granted.

Lifeblood

*** 38. 41 non-life insurance corporations organized and existing under the laws of the
Philippines organized a pool of machinery insurers for the purpose of entering into a Quota

18

Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (Munich for brevity), a non-resident foreign insurance
corporation.
On April 14, 1976 the pool submitted a financial statement and filed an Information
Return of Organization Exempt from Income Tax for the year ending 1975, on the basis of
which the pool was assessed deficiency corporate income tax of P1.8 million and
withholding tax in the amount of P1.7 million and P89 thousand and to the pool on dividends
paid to Munich and the pool members respectively.
The pool raises the following issues why they should not be subject to the deficiency
taxes:
1. They have not formed an unregistered partnership to be treated as a corporation
for tax purposes;
2. There would be double taxation if they would be made to pay the deficiency taxes;
and
3. The right of the government to collect has already prescribed.
Rule on the issues raised discussing each one of them.
SUGGESTED ANSWERS:
1. They have formed an association which should be taxable like a corporation. The Tax
Code has included under the term corporation partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997].
In Evangelista v. Collector, 102 Phil. 140, the Supreme Court already held citing Mertens that
the term partnership includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried
on.
There is no question that the 41 non-life corporations entered into a Pool Agreement or an
association that would handle all the insurance businesses covered under their quota-share
reinsurance treaty and surplus reinsurance treaty with Munich. This unmistakably indicates a
partnership or an association which is considered under the Tax Code as a partnership or
association treated like a corporation.
2. There is no double taxation which means taxing the same property twice when it should
be taxed only once. The Pool is a taxable entity separate and distinct from the individual corporate
entities of the Pool.
3. The prescriptive period was not suspended because it may be suspended only if the
taxpayer informs the Commissioner of Internal Revenue of any change in the address. The fact
that the Pools information return filed in 1980 indicated therein its present address is not sufficient
compliance with the legal requirement.
***NOTES AND COMMENTS: The Bar examination question may be with respect to the
income of an estate that has not been partitioned or to a case where there is co-ownership.
Certain business organizations do not fall under the category of corporations under
the Tax Code, and therefore not subject to tax as corporations. They include:
1. General professional partnerships;
2. Joint venture or consortium formed for the purpose of undertaking construction projects
engaging in petroleum, coal, geothermal, and other energy operations, pursuant to an operation or
consortium agreement under a service contract with the Government. [1 st sentence, Sec. 22 (B),
BIRC of 1997]
39. What is a payment order ?
SUGGESTED ANSWER: A payment order contains the particular kind of tax to be paid and
the corresponding TNC is issued to a taxpayer to be presented by him to the bank when he pays
his taxes. (Evangelista v. People of the Philippines, et al., G.R. Nos. 108135-36, prom. September
30, 1999)
*** 40. Agustin died in December, 1999 leaving to his two sons, Fernando and Jose, an
apartment building. After the settlement of Agustins estate, his two sons decided not to
partition the apartment building and just divided the rentals among themselves for the year
2000.
a. Was a partnership formed which is subject to corporate income taxes for the year
2000 ? Reason out your answer.
b. If, instead of dividing the rentals in 2000, the brothers invested the same in the
purchase of a house to be rented out. How shall the income from the rentals of the house be
treated for tax purposes ? Explain briefly. Would your answer be different if the house was
not purchased for the purpose of renting out the same but was later sold ? Explain briefly.
SUGGESTED ANSWERS:

19

a. No. Co-heirs who own inherited properties which produce income should not
automatically be considered as partners of an unregistered corporation subject to income tax for the
following reasons:
1. the sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any property from
which the returns are derived. There must be an unmistakable intention to form a
partnership or joint venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA
436)
2. There is no contribution or investment of additional capital to increase or expand
the inherited properties, merely continuing the dedication of the property to the use to which
it had been put by their forebears. (Ibid.)
3. Persons who contribute property or funds to a common enterprise and agree to
share the gross returns of that enterprise in proportion to their contribution, but who severally
retain the title to their respective contribution, are not thereby rendered partners. They have
no common stock capital, and no community of interest as principal proprietors in the
business itself from which the proceeds were derived. (Elements of the Law of Partnership
by Floyd R. Mechem, 2nd Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner of Internal
Revenue, 166 SCRA 560)
4. In order to constitute a partnership inter sese there must be: (a) an intent to form
the same; (b) generally participating in both profits and losses; (c) and such a community
of interest, as far as third persons are concerned as enables each party to make a contract,
manage the business, and dispose of the whole property. (Municipality Paving Co. v.
Herring, 150 O. 1067, 50 Ill. 470, Ibid.)
5. The common ownership of property does not itself create a partnership between
the owners, though they may use it for purpose of making gains, and they may, without
becoming partners, are among themselves as to the management and use of such property
and the application of the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No.
App. 14, Ibid.)
b. The income from the rental of the house shall be treated as the income of an
unregistered partnership to be taxable as a corporation because of the clear intention of the
brothers to join together in a venture for making money out of rentals.
The answer would be different because there was no intention to enter into a profit making
venture. They merely formed a co-ownership. This is evident from the following authorities:
Where the plaintiff, his brother and, and another agreed to become owners of a single tract
of realty holding as tenants in common, and to divide the profits of disposing of it, the brother and
the other not being entitled to share in plaintiffs commissions, no partnership existed as between
the three parties, whatever their relation may have been as to third parties. (Magee v. Magee, 123
N.E. 673, 233 Mass. 341 cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560)
41. Liboro is a practicing lawyer who on 15 April 1995 filed his income tax return for
the year 1994. Upon examination, the BIR found his return deficient of P14,009.84. On 30
September and 30 November 1995, Liboro was notified of his tax deficiency. He responded
with a protest letter dated 19 December 1995.
On 11 May 1996, the Commissioner of Internal Revenue denied Liboros protest for
lack of legal basis. He then seasonably filed a petition for review before the Court of Tax
Appeals. On 29 March 1998, the CTA rendered a decision dismissing the appeal which
Liboro received on 29 May 1998. Thus, he had until 13 June 1998 to file a petition for review
before the Court of Appeals.
On 11 June 1998, instead of filing a petition for review with the Court of Appeals,
Liboro filed a Notice of Appeal with the Court of Appeals, and on 13 June 1998, a motion for
an extension of thirty (30) days to file a petition for review before the Court of Appeals.
May the Court of Appeals grant Liboro an extension of time to file the petition for
review?
SUGGESTED ANSWER: Yes. The prohibition against granting an extension of time
applies only in a case where ordinary appeal is required to perfect an appeal and nothing more.
However, it is different in a petition for review where the pleading is required to be verified.
A petition for review, unlike an ordinary appeal, requires careful preparation and research in
order to put up a persuasive and formidable position. In other words, the drafting of a petition for
review entails more time and effort than merely filing a notice of appeal. (Liboro v. Court of Appeals,
et al., G.R. No. 101132 and Commissioner of Internal Revenue v. Court of Appeals, et al., January
29, 1993)
NOTES AND COMMENTS:: Sec. 4, Rule 43 of the 1997 Rules of Civil Procedure provides,
The appeal shall be taken within fifteen (15) days from notice of the ... judgment.... Upon proper
motion and the payment of the full amount of the docket fee before the expiration of the
reglementary period, the Court of Appeals may grant an additional period of fifteen (15) days only

20

within which to file the petition for review. No further extension shall be granted except for the most
compelling reason and in no case to exceed fifteen (15) days. (paraphrasing supplied)
*** 42. Is there a necessity for an administrative determination that a tax is due before
initiation of criminal prosecution for tax evasion ?
SUGGESTED ANSWER: No, because of the following reasons, which distinguishes a
criminal charge from an assessment:
a. Criminal charge need only be supported by a prima facie showing of failure to file a
required return WHILE the fact of failure to file a return need not be proven by an assessment.
b. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the
taxpayer WHILE such is not so with a criminal charge. The charge is filed directly with the
Department of Justice.
c. A criminal complaint is instituted not to demand payment, but to penalize the taxpayer for
violation of the Tax Code WHILE the purpose of the issuance of an assessment is to collect the tax.
(Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No.
128315, June 29, 1999)
NOTES AND COMMENTS: For Bar examination purposes take note of the distinction
between the Fortune Tobacco case (Commissioner of Internal Revenue v. Court of Appeals, et al.,
G.R. No. 119322, June 4, 1996) on one hand with the above Pascor case and that of Ungab v.
Cusi, 97 SCRA 877 (1980), which allowed the tax evasion case to proceed notwithstanding no
showing of an administrative finding that a tax is due. In Ungab, there was a prima facie attempt to
evade taxes because of the taxpayers failure to declare in his income tax return his income
derived from banana saplings, WHILE in the Fortune Tobacco case, the registered wholesale price
of the goods, approved by the BIR is presumed to be the actual wholesale price, therefore, not
fraudulent and unless and until the BIR has made a final determination of what is supposed to be
the correct taxes, the taxpayer should not be placed in the crucible of criminal prosecution
*** 43. What are the tax cases which may be the subject of a compromise settlement with
the BIR ?
SUGGESTED ANSWER: The following may be the subject matter of compromise
settlement:
a. Delinquent accounts;
b. Cases under administrative protest pending in the Regional Offices, Revenue District
Offices, Legal Service, Large Taxpayer Service (LTS), Enforcement Service (ES), Excise Taxpayer
Service (ETS) and Collection Service (CS);
c. Civil tax cases being disputed before the courts, e.g. CTA, CA, SC;
d. Collection cases filed in courts; and
e. Criminal violations, other than those already filed in court, or those involving criminal tax
fraud. (Sec. 2, Rev. Regs. No. 6-2000)
NOTES AND COMMENTS:
a. Tax cases which could not be the subject of compromise:
1) Withholding tax cases;
2) Criminal tax fraud cases;
3) Criminal violations already filed in court; and
4) Delinquent accounts with duly approved schedule of installment payments. (Sec.
2, Rev. Regs. No. 6-2000)
*** 44. On June 15, 1996, Mr. Grant O. Neal, paid his income tax for the year 1995. On
March 15, 1998, he discovered that the BIR excessively collected from his the amount of
P75,000.00. Thus, on the same day he filed with the Commissioner of Internal Revenue a
written claim for refund. On August 15, 1998 he received the Commissioners letter denying
his claim for refund. On September 1, 1998, or within thirty (30) days from receipt of the
letter, he filed a petition for review with the Court of Appeals for the refund of the P75,000.00.
In conformance with the material data rule, he alleged that Section 11 of Republic Act No.
1125, provides that a taxpayer adversely affected by a ruling or decision of the
Commissioner of Internal Revenue may appeal to the Court of Tax Appeals within thirty (30)
days from receipt of the adverse decision. Decide the case.
SUGGESTED ANSWER: The petition should be dismissed for having been filed out of time.
Sec. 229, NIRC of 1997 provides that court action for the recovery of internal revenue tax should be
filed within two (2) years from the date such tax was paid.
The petition should have been filed no later than June 16, 1998. There was as yet no
decision of the Commissioner to be appealed but this contention is bereft of merit, as it would leave
the taxpayer at the mercy of the BIR Commissioner without any positive and expedient relief from
the Court. It is disheartening enough to a taxpayer to be kept waiting for an indefinite period for the
ruling,. It would make matters more exasperating for the taxpayer if the doors of justice would be

21

closed for such a relief until after the Commissioner, would have, at his personal convenience,
given his go signal. (Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No.
82618, prom. March 16, 1989, unrep.)
*** 45. Philippine Bank of Communications filed its quarterly income tax returns for the
first and second quarters of 1985, reporting profits and paid the total income tax of P5
million. The taxes due were settled by applying the Banks tax credit memos, and
accordingly, the BIR issued the appropriate Tax Debit Memos.
Subsequently, the Bank suffered losses so that when it filed its Annual Income Tax
Returns for the year-ended December 31, 1985, it declared a net loss of P25 million, thereby
showing no tax liability. For the succeeding year, ending December 31, 1986, it likewise
reported a net loss of P14 million and thus declared no income tax payable for the year.
During 1985 and 1986, the Bank earned rental income from leased properties from
where the lessees withheld and remitted to the BIR withholding creditable taxes of P282
thousand for 1985, and P234 thousand for 1986.
On August 7, 1987, the Bank requested the Commissioner of Internal Revenue, among
others for a tax credit of P5 million representing the overpayment of taxes in the first and
second quarters of 1985. Thereafter, on July 25, 1988, the Bank filed a claim for refund of
creditable taxes withheld by its lessees from property rentals in 1985 and in 1986. Both the
request and the claim were seasonably filed within the ten (10) year period for filing claims
of excess quarterly income tax payments as provided for in RMC 7-85 issued by the then
Actg. BIR Commissioner.
On November 18, 1988 the Bank instituted a Petition for Review before the Court of
Tax Appeals. Would the petition prosper ?
SUGGESTED ANSWER:
No. It was filed out of time and since the taxpayer decided to
avail of the tax credit it could not anymore seek a refund.
The two (2) year prescriptive period should be computed from the time of filing the
Adjustment Return and final payment of the tax for the year. (Philippine Bank of Communications v.
Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28, 1999)
The claim for refund should be exercised within the time fixed by law. REASON: The
Bureau of Internal Revenue being an administrative body enforced to collect taxes, its functions
should not be unduly delayed or hampered by incidental matters. (Ibid.)
The issuance of RMC 7-85 changing the statutory prescriptive period of two (2) years to ten
(10) years on claims of excess quarterly income tax payments did not merely interpret the law,
rather it legislated guidelines contrary to the statute passed by Congress.
Revenue Memorandum Circulars are considered administrative rulings (in the sense of more
specific and less general interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a
statute by the executive officers, whose duty it is to enforce it, is entitled to great respect by the
courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to
be erroneous. Rules and regulations issued by administrative officials to implement a law cannot
go beyond the terms and provisions of the latter. Further, fundamental is the rule that the State
cannot be put in estoppel by the mistakes or errors of its officials or agents. (supra)
Finally, Sec. 69 of the 1977 NIRC (now Sec. 76 of the 1997 NIRC) provides that any excess
of the total quarterly payments over the actual income tax computed in the adjustment or final
corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be credited
against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year.
To ease the administration of tax collection, these remedies are in the alternative and the choice of
one precludes the other. Since the Bank has chosen the tax credit approach it cannot anymore
avail of the tax refund.. (supra)
*** 46. On July 18, 1986, the BIR issued to Salud V. Hizon a deficiency income tax
assessment. Since the assessment was not contested, the BIR on January 12, 1989, served
warrants of distraint and levy to collect the tax deficiency. For unknown reasons, the BIR
did not proceed to dispose of the attached properties.
On November 3, 1992, Salud wrote the BIR requesting a reconsideration of her tax
deficiency assessment. The BIR, in a letter dated August 11, 1994, denied.
On
January 1, 1997, the BIR filed with the RTC a case to collect the tax deficiency. The
complaint was signed by the Chief of the Legal Division of the Region and verified by the
Regional Director.
Salud now seeks the dismissal of the case on the following grounds:
a. The complaint was not filed upon authority of the BIR Commissioner as required
under Section 220 of the Tax Code;
b. The action has already prescribed. Resolve the issues raised.
SUGGESTED ANSWERS:

22

a. Revenue Administrative Order No. 10-95 specifically authorizes the Litigation and
Prosecution Section of the Legal Division of the regional district offices to institute the necessary
civil and criminal actions for tax collection. As the complaint filed in this case was signed by the
BIRs Chief of Legal Division for the region and verified by the Regional Director, there was,
therefore, compliance with the law. Sec. 7 of the present Tax Code authorizes the BIR
Commissioner to delegate some of his powers.
b .Sec. 228 of the NIRC of 1997 mandates that a request for reconsideration must be made
within 30 days from the taxpayers receipt of the tax deficiency assessment, otherwise the
assessment becomes final, unappealable and, therefore demandable. The notice was received by
Salud on July 18, 1986 and she made her request for reconsideration thereof only on November 3,
1992. Even assuming that she first learned of the notice on the day the warrants were served on
January 12, 1989, her request for reconsideration was still filed beyond the 30 day period. Hence,
her request for reconsideration did not suspend the running of the prescriptive period. Although the
Commissioner acted on Saluds request, eventually denying it on August 11, 1994, this is of no
moment and does not detract from the fact that the assessment had long become demandable.
(Republic of the Philippines, etc. v. Hizon, G.R. No. 1304, prom. December 13, 1999)
NOTES AND COMMENTS:
a. Effect of service of warrant of distraint or levy. The timely service of a warrant of
distraint or levy suspends the running of the period to collect the tax deficiency in the sense that
the disposition of the attached properties might well take time to accomplish, extending even after
the lapse of the statutory period for collections. (Advertising Associates, Inc., v. Court of Appeals,
133 SCRA 765; Palanca v. Commissioner of Internal Revenue, 114 Phil. 203). In those cases, the
BIR did not file any collection case but merely relied on the summary remedy of distraint and levy to
collect the tax deficiency.
Thus, the enforcement of tax collection through summary proceedings may be carried out
beyond the statutory period. (Republic of the Philippines, etc. v. Hizon, G.R. No. 1304, prom.
December 13, 1999) The statutory period for collection applies only where a court suit is availed of
for collection.
b. Form and Mode of Proceeding in Actions Arising under the Tax Code. Civil and
criminal actions and proceedings instituted in behalf of the Government under the authority of this
Code or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the
Government of the Philippines and shall be conducted by legal officers of the Bureau of Internal
Revenue but no civil or criminal action for the recovery of taxes or the enforcement of any fine,
penalty or forfeiture under this Code shall be filed in court without the approval of the
Commissioner." (Sec. 220, NIRC of 1997)
*** 47. After dissolution of Paramount on March 31, 1986, BPI acted as liquidator. On
May 30, 1985 Paramount paid P308,779.00 in income taxes for the 1 st quarter; for the 2nd
quarter, it paid P626,000.00 on August 29, 1985; for the 3 rd quarter, it paid P284,161.00 on
November 29, 1985.
On April 2, 1986, Paramount filed its corporate annual income tax return for the
calendar year ending December 31, 1985. All in all, Paramount paid the total amount of
P1,218,940.00 thereby showing a refundable amount of P65,259.00.
On April 14, 1988, BPI, as liquidator of Paramount, filed with the Court of Tax Appeals
a letter dated April 12, 1988 reiterating its claim for the refund of P65,259.00 as overpaid
income tax for calendar year 1985. On April 15, 1988, the Paramount representative, filed
with the Court of Tax Appeals a petition to toll the running of the prescriptive period for
filing a claim for refund of overpaid income taxes.
The Court of Tax Appeals ruled that the two-year prescriptive period commenced to
run from April 15, 1986, the last day for filing the corporate income tax return and granted
the refund. Was the grant of the refund proper ?
SUGGESTED ANSWER: No. The two-year prescriptive period for actions for refund of
corporate income tax should be computed from the time of actual filing of the Final Adjustment
Return or Annual Income Tax Return. REASON: At That point, it can already be determined
whether there has been an overpayment made by the taxpayer. Moreover, payment is made at the
time the return is filed.
Since Paramount filed its corporate annual income tax return on April 2, 1986, it had only
two-years from date within which to file its written claim for refund. When it filed a written claim for
refund on April 14, 1988, and a petition for refund only on April 15, 1988, both claim and action for
refund were thus barred by prescription. (Commissioner of Internal Revenue v. Court of Appeals, et
al., G.R. No. 117254, January 21, 1999)
NOTES AND COMMENTS: For corporations, the two year prescriptive period under Sec.
230 (now Sec. 229, NIRC of 1997), for instituting tax refund cases in court commence to run only
from the time the refund is ascertained, which can only be determined after a final adjustment return
is accomplished. Two years not jurisdictional and may be suspended. ( Commissioner of Internal

23

Revenue v. The Philippine Life Insurance Co.,et al. G.R. No. 105208, May 29, 1995 reiterating the
TMX case).
The two year period applies only to recovery of taxes or penalties NOT to tax credits
availment. Absent a specific provision in the Tax Code or special laws, the period would be 10
years. (Justice Vitug, concurring in the above case )
A simultaneous filing of the application with the BIR for refund/credit and the institution of the
court suit with the CTA is allowed. No need to wait for a BIR denial. REASONS:
a. The positive requirement of Section 230 NIRC (now Sec. 229, NIRC of 1997);
b. The doctrine that delay of the Commissioner in rendering decision does not extend the
peremptory period fixed by the statute;
c. The law fixed the same period two years for filing a claim for refund with the
Commissioner under Sec. 204, par. 3, NIRC (now Sec. 204 [C], NIRC of 1997), and for filing suit in
court under Sec. 230, NIRC (now Sec. 229, NIRC of 1997), unlike in protests of assessments under
Sec. 229 (now Sec. 228, NIRC of 1997), which fixed the period (thirty days from receipt of
decision) for appealing to the court, thus clearly implying that the prior decision of the
Commissioner is necessary to take cognizance of the case. (Commissioner of Internal Revenue v.
Bank of Philippine Islands, etc. et al., CA-G.R. SP No. 34102, September 9, 1994; Gibbs v.
Collector of Internal Revenue and Court of Tax Appeals, 107 Phil, 232; Johnston Lumber Co. v.
CTA, 101 Phil. 151)
If the protest is denied in whole or in part or n the instance where the Commissioner of
Internal Revenue does not act within one hundred eighty (180) days from submission of
documents, the taxpayer adversely affected may appeal to the Court of Tax Appeals within thirty
(30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180) days,
otherwise the decision shall become final, executory and demandable. (last par., Sec. 228, NIRC of
1997)
48. Philippine Home Assurance Corporation paid documentary stamp taxes on certain
non-life insurance policies it issued. However, the premiums were not paid. The company
on basis the provisions of Section 77 of the Insurance Code to the effect that,
Notwithstanding any agreement to the contrary, no policy or contract of insurance issued
by an insurance company is valid and binding unless and until the premium thereof has
been paid xxx, now claims for a refund of the documentary stamps it paid because the
policies never became effective. Should the refund be granted ? Alternatively, could there
be a refund of documentary stamp tax payments ?
SUGGESTED ANSWER: No. Documentary stamp taxes are levied upon the privilege,
opportunity, or facility to execute certain instruments irrespective of whether the contracts are
subsequently declared to be rescissible, void, voidable or unenforceable. The documentary stamp
taxes are imposed on the mere issuance of the policies even if these policies subsequently are
considered as not valid or binding under the law. (Philippine Home Assurance Corporation, et al., v.
Court of Appeals, et al., G.R. No. 119446, prom. January 21, 1999)
49. Should interest be paid where a tax is refunded by the Government to a taxpayer ?
SUGGESTED ANSWER: The rule is that no interest on refund of tax can be awarded unless
authorized by law or the collection of the tax was attended by arbitrariness. An action is not
arbitrary when exercised honestly and upon due consideration where there is room for two
opinions, however much it may be believed that an erroneous conclusion was reached.
Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions. (Philex Mining
Corporation v. Commissioner of Internal Revenue, et al., G.R. No. 120324, prom. April 21, 1999)
50. What is the nature of a tax amnesty ?
SUGGESTED ANSWER: A tax amnesty is a general pardon to taxpayers who want to start
a clean slate. It also gives the government a chance to collect uncollected tax from tax evaders
without having to go through the tedious process of a tax case. To avail of a tax amnesty granted
by the government, and to be immune from suit on its delinquencies, the taxpayer must have
voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on
such previously untaxed income.
A tax amnesty, much like a tax exemption, is never favored nor presumed in law and if
granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly
against the taxpayer and liberally in favor of the taxing authority. (Banas, Jr. v. Court of Appeals, et
al., G.R. No. 102967, prom. February 10, 2000)

NATIONAL INTERNAL REVENUE CODE

THE BUREAU OF INTERNAL REVENUE

24

51. An internal revenue officer, having been reliably informed by an unimpeachable

source, that cigars, jewelries, liquor and other articles subject to excise taxes are kept in the
house of Mr. Tomas, entered said house, seized the articles and arrested Mr. Tomas on the
strength of a warrant signed by the Commissioner of Internal Revenue.
a. Mr. Tomas denounced the search, seizure and his arrest as violative of the
constitution because it was effected without a search warrant and warrant of arrest issued
by the appropriate court. Under the circumstances, is the actuation of the internal revenue
officer sanctioned by law? Why?
b. Would your answer be the same if the search, seizure and arrest was effected by
customs officers by virtue of a warrant of seizure and detention signed by the collector of
customs? Explain.

SUGGESTED ANSWER:
a. Yes. Any internal revenue officer in the discharge of his official duties may enter any
house, building or place where articles subject to excise taxes are produced or kept, or are believed
by him upon reasonable grounds to be produced or kept so far as may be necessary to examine,
discover or seize the same. (1st par., Sec. 171, NIRC of 1997)
Internal revenue officers shall have authority to make arrests and seizures for violation of any
penal law or regulation administered by the Bureau of Internal Revenue. Any person so arrested
shall forthwith be brought before a court, there to be dealt with according to law. (Sec. 13, NIRC of
1997)
No search warrant or warrant of arrest is required under the doctrine of primary jurisdiction
which posits that in technical matters where the administrative bodies have obtained expertise, the
courts will defer. This is likewise premised on the lifeblood theory which mandates the immediate
collection of taxes to ensure the continued existence of the State.
b. My answer would be different because customs authorities may search a dwelling place
only upon a warrant issued by a Judge of the appropriate court upon sworn application showing
probable cause and particularly describing the place to be searched and person or thing to be
seized. (Sec. 2208, 2209, Tariff & Customs Code). The customs authorities could detain persons
only if they are coming to the Philippines from foreign countries (Sec. 2212, Ibid.) not in the above
entitled problem where they are already in the Philippines.
52. Explain the rule making power of BIR.
SUGGESTED ANSWER:
a. There are two kinds of rulings the BIR may issue - interpretative rulings and legislative
rulings.
Interpretative rules are designed to provide guidelines to the law which the administrative
agency is in charge of enforcing. No notice, hearing or publication is required, as they are issued
merely for the guidance of administrative officers. Illustration: Revenue Memorandum Circular No.
47-91 classifying copra as an agricultural non-food item declaring it exempt from VAT only if the
sale is made by the primary producer. (Misamis Oriental Association of Coco Traders, Inc. v.
Department of Finance Secretary, et al., 238 SCRA 63 [1994].
Legislative rules are in the nature of subordinate legislation, designed to implement a primary
legislation by providing the details thereof. They are issued under the quasi-legislative authority of
the BIR Commissioner. There is a requirement for notice, hearing and publication. Illustration:
Revenue Memorandum Circular No. 37-93 which placed Hope Luxury, Premium More and
Champion cigarettes within the scope of the amendatory law R.A. No. 7654 and subjected them to
the increased tax rate requires notice, hearing and publication. (Commissioner of Internal Revenue
v. Court of Appeals, et al., 261 SCRA 236)
NOTES AND COMMENTS:
The rulings and circulars promulgated by the Commissioner do not have retroactive
application if the revocation, modification, or reversal would be prejudicial to the taxpayers. (Sec.
246, NIRC of 1997; Commissioner of Internal Revenue v. Court of Appeals, et al., 267 SCRA 557)
Exceptions: Instances when revenue rulings and regulations have retroactive effect even if
prejudicial to the taxpayer:
a. Where the taxpayer deliberately misstates or omits material facts from his return or in any
document required of him by the BIR;
b. Where the facts subsequently gathered by the BIR are materially different from the facts
on which the ruling is based, or
c. Where the taxpayer acted in bad faith. (Sec. 246, NIRC of 1997)
53. In what instances may the Bureau of Internal Revenue suspend or temporarily
close the business establishment of a taxpayer ? How long does the suspension last ?

25

SUGGESTED ANSWER: The Commissioner or his authorized representative is empowered

to suspend the business operations and temporarily close the business establishment of any
person for any of the following violations
a. In case of a VAT-registered person:
1) Failure to issue receipts or invoices;
2) Failure to file a VAT return as required under the Tax Code;
3) Understatement of taxable sales or receipts by 30% or more of his correct taxable
sales or receipts for the taxable quarter.
b. Failure to register under the VAT provisions of the Tax Code. The temporary closure of
the establishment shall for the duration of not less than five (5) days and shall be lifted only upon
compliance with whatever requirements prescribed by the Commissioner in the closure order.
(Atlas Consolidated Mining & Development Corporation v. Commissioner of Internal Revenue, G.R.
No. 134467, prom. November 17, 1999)
*** 54. The Commissioner of Internal Revenue is authorized under the Tax Code to
delegate the powers vested in him under the pertinent provisions of the Tax Code to any
subordinate official with the rank equivalent to a division chief or higher.
What are the exceptions to this rule on delegation or alternatively speaking, what are
the powers of the Commissioner that he could not delegate ?
SUGGESTED ANSWER: The following are some of the powers that he could not delegate:
a. The power to recommend the rules and regulations by the Secretary of Finance;
b. The power to issue rulings of first impression or to reverse, revoke, or modify any existing
ruling of the Bureau;
c. The power to compromise or abate, any tax deficiency, Provided, however, that
assessments issued by the Regional Offices involving basic deficiency taxes of P500,000.00 or
less, and minor criminal violations as may be determined by rules and regulations to be
promulgated by the Secretary of Finance, upon the recommendation of the Commissioner,
discovered by regional and district officials, may be compromised by a regional evaluation board
which shall be composed of the Regional Director as Chairman, the Assistant Regional Director,
heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having
jurisdiction over the taxpayer, as members; and
d. The power to assign or reassign internal revenue officers to establishments where articles
subject to excise tax are produced or kept. (Sec. 7, NIRC of 1997 cited in Republic of the
Philippines, etc. v. Hizon, G.R. No. 130430, prom. December 13, 1999)

INCOME TAXATION
*** 55. Define income in income tax law.
An amount of money coming to a person within a specified time, whether as payment for
services, interest, or profit from investment. It means cash or its equivalent.
It is gain derived and severed from capital, from labor or from both combined. For example,
to tax a stock dividend would be to tax a capital increase rather than the income. (Commissioner of
Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
NOTES AND COMMENTS: Income distinguished from capital:
a. Capital is wealth or fund, WHILE income is profit or gain from the flow of wealth.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
Capital is a fund of property existing at an instant of time WHILE income is that flow of
services rendered by that capital by the payment of money from it or any other benefit rendered by
a fund of capital in relation to such fund through a period of time.
b. Capital is wealth WHILE income is the service of wealth; and
c. Capital is the tree WHILE income is the fruit. (Madrigal v. Rafferty, 38 Phil. 414)
Realization is determinative of earning process resulting to income. Without realization,
there is no income.
The determining factor for the imposition of income tax is whether any gain or profit was
derived from the transaction. In the metaphor of Eisner v. Macomber, 252 U.S. 426, income is not
deemed realized until the fruit has fallen
*** 56. What are the general principles of income taxation in the Philippines ?
a. A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines.
b. A nonresident citizen is taxable only on income derived from sources within the
Philippines.
c. An individual citizen of the Philippines who is working and deriving income from abroad as
an overseas contract worker is taxable only on income from sources within the Philippines,
Provided, That a seaman who is a citizen of the Philippines and who receives compensation for

26

services rendered abroad as a member of the complement of a vessel engaged exclusively in

international trade shall be treated as an overseas contact worker.
d. An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines.
e. A domestic corporation is taxable on all income derived from sources within and without
the Philippines.
f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines. (Sec. 23, NIRC of 1997)
57. Are stock dividends subject to income taxation ?
SUGGESTED ANSWER: Stock dividends are unrealized gain and cannot be subject to
income tax until the gains have been realized.
Stock dividends represent capital and do not constitute income to its recipient. The mere
issuance thereof is not subject to income tax as they are nothing but an enrichment through
increase in value of capital investment.
As capital, stock dividends postpone the realization of profits because the fund represented
by the new stock has been transferred from surplus to capital and no longer available for actual
distribution.
Before realization, stock dividends are nothing but a representation of an interest in the
corporate properties. As capital, it is not yet subject to income tax. (Commissioner of Internal
Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
58. What is meant by redemption of shares of stock ?
SUGGESTED ANSWER: Redemption is repurchase, a reacquisition of stock by a
corporation which issued the stock in exchange for property, whether or not the acquired stock is
cancelled, retired or held in treasury.
Essentially, the corporation gets back some of its stock, distributes cash or property to the
shareholder in payment for the stock, and continues in business as before. The redemption of stock
dividends previously issued is used as a veil for the constructive distribution of cash dividends.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
NOTES AND COMMENT: Taxability of redemption by issuing corporation of shares of
stock. It is suggested that the Bar reviewee ignores the concepts of taxability of redemption of
shares is stock by the issuing corporation as discussed in Commissioner of Internal Revenue v.
Court of Appeals, et al., G.R. No. 108576, January 20, 1999 (the ANSCOR case), where the
present provisions of the Tax Code on transaction tax [Sec. 127 (A), NIRC of 1997], and capital
gains tax find application. The only concepts that should be retained is the definition of redemption,
and the applicability of the ANSCOR case concept of redemption where the shares of stock that are
redeemed are ordinary assets. The tax treatment of redemption of shares of stock, under the
present provisions of the Tax Code shall be discussed below.
Tax treatment of redemption by issuing corporation of shares of stock under the
present provisions of the Tax Code, not under the former provisions of the Tax Code as
interpreted in the ANSCOR case. The tax treatment would be dependent upon the following
factors:
a. The nature of the shares of stock being disposed of, whether the shares are capital
assets or ordinary assets;
b. Whether or not the shares of stock are listed and traded and listed in the stock exchange.
Taxability of sales, barter or exchange of shares of stocks:
a. Shares of stock are capital assets and not listed and traded in the stock exchange.
Where the shares of stock are capital assets because the seller is not engaged in the business of
buying and selling shares of stock (a dealer in securities), and not listed and traded in the stock
exchange, the sale is subject to a 5% tax on net capital gain not over P100,000.00 while the net
capital gain over P100,000.00 is subject to a tax of 10%. Note that the holding period is not
applied. The capital gains tax is an income tax because the tax falls under title II of the Tax Code,
entitled, Income Tax
b. Shares of stock whether capital or ordinary assets but are listed and traded in the
stock exchange are subject to the transaction tax of of 1% of the gross selling or transaction
price. The holding period is not applied and the transaction tax is in lieu of all income taxes that
may be collected.
c. Shares of stock ordinary assets but not listed and traded in the stock exchange. If
the shares of stock are ordinary assets because the seller is engaged in the business of buying and
selling shares of stock (dealer in securities), the transaction shall be subject to inclusion in the
income tax return depending on certain circumstances. See discussion on tax treatment of
redemption of shares of sock where the shares that are redeemed are ordinary assets and not
listed and traded in the stock exchange.

27

Tax treatment of redemption of shares of stock where the shares that are redeemed
are ordinary assets and not listed and traded in the stock exchange.
Whether the transaction is to be subject to income taxation or not would be dependent upon
the nature and character of the shares of stock that are the subject of redemption.
If the source is the original capital subscriptions upon the establishment of the corporation or
from initial capital investment in an existing enterprise, the redemption to the concurrent value of
acquisition is not subject to income taxation, as it is not income but a mere return of capital.
On the contrary, if the redeemed shares are from stock dividend declarations other than as
initial capital investment, the proceeds of the redemption is additional wealth, for it is not merely a
return of capital but a gain therefrom.
The test for taxability therefor, as would make the redemption essentially equivalent to the
distribution of a taxable dividend, is whether the redemption resulted into a flow of wealth. If no
wealth is realized from the redemption, there may not be a dividend equivalence treatment.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
*** 59. What are improperly accumulated earnings ?
SUGGESTED ANSWER: These are the earnings or profits of a corporation which are
permitted to accumulate instead of being divided by a corporation to its shareholders for the
purpose of avoiding the income tax with respect to its shareholders or the shareholders of another
corporation. If the income were divided and distributed, they would have been taxed as dividends.
NOTES AND COMMENTS:
a. Improperly accumulated earnings tax. In addition to other income taxes, there is
imposed for each taxable year on the improperly accumulated taxable income of each corporation,
an improperly accumulated earnings tax equal to ten percent of the improperly accumulated taxable
income. [Sec. 29 (A), NIRC of 1997]
b. Corporations liable for the improperly accumulated earnings tax. Every corporation
formed or availed for the purpose of avoiding income tax with respect to its shareholders or the
shareholders of another corporation, by permitting earnings and profits to accumulate instead of
being divided or distributed. [Sec. 29 (B) (1), NIRC of 1997]
*** c. Corporations exempt from the improperly accumulated earnings tax:
1) Publicly-held corporations;
2) Banks and other nonbank financial intermediaries; and
3) Insurance companies. [Sec. 29 (B) (2), NIRC of 1997]
d. Evidence determinative of purpose to avoid tax upon shareholders. The fact that
the earnings or profits of a corporation are permitted to accumulated beyond the reasonable needs
of the business shall be determinative of the purpose to avoid the tax upon its shareholders or
members unless the corporation, by clear preponderance of evidence, shall prove the contrary.
[Sec. 29 (C) (2), NIRC of 1997]
Reasonable needs of business includes the reasonably anticipated needs of the business.
[Sec. 29 (E), NIRC of 1997]
In order to determine whether profits are accumulated for the reasonable needs of the
business to avoid the surtax upon shareholders, it must be shown that the controlling intention of
the taxpayer is manifested at the time of the accumulation, not intentions declared subsequently,
which are mere afterthoughts. Furthermore, the accumulated profits must be used within a
reasonable time after the close of the taxable year. (Cyanamid Philippines, Inc. v. Court of Appeals,
et al., G.R. No. 108067, prom. January 20, 2000)
*** e. Tests to determine justified accumulation not subject to tax.
1) Immediacy Test. Reasonable needs of the business means the immediate
needs of the business, and it was generally held that if the corporation did not prove an
immediate need for the accumulation of the earnings and profits, the accumulation was not
for the reasonable needs of the business and the penalty tax would apply. (Cyanamid
Philippines, Inc. v. Court of Appeals, et al., G.R. No. 108067, prom. January 20, 2000 citing
Manila Wine Merchants, Inc. v. Commissioner of Internal Revenue in turn citing Mertens)
2) 2 to 1 Rule. The ratio of current assets to current liabilities and the adoption of
the industry standard. The ratio of current assets to current liabilities is used to determine
the sufficiency of working capital. Ideally, the working capital should equal the current
liabilities and there must be 2 units of current assets for every unit of current liability, hence
the so-called 2 to 1 Rule. (Ibid.)
3) Bardahl Formula. Allows retention as working capital reserve, sufficient
amounts of liquid assets to carry the company through one operating cycle. The formula
requires an examination of whether the taxpayer has sufficient liquid assets to pay all its
current liabilities and any extraordinary expenses reasonably anticipated, plus enough to
operate the business during one operating cycle.
Operating cycle is the period of time it takes to convert cash into raw materials, raw
materials into inventory, and inventory into sales, including the time it takes to collect

28

payment for the sales. There are variations in the application of the Bardahl formula, such
as average operating cycle or peak oiperating cycle. In times when there is no recurrence of
a business cycle, the working capital needs cannnot be predicted with accuracy.
Although the Bardahl formula is well-established and routinely applied by the courts,
it is not a precise rule. It is used only for administrative convenience. (Ibid.)
60. What is meant by the accrual method of accounting ?
SUGGESTED ANSWER: Income is reportable when all the events have occurred that fix the
taxpayers right to receive the income, and the amount can be determined with reasonable
accuracy. Thus it is the right to receive income, and not the actual receipt, that determines when to
include the amount in gross income.
Consequently, the following are the requisites:
1) That the right to receive the income must be valid, unconditional and enforceable, i.e. not
contingent upon future time;
2) The amount must be reasonably susceptible of accurate estimate; and
3) There must be a reasonable expectation that the amount will be paid in due course.
(Filipinas Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, prom. October
12, 1999)
NOTES AND COMMENTS:
a. The two (2) principal accounting methods for recognition of income are the 1)
accrual method; and the (2) cash method.
Under the cash method income is to be construed as income for tax purposes only upon
actual receipt of the cash payment. It is also referred to as the cash receipts and disbursements
method because both the receipt and disbursements are considered. Thus, income is recognized
only upon actual receipt of the cash payment but no deductions are allowed from the cash income
unless actually disbursed through an actual payment in cash.
Example of the two methods. Leon the owner of a building leased the same to Miguel.for
P50,000.00 monthly, payable every 1 st day of the month. If Leon uses the accrual method of
income recognition, he would have an income of P50,000.00 on the 1 st day of each month
irrespective of whether he receives the rent from Miguel. On the other hand, if Leon uses the cash
method, he would have income only when he physically receives the cash from Miguel.
b. Other methods of accounting:
1) Completion of Contract basis. Under this method, gross income is to be
reported in the taxable year in which the contract is fully completed and accepted by the
contractee if the taxpayer elected it as a consistent practice to treat such income, provided
that such method clearly reflects the net income. This method is applicable to contractors in
the construction of building, installation of equipment and other fixed assets, or other
construction work covering a period in excess of one year. This is not recognized under the
NIRC of 1997.
2) Percentage of completion basis.
3) Installment basis which is a method considered when collections extend over
relatively long periods of time and there is a strong possibility that full collection will not be
made. As customers make installment payments, the seller recognizes the gross profit on
sale in proportion to the cash collected. (Chapter II, Accounting Methods, Handbook on
Audit Procedures and Techniques Volume I, Revision 2000, pp. 3-4)
61. What is a fringe benefits tax ?
SUGGESTED ANSWER: A final withholding tax imposed on the grossed-up monetary value
of fringe benefits furnished, granted or paid by the employer to the employee, except rank and file
employees. (1st par., Sec. 2.33 [A], Rev. Regs. No. 3-98)
62. What are considered as fringe benefits for purposes of taxation ?
SUGGESTED ANSWER: For purposes of taxation, fringe benefit means any good, service,
or other benefit furnished or granted in cash or in kind by an employer to an individual employee
(except rank and file employees), such as but not limited to:
a. Housing;
b. Expense account;
c. Vehicle of any kind;
d. Household personnel, such as maid, driver and others;
e. Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;
f. Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organizations;
g. Expenses for foreign travel;
h. Holiday and vacation expenses;

29

i. Educational assistance to the employee or his dependents; and

j. Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows. [Sec. 33 (B), NIRC of 1997; 1 st par., Sec. 2.33 (B), Rev. Regs. No.
3-98]
*** 63. What are the kinds of fringe benefits that are not subject to the fringe benefits
tax ?
SUGGESTED ANSWER:
a. When the fringe benefit is required by the nature of, or necessary to the trade, business
or profession of the employer; or
b. When the fringe benefit is for the convenience or advantage of the employer. [Sec. 32(A),
NIRC of 1997; 1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
c. Fringe benefits which are authorized and exempted from income tax under the Tax Code
or under any special law;
d. Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans;
e. Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and
f. De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance upon recommendation of the Commissioner of Internal Revenue. [1 st par.,
Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-98]
*** 64. What are de minimis benefits ?
SUGGESTED ANSWER: Facilities and privileges (such as entertainment, medical services,
or so-called courtesy discounts on purchases), furnished or offered by an employer to his
employees. They are not considered as compensation subject to income tax and consequently to
withholding tax, if such facilities are offered or furnished by the employer merely as a means of
promoting the health, goodwill, contentment, or efficiency of his employees. [Sec. 2.78,1 (A) (3),
Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]
*** 65. What are considered as de minimis benefits not subject to withholding tax on
compensation income of both managerial and rank and file employees ?
SUGGESTED ANSWER: The following shall be considered as de minimis benefits not
subject to withholding tax on compensation income of both managerial and rank and file
employees:
a. Monetized unused vacation leave credits of employees not exceeding ten (10) days
during the year;
b. Medical cash allowance to dependents of employees not exceeding P750.00 per
employee per semester or P125 per month;
c. Rice subsidiy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not
more than P1,000.00;
d. Uniforms and clothing allowance not exceeding P3,000.00 per annum;
e. Actual yearly medical benefits not exceeding P10,000.00 per annum;
f. Laundry allowance not exceeding P300 per month;
g. Employees achievement awards, e.g. for length of service or safety achievement, which
must be in the form of a tangible persona property other than cash or gift certificate, with an annual
monetary value not exceeding P10,000.00 received by an employee under an established written
plan which does not discriminate in favor of highly paid employees;
h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000
per employee per annum;
i. Flowers, fruits, books, or similar items given to employees under special circumstances,
e.g. on account of illness, marriage, birth of a baby, etc.; and
j. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the
basic minimum wage.
The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be
considered in determining the P30,000 ceiling of other benefits provided under Section 32 (B)(7)
(e) of the Code. However, if the employer pays more than the ceiling prescribed by these
regulations, the excess shall be taxable to the employee receiving the benefits only if such excess
is beyond the P30,000.00 ceiling, provided, further, that any amount given by the employer as
benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall
constitute as deductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as
amended by Rev. Regs. No. 8-2000]
NOTES AND COMMENTS: The above provision of Rev. Regs. No. 8-2000 likewise modified
Sec. 2.33 (C), Rev. Regs. No. 3-98, which enumerates the de minimis benefits exempt from fringe
benefits taxes.

30

*** 66. The following were the events and transactions of Rosalinda, a resident alien, in
2000:
a. Received P7.0 million as commissions for being the agent of actor Mikey and
actress Meggy;
b. Received P2.0 million as blackmail money for not exposing the indiscretions of
movie actress Alma;
c. Sold her residential condominium at Ayala Avenue for P30 million. She bought
the same in 1997 for only P10 million;
d. Made a killing at the stock market when she sold for P5.0 million Primus, Inc.
shares which were not traded in the stock exchange. She bought the shares in 1985 for only
P500,000.00;
e. During her birthday, Mrs. Water Lily, the famous producer gave her a ten carat
diamond ring worth P750,000.00;
f. Received P360,000.00 annual salary as P.R.O. of Regal Productions;
g. Awarded P1.5 million damages from the libel suit she filed against actress Natalia;
h. Was sent by Regal Productions to Hollywood, U.S.A. to observe movie making at
various studios. She traveled at Regal s expense through First Class Airfare, and Regal
spent US$500.00 a day for her hotel and accommodations which were all reimbursed to
Rosalinda;
i. Received P750,000.00 from Regal Productions as separation pay when she was
terminated as the result of her involvement in a well publicized scandal;
j. Upon nomination of her friend, Rosalinda was awarded the best P.R.O. of the year
with the accompanying trophy worth P50,000.00 and cash price of P100,000. She was
required to deliver at least 12 lectures before P.R.O.s;
k. Won a brand new Mercedes Benz C600Z worth P6,500,000.00 during a raffle
conducted by a well-known supermarket;
l. P250,000.00 proceeds of a bouncing check she issued to her friend Ms. Cris Ty, who
instituted a criminal case for violation of B.P. Blg. 22; and
m. P500,000.00 which constituted the sales proceeds of the jewelry she stole from
movie producer, Aling Pepa.
1) What items are to be included as part of Rosalinda's compensation income, or
income from self-employment? Explain.
2) Why were the items you excluded not includible as part of Rosalindas
compensation income or income from self-employment? Explain.

SUGGESTED ANSWER:
a. The following are the items to be included as part of Rosalindas compensation income
because they were derived from employer-employee relationship from Regal Productions:
1.) The P360,000.00 annual salary as P.R.O. of Regal Productions.
2.) The cost of the First Class Airfare Ticket exceeding the cost of a business class
ticket for the travel to Hollywood in pursuit by Rosalinda of Regal's trade and business is includible
as part of Rosalindas compensation income. (No. 3, 3.1, Revenue Audit Memorandum No. 1-87).
3.) The amount reimbursed to Rosalinda for meals and lodging during her stay in the
U.S.A. exceeding U.S.$150.00 per day or in the problem U.S.$350.00 per day forms part of
Rosalindas compensation income. (No. 3, 3.2, Ibid.)
The following are the items to be included as part of Rosalindas income from selfemployment engaged in the business of being an agent for actors and actresses:
1) The P7.0 million commissions for being the agent of actor Mikey and actress
Meggy;
2) The P2.0 million blackmail money is considered as other income coming from
sources other than those mentioned in Sec. 3(A) of Revenue Regulation No. 2-93 as well as
income from whatever source derived. (Section 32 [A], NIRC of 1997) The same is true with the
P250,000.00 proceeds of the bouncing check and the P500,000.00 sales proceeds of the jewelry
she stole. Thus, all incomes, illegal or legal, are included. For Philippine tax purposes all income not
expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or
involuntary action of the taxpayer in producing the income are subject to income taxation.
NOTES AND COMMENTS: The rule is different in the United States. In Commissioner of
Internal Revenue v. Wilcox, 286 U.S. 417, the U.S. Supreme Court held that a swindler, embezzler,
thief or robber has an unqualified duty and obligation to return the money. to collect a tax would
give the government an unjustified preference as to the part of the money which rightfully belongs
to the victim.
In U.S. v. Lozia, 104, 104 F. Supp. (D.C.J.D.N.Y. 1952), it was held that the money or other
proceeds of the sale or other disposition of stolen property is subject to income tax because the

31

felon has an obligation to return the property taken. The proceeds were not the property taken.
The proceeds may not even be the equivalent of the property taken.
3) P1.5 million damages, because they are not compensation arising from under Sec.
32 (B) [4] of the NIRC of 1997. These are not damages which arose from personal injuries, hence
subject to income tax.
4) The P50,000.00 prize as Best P.R.O. While it is true that Rosalinda was selected
without any action on her part to enter the contest or proceeding, she is required to deliver 15
lectures, which is considered as substantial future services as a condition to receiving the prize.
(Sec. 32 [B] {7} (c) {ii} of the NIRC of 1997)
b. The following are the excluded items and reasons for their exclusion:
1) P30 million proceeds from the sale of her residential condominium because the
same is subject to final taxes in the form presumed capital gains taxes from the sale of real property
under Sec. 24 (D) of the NIRC of 1997).
2) The gains from the sale of Primus shares because the gains are subject to final
taxes for the capital gains from sales of stock not traded in the stock exchange under Sec. 24 (C)
of the NIRC of 1997.
3) The P750,000.00 diamond ring because it is a gift excluded from gross income
(Sec. 32 [B] {3} of the NIRC of 1997) It is subject to gift taxes under Sec. 98 of the NIRC of 1997.
The giving of the gift was a pure act of liberality and not in consideration of any service.
4) P750,000.00 separation pay as Rosalindas services were terminated for a cause
beyond her control in accordance with Sec. 32 (B) [6] {b} of the NIRC of 1997, hence excluded
from gross income.
5) The P6,500,000.00 value of the Mercedes Benz she won because it is subject to a
final tax of 20% on passive income under the provisions of Sec. 24 (B) [1] of the NIRC of 1997.
67. In 1998, Mang Joe Liby after thirty (30) years experience as a mechanic for
Mercedes Benz decided to establish his own auto repair shop with two of his former
supervisors as his partners. For the year 2000, the auto repair shop incurred the following:
a. Advertising expenses;
b. Donations to the Samahang Rizalista, a non-profit, non-stock religious corporation
which venerates as its God, the hero Jose Rizal;
c. Taxes paid on the importation of auto repair equipment;
d. Losses when the auto repair shop was burned;
e. Insurance premiums on the life of Mang Joe Liby payable to the partnership;
f. Salaries of mechanics.
Mang Joe and his partners now asks you how their partnership income shall be taxed
in the light of the provisions of the NIRC of 1997. What advise shall you give?

SUGGESTED ANSWER:
Mang Joe and his partners shall be taxed like a corporation. As defined under Sec. 22 (B),
of the NIRC of 1997, a corporation includes partnerships no matter how created or organized, but
does not include general professional partnership. Since what was formed by Mang Joe and his
partners was a business partnership, they should be considered as having formed a corporation for
tax purposes.
Since the partnership was organized and existing under Philippine law, its taxable income
shall be subject to the reduced rate of 32% on taxable income effective January 1, 2000. (Sec. 27
[A], NIRC of 1997) To arrive at its taxable income, the partnership is allowed to use the allowed
itemized deduction under Sec. 34 also of the NIRC of 1997. All of the above expenses, except the
insurance premium are all deductible.
The partnership shall not be subject to the minimum corporate income tax on domestic
corporations, because it is only on its second taxable year immediately following the
commencement of its business operations. The minimum corporate income tax is computed only
beginning the fourth taxable year immediately following the year the taxpayer corporation
commenced business. (Sec. 27 [E] {1}, NIRC of 1997)
Should the partnership distribute its net income after tax to Mang Joe and his partnerships,
their individual shares in the distribution shall be subject to tax on dividends. (Sec. 24 [B] {2}, NIRC
of 1997)
68. After ten (10) years experience working as the General Manager of a fastfood
chain, Wendy decided to become self employed and opened an eatery which she called
McWendys Pizza. She registered the eatery as a single proprietorship.
In 2000, Wendy had the following income items:
a. Gross receipts from operation of McWendys Pizza amounting to P5 million.
b. Proceeds from the sale of her house and lot amounting to P3 million which she
invested in McWendys Pizza.

32

c. Cash prize of P15,000 which she won in a singing contest.

d. Cash dividends of P35,000.00 which she received from MERALCO, a domestic
corporation.
e. Life insurance proceeds which she received from the death of her pet dog
amounting to P15,000.00.
f. P25,000.00 cash prize for being the Best Pizza Parlor in Metro Manila. The award
was made by an independent body comprised of selected pizza parlor operators which,
without the knowledge of pizza parlor operators, went around Metro Manila sampling the
food, rating the facilities and personnel. There were no entries to the contest as the winners
were chosen by the independent body.
g. Two round trip tickets for the U.S.A. valued at U.S. $3,500.00 with U.S.$5,000.00
pocket money won from the annual raffle of her depository bank.
h. P45,000.00 interest earned from her time deposit with a local bank.
I. P40,000.00 dowry from her prospective mother-in-law, an American living in New
York, U.S.A., as Wendy was getting married in 1999.
j. P50,000.00 net profit from the sale of Primus Corporation stocks which were not
traded at the Phil. Stock Exchange.
Upon the other hand, Wendy had the following disbursements:
a. P50,000.00 legal fees for the organization of McWendys Pizza;
b. P120,000.00 for radio and TV time to advertise McWendys Pizza;
c. P25,000.00 as contribution to the First Ladys Doctor for the Poor Programs;
d. P35,000.00 worth of food which Wendy personally distributed to families displaced
by lahar in Pampanga, a calamity-stricken area declared by the President;
e. P10,000.00 donation to her alma mater, the University of the Philippines;
f. P150,000.00 value of spoiled food resulting from a brown-out;
g. P25,000.00 customs duties and value added taxes on the importation of food
heaters;
h. P12,000.00 paid to the independent CPA who audited McWendys Books of
Accounts;
I. P35,000.00 medical expenses for one of her waiters who was injured in a job
related accident;
j. P85,000.00 paid as interest to her sister who lent her P500,000.00 as part of the
initial capitalization for McWendys;
k. P35,000.00 interest payments for the car Wendy bought on installment basis which
car was bought from a car company but financed by CITYTRUST, a bank authorized to
operate by the Bangko Sentral ng Pilipinas; and
l. P150,000.00 which Wendy spent in observing trends in the fastfood business in the
United States and Europe.
a. Which of the above income items should be reported by Wendy on her 2000
Income Tax Return? Explain.
b. Which of the above disbursements are properly deductible in computing the taxable
income of Wendy? Explain.

SUGGESTED ANSWER:
a. The following are the income items to be reported by Wendy in her 2000 income tax
return:
1) P5 million gross receipts from operation of McWendys Pizza derived as income
from self-employment under sec. 1(12) Rev. Regs. No. 2-93.
2) P15,000.00 life insurance proceeds derived from the death of her dog. The tax
imposed on income from self-employment is imposed on income received from all sources other
than compensation income, certain passive incomes, capital gains from the sales of shares of stock
and capital gains from sales of real property (Sec. 3(A) Rev. Regs. 2-93) While the P15,000.00 is
sourced from life insurance proceeds, the same is not excluded under Sec. 32 (B) [1] of the NIRC of
1997 because the exclusion presupposes life insurance proceeds from the death of a person and
not of animals.
3) P25,000.00 cash prize as the Best Pizza Parlor because this is a prize was not
given primarily in recognition religious, charitable, scientific, educational, artistic, literary or civic
achievement but rather as part of business activity. It does not matter that McWendys Pizza was
selected without any action on its part to enter the contest or proceeding and McWendys Pizza is
not required to render substantial future services as a condition to receiving the prize. (Sec. 32 (B)
{7} (c), NIRC of 1997)
The following items are excluded from her income reportable in her income tax returns:
1) P3 million proceeds from sale of house and lot as subject to capital gains from sale
of real property which is a final tax. (Sec. 24 [D], NIRC of 1997)

33

2) P35,000.00 dividends from MERALCO, a domestic corporation is subject to a final

tax on dividends under Sec. 24 (B) [2], NIRC of 1997.
3) P15,000.00 won in a singing contest as this is a prize exceeding P10,000.00
subject to a final tax on passive income in accordance with Sec. 24 (B) [1], NIRC of 1997.
4) Value of the tickets and pocket money won from the annual raffle of Wendys Bank
for the same reason as above.
5) P45,000.00 interest income for the same reason as above.
6) Net profit from sale of Primus shares as these are subject to final tax on the sales
of shares of stock not traded in the stock exchange under Sec. 24 (C) of the NIRC of 1997.
7) P40,000.00 dowry because it is a gift. (Sec. 32 [B] {3}, NIRC of 1997)
b. Only the P50,000.00 donation to the University of the Philippines is allowed to be
deducted from Wendys income from self-employment to arrive at her taxable income. This is so,
because it is a donation to the government under Sec. 34 (H) [2] {a}, NIRC of 1997.
The government as used here refers to the Government of the Philippines or any of its
agencies or political subdivisions and includes among others state colleges and universities. The
University of the Philippines is a state university (Sec. 3(b)(f) Rev. Regs. No. 2-93).
c. The P50,000.00 legal fees, the P120,000.00 advertising expenses for radio and TV time;
the P150,000.00 value of the spoiled food, the P25,000.00 taxes, the P12,000.00 audit fee, the
P35,000.00 medical expenses and the P150,000.00 expenses to observe trends in the fastfood
business are deductible as ordinary and necessary expenses incurred in connection with Wendy's
trade and business.
The following are not deductible from her gross income:
1. P25,000.00 contribution to the Doctor for the Poor Program because it is a contribution
to a private organization and not to the government.
2. While it is true that the P35,000.00 worth of food was distributed to families in a calamity
stricken area declared by the President, the same was not donated to the government or to a relief
organization duly accredited as such by the Department of Social Welfare and the Bureau of
Internal Revenue.
3. The interest paid to her sister amounting to P85,000.00 because her sister is a related
party.
4. The P35,000.00 interest payments to CITYTRUST because there is no showing in the
problem that it has been paid or incurred in connection with the conduct of Wendys business.
Since she is a resident, Wendy could, instead of availing of the itemized deductions, choose
to avail of the optional standard deduction of ten percent (10%) of gross income.
69. What is considered as conclusive proof of serious business losses ?
SUGGESTED ANSWER: Financial statements audited by in dependent external auditors
constitute the normal method of proof of the profit and loss performance of a company. A
comparative statement of revenue and expenses for two years, by itself, is not conclusive proof of
serious business losses. (Bogo-Medellin Sugarcane Planters Association, Inc. v. NLRC, et al., 296
SCRA 108, 121)
NOTES AND COMMENTS: The above definition was for a labor case. For tax purposes,
business losses have to be proven by more stringent rules than through mere audited financial
statements. The author believes that, there must be proof to support each transaction which
contributed to a major extent to the business losses.
70. What are bad debts ?
SUGGESTED ANSWER: Those debts resulting from the worthlessness or uncollectibility, in
whole or in part, of amounts due the taxpayer by others, arising from money lent or from
uncollectible amounts of income from goods sold or services rendered. (Sec. 2.a, Rev. Regs. 5-99)
***71. Philippine Refining Company was assessed by the Bureau of Internal Revenue
deficiency taxes because of disallowances of bad debts expense. What are the
requirements before bad debts expense are allowed to be deductible ?
SUGGESTED ANSWER:
a. In general, the requisites for deductibility of bad debts are:
1) There must be an existing indebtedness due to the taxpayer which must be valid
and legally demandable;
2) The same must be connected with the taxpayers trade, business or practice of
profession;
3) The same must not be sustained in a transaction entered into between related
parties as enumerated under the Tax Code of 1997;

34

4) The same must be actually charged off the books of accounts of the taxpayer as of
the end of the taxable year; and
5) The same must be actually ascertained to be worthless and uncollectible as of the
end of the taxable year. (Sec. 3, Rev. Regs. 5-99)
b. The following steps must be undertaken by the taxpayer to proved that it exerted diligent
efforts to collect the debts:
1) Sending of statements of accounts;
2) Sending of collection letters;
3) Giving the account to a lawyer for collection;
4) Filing a collection case in court. While it is not required to file suit, a taxpayer is at
least expected by the law to produce reasonable proof that the debts are uncollectible
although diligent efforts were exerted to collect the same. (Phil. Refining Company, etc., v.
Court of Appeals, 256 SCRA 667)
NOTES AND COMMENTS: Related parties.
a. Members of the same family. The family of an individual shall include only his brothers
and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants;
b. An individual and a corporation more than fifty percent (50%) in value of the outstanding
stock of which is owned, directly or indirectly, by or for such individual;
c. Two corporations more than fifty percent (50%) in value of the outstanding stock of which
is owned, directly or indirectly, by or for the same individual;
d. A grantor and a fiduciary of any trust; or
e. The fiduciary of a trust and the fiduciary of another trust if the same person is a grantor
with respect to each trust; or
f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997]
72. What is meant by the tax benefit rule ? Illustrate by example.
SUGGESTED ANSWER: The recovery of bad debts previously allowed as deduction in the
preceding year or years shall be included as part of the taxpayers gross income in the year of such
recovery to the extent of the income tax benefit of said deduction.
For example: If in the year the taxpayer claimed deduction of bad debts written-off, he
realized a reduction of the income tax due from him on account of the said deduction, his
subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable
income. Conversely, if the said taxpayer did not benefit from the deduction of the said bad debt
written-off because it did not result to any reduction of his income tax in the year of such deduction
(i.e. where the result of his business operation was a net loss even without deduction of the bad
debts written-off), then his subsequent recovery thereof shall be treated as a mere recovery or a
return of capital, hence, not treated as receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
73. What is meant by depreciation. What are the different methods of depreciation
allowed under the law ?
SUGGESTED ANSWER:
a. Depreciation is the gradual diminution in the useful value of tangible property resulting
from ordinary wear and tear and from normal obsolescence. The term is also applied to
amortization of the value of intangible assets the use of which in the trade or business is definitely
limited in duration.
b. The methods of depreciation are the following:
1) Straight line method;
2) Declining balance method;
3) Sum of years digits method; and
4) Any other method prescribed by the Secretary of Finance upon the
recommendation of the Commissioner of Internal Revenue:
a) Apportionment to units of production;
b) Hours of productive use;
c) Revaluation method; and
d) sinking fund method.
*** 74. What are ordinary and necessary expenses for tax purposes. What are the
requirements before business expenses may be deducted from gross income ?
SUGGESTED ANSWER:
a. Ordinary expenses are those which are common to incur in the trade or business of the
taxpayer WHILE capital expenditures are those incurred to improve assets and benefits for more
than one taxable year. Ordinary expenses are usually incurred during a taxable year and benefits
such taxable year. Necessary expenses are those which are appropriate or helpful to the business.
b. The following are the requisites for deductibility of business expenses:

35

1) Compliance with the business test:

a) Must be ordinary and necessary;
b) Must be paid or incurred within the taxable year;
c) Must be paid or incurred in carrying on a trade or business.
d) Must not be bribes, kickbacks or other illegal expenditures
2) Compliance with the substantiation test. Proof by evidence or records
the deductions allowed by law including compliance with the business test.
75. In 2000, Mara, Inc., incurred P350,000.00 in order to promote the sale of its line of
ladies dresses which were specially designed and targetted the Valentines day market for
that year. It likewise incurred P500,000.00 to promote its image in the local market and
another P250,000.00 to promote the sale of its shares of stock which it was offering to the
general public for sale.
It asks your advice on how to treat these advertising expenses.
SUGGESTED ANSWER:
a. It should deduct the P350,000.00 from its 2000 gross income as ordinary and necessary
expenses because these are advertising expenses used to stimulate the current sale of
merchandise.
b. It should not deduct the P500,000.00 advertising expense from its 2000 gross income as
these are advertising expenses designed to stimulate the future sale of merchandise. These are
expenditures in order to create or maintain some form of goodwill for Mara, Inc.s trade or business.
These expenditures are to be spread over a reasonable period of time because they are considered
that a capital asset which has a determinable life has been acquired. (General Foods [Phils.], Inc.
v. Commissioner of Internal Revenue, CTA Case No. 4386, prom. February 8, 1994)
c. It should likewise spread the P250,000.00 over a reasonable period of time because
these are expenses incurred to create a favorable image for the corporation to generate sales of its
shares of stock. These constitute capital investment because the particular advertising expense
was incurred in relation to the capital asset or equity of the company. (Atlas Consolidated Mining
and Development Corporation v. Commissioner of Internal Revenue, 102 SCRA 246)
** *76. Mikey Corporation issued preferred shares with the following condition: The
holders of preferred shares shall be entitled to an annual 7% interest, and shall likewise
participate in the general distribution of dividends to common shares. In 2000 Mikey
Corporation paid P4 million to its preferred shareholders representing the 7% interest. It
seeks your advise whether it could deduct the said amount from its gross income. What
would your advice be ?
SUGGESTED ANSWER: It is not allowed to deduct said interests. Preferred shares are
considered capital regardless of the conditions under which such shares are issued and dividends
or interests paid thereon are not allowed as deductions from the gross income of corporations.
(Revenue Memorandum Circular No. 17-71)
*** 77. Jack, 45 years old with 10 years service with his employer, decided to avail of the
liberal early voluntary retirement program offered by his employer. The program was part of
the profit improvement program of the company. The positions of those who would avail of
the program would not be filled up once they are vacated as a result of the voluntary early
retirement. Are any amounts received by Jack as a result of his availment of such program
tax-free ? What should be done in order to have his retirement pay be exempt from
taxation ? Explain briefly.
SUGGESTED ANSWER: Any amount he shall receive shall be subject to tax, considering
that he is below 50 years of age and that his retirement is voluntary in character.
For Jack to avail of the tax exemption his employer should fire him. Hence, any amount he
would be receiving would be as a consequence of his separation for a cause beyond his control
such as retrenchment. [1st par., Sec. 2.78.1 (B) {1} {b}, Rev. Regs. No. 2-98]
NOTES AND COMMENTS:
*** a. Conditions for excluding retirement benefits from gross income:
1) Retirement benefits received under Republic Act No. 7641 and those received by
officials and employees of private firms, whether individual or corporate, in accordance with
the employers reasonable private benefit plan approved by the BIR.
2) Retiring official or employee
a) In the service of the same employer for at least ten (10) years;
b) Not less than fifty (50) years of age at time of retirement;
c) Availed of the benefit of exclusion only once. [Sec. 32 (B) {6} {a}, NIRC of
1997]. The retiring official or employee should not have previously availed of the
privilege under the retirement plan of the same or another employer. [1 st par., Sec.
2.78 (B) {1}, Rev. Regs. No. 2-98]

36

*** b. Separation (retirement) pay excluded from gross income, hence tax-exempt.
1) Any amount received by an official, employee or by his heirs,
2) From the employer
3) As a consequence of separation of such official or employee from the service of
the employer because of
a) Death, sickness or other physical disability; or
b) For any cause beyond the control of said official or employee [Sec. 32 (B)
{6} {b}, NIRC of 1997], such as retrenchment, redundancy and cessation of business.
[1st par., Sec. 2.78 (B), {1} {b}, Rev. Regs. No. 2-98]
78, What are the prizes that are excluded from gross income, hence not taxable ?
SUGGESTED ANSWER:
a. Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if
1) The recipient was selected without any action on his part to enter the contest or
proceeding; and
2) The recipient is not required to render substantial future services as a condition to
receiving the prize or award. [Sec. 32 (B) {7} {c}, NIRC of 1997]
b. All prizes and awards
1) Granted to athletes
2) In local and international sports tournaments and competitions
3) Whether held in the Philippines or abroad, and
4) Sanctioned by their national sports associations [Sec. 32(B) {7} {d}, NIRC of 1997],
which per BIR ruling is accreditation with the Philippine Olympic Committee. Note that the
exemption refers only to amateur sports. For professional boxing, a special law grants the
exemption not the NIRC.
*** 79. A was seriously injured in a vehicular accident. As a result of his injuries, he was
able to recover P1 million representing unearned income, and P5 million for moral and
exemplary damages. Are the amounts subject to tax ?
SUGGESTED ANSWER: No. Excluded from gross income, hence exempt from income tax
are amounts received as compensation for personal injuries plus the amounts of any damages
received whether by suit or agreement on account of such injuries. [Sec. 32 {B} {4}, NIRC of 1997;
Sec. 2.78 (B) {9}, Rev. Regs. No. 2-98]
NOTES AND COMMENTS: The above is the prevailing view. The author submits that the
amount of P1 million, being in the nature of replacement of income lost is taxable. This is so,
because exclusions are in the nature of tax exemptions, hence they must be strictly construed
against the taxpayer.
*** 80. In 1986 Bella purchased a parcel, of land adjoining the City Camp Lagoon in
Baguio City for P2.5 million. She intended to build her family home on the said parcel of
land. Unfortunately for her, the embankment was destroyed during the July 6, 2001 flash
floods causing erosion which led to a deterioration of the market value to only P1.5 million.
The City Assessor assessed the property for tax purposes at P1.2 million while the BIR zonal
valuation is P1.4 million.
a. Supposing that on August 31, 2001, the owner of the adjoining property buys the
property at P1.3 million, what would be the tax consequences to Bella considering that she
suffered a loss? Explain.
b. Would your answer be the same if the government expropriated the property at its
present market value of P1.5 million? Why?
SUGGESTED ANSWERS:
a. The parcel of land is a capital asset of Bella. This is so because it is not her stock in
trade, or property includible as part of her inventory at the end of the taxable year, or property
primarily held by her for sale to customers in the ordinary course of trade or business, or property
used in trade or business subject to depreciation, or real property used by Bella in her trade or
business. (Sec. 33 [A] {1}, NIRC of 1997)
Consequently, irrespective of the holding period under the provisions of Sec. 39 (B) of the
NIRC of 1997, the capital gains presumed to have been realized from the sale shall be taxed at the
rate of 6% based on the gross selling price or the fair market value at the time of the sale whichever
is higher. (Sec. 24 [D], NIRC of 1997) Since the market value of P1.5 million is higher than the
gross selling price of P1.3 million, then the presumed capital gains tax of 6% should be based on
P1.5 million not P1.3 million.
The tax is denominated as a presumed capital gains tax hence it is imposed even if there
was a loss.

37

b. No. The taxpayer, in this case Bella, has the option of reporting her actual gains from the
expropriation as part of her income subject to the rates for compensation income under Sec 21(a)
of the National Internal Revenue Code or to pay a 6% presumed capital gains tax based on the fair
market value of P1.5 million. (Sec. 24 (D) [1], NIRC of 1997) Since she suffered a loss and there
is no gain, she should choose the first option; she should not be subjected to any tax.
81. In 1994, a domestic corporation engaged in the manufacture of semi-conductor
devices bought a parcel of land for P2.0 million. On August 27, 2001, it sold the parcel of
land for P5.5 million. The fair market value at the time was P5.7 million, the assessed value
was P4.5 million and the BIR zonal valuation was P5.6 million. The corporation realized a
net profit of P3.5 million on the transaction.
The land was not part of the corporations stock in trade, or property includible as part
of its inventory at the end of the taxable year, or property primarily held by it for sale to
customers in the ordinary course of trade or business or property used in trade or business
subject to depreciation, or real property used by the corporation in its trade or business.
To what tax should the corporation be subject to and why?
SUGGESTED ANSWER:
A final tax of six percent (6%) based on the gross selling price or fair market value as
determined by the Commissioner of Internal Revenue or as shown in the schedule of values of the
Provincial and City Assessors. (Sec. 27 [D] {5}, NIRC of 1997 in relation to Sec. 6 [E])
82. Define net loss carry-over and net operating loss carry-over. Distinguish the two
concepts and discuss tax implications of each.
SUGGESTED ANSWER:
a. Net loss carry-over means the deduction from net capital gains of a succeeding year the
net capital loss suffered during the prior year. Net operating loss carry-over is the deduction from
gross income for the next three (3) consecutive taxable years following the year of such loss, the
excess of allowable deduction over the gross income .
b. Distinctions between net loss carry-over and net operating loss carry-over. Source: The
source of net loss carry-over are capital losses only WHILE the source of net operating loss carryover are from the ordinary trade and business of the taxpayer. Who may enjoy the carry-over: Only
taxpayers other than corporations may enjoy net loss carry-over WHILE only corporations may
enjoy the net operating loss carry-over.
c. Any taxpayer, other than a corporation (individuals including trusts and estates), who
sustains in any taxable year a net capital loss from capital transactions involving capital assets
(other than real property or shares of stock not listed or traded in the stock exhange), is allowed to
treat during the succeeding year such net capital loss as a loss from the sale or exchange of a
capital asset (other than real property or shares of stock not listed and traded in the stock
exchange), held for more than twelve months. (Sec. 39 [D], NIRC of 1997)
83. In 1995, Ms. Ma Ganda bought a diamond ring worth P75,000.00 for use during her
debut. On September 5, 2001, having no further use for the ring, she decided to sell it to
Mrs. M. Ayaman for P350,000.00. Without going into arithmetical computations, how should
Ms. Ganda be taxed on the sale of her ring .
SUGGESTED ANSWER:
The ring is Ms. Gandas capital asset because she is not in the business of buying and
selling jewelry. She bought the ring for her personal use and not for trade or business.
Consequently, she should determine the net profit from the sales of the ring and applying the
holding period should report fifty percent (50%) of such net profit in her income tax return for 1999
as part of ordinary income. The holding period should be applied because she held the diamond
ring, her capital asset, for more than twelve (12) months.
*** 84. In 1980, China Banking Corporation made a 53% equity investment in the First
CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and investment with
deposit-taking function. The investment amounted to P16,227,851.80, consisting of
106,000 shares with a par value of P100 per share.
Subsequently, First CBC Capital (Asia), Ltd., has become insolvent. China Banking
treated the investment in its 1987 Income Tax Return as a bad debt or as an ordinary loss
deductible from its gross income. The BIR disallowed the deduction because the
investment should not be classified as worthless. Rule on the disallowance.
SUGGESTED ANSWER: BIR was correct. The equity investment is capital in character, the
loss of which could be deductible only from capital gains, and not from any other income of the
taxpayer.

38

First CBC Capital (Asia), Ltd., the investee corporation, is a subsisidary corporation of China
Banking whose shares in said investee corporation are not intended for purchase or sale but an
investment. (China Banking Corporation v. Court of Appeals, et al., G.R. No. 12508, prom. July 19,
2000)
NOTES AND COMMENTS:
*** a. When securities become worthless, the law deems the loss to be a loss from the
sale or exchange of capital assets. An equity investment is a capital, not ordinary, asset of the
investor, the sale or exchange of which results in either a capital gain or a capital loss. The gain or
the loss is ordinary when the property sold or exchanged is not a capital asset.
The loss sustained by the holder of the securities, which are capital assets (to him), is to be
treated as a capital loss as if incurred from a sale or exchange transaction. A capital gain or a
capital loss normally requires the concurrence of two conditions for it to result:
1) There is a sale or exchange; and
2) The thing sold or exchanged is a capital asset.
When securities become worthless there is strictly no sale or exchange but the law
deems the loss anyway to be a loss from the sale or exchange of capital assets. (China Banking
Corporation v. Court of Appeals, et al., G.R. No. 12508, prom. July 19, 2000)
b. Securities, defined for deductibility of bad debts. Shares of stock in a corporation and
rights to subscribe for or to receive such shares. The term includes bonds, debentures, notes or
certificates, or other evidence of indebtedness, issued by any corporation, including those issued by
a government or political subdivision thereof, with interest coupons or in registered form. (Sec. 2.b,
Rev. Regs. No. 5-99)
*** c. Tax treatment of securities becoming worthless. If securities, as defined under Sec. 2
(b) hereof, held as capital asset, are ascertained to be worthless and charged off within the taxable
year, the loss resulting therefrom shall be considered as a loss from the sale or exchange of capital
asset made on the last day of such taxable year. The taxpayer, however, has to prove through
clear and convincing evidence that the securities are in fact worthless.
This rule, however, is not true in the case of banks or trust companies incorporated under the
laws of the Philippines, a substantial part of whose business is the receipt of deposits. (Sec. 5,
Rev. Regs. No. 5-99)
***85. XYZ Corporation has an authorized capital stock of P5 million divided into 50,000
shares with par value of P100.00 per share. P2 million of the authorized capital stock were
subscribed, by various stockholders including Mr. Flores who subscribed for stocks with
par value of P1.5 million. To fully pay for his subscription, Mr. Flores transferred in 2000 to
XYZ Corporation a parcel of land. It was subsequently discovered by the Bureau of Internal
Revenue that the parcel of land had a fair market value of only P1 million.
a. Since the value of the parcel of land was only P1 million while Mr. Flores received
shares of stock worth P1.5 million did Mr. Flores earn income amounting to P500,000.00
which should be subject to income tax ? On the other hand, should the corporation be
allowed to deduct a loss amounting to P500,000.00 ?
b. What would be the tax treatment, if in 2001, Mr. Flores sold the shares of stock in
XYZ Corporation which are not listed or traded in the stock exchange for P1.2 million ?
c. Supposing that in 2001 XYZ Corporation sold the parcel of land for P1 million
which is its zonal valuation in 2001. XYZ is not engaged in the real estate business. What
would be the tax treatment for such a sale ?
SUGGESTED ANSWER:
a. Mr. Flores did not earn any income subject to tax neither did XYZ incur a loss which it
could deduct from its 2000 gross income.
The transaction is known as a tax-free exchange solely in kind, hence no gain or loss is
recognized. It is an exchange solely in kind because property (land) was exchanged for another
property (shares of stock). It is a tax- free exchange because as a result of the exchange, Mr.
Flores by himself was able to obtain control of the corporation.
b. If in 2001, Mr. Flores sold the shares of stock for P1.2 million, the basis for the shares of
stock would be the value of the parcel of land. In this case, it would be considered as if Mr. Flores
acquired the shares of stock for P1 million the value of the property he has exchanged for the
shares of stock. Since there is no showing in the problem that Mr. Flores is engaged in the
business of buying and selling shares of stock, then the net gain should be computed, by deducting
the acquisition price (P1 million) from the selling price (P1.2 million). Thus, the net gain is
P200,000.00. On the first P100,000.00 net gain the tax should be 5% and on the amount
exceeding the first P100,000.00 net gain then the tax should be 10%. It is to be noted that the
holding period is not applied.

39

c. A corporation is now subject to capital gains taxes and all proceeds from sales of real
property owned by a corporation which are not used in trade or business is subject to the 6%
presumed capital gains tax.
NOTES AND COMMENTS: Remember that the first transaction is tax-free but the second
transaction is taxable. The problem that may be given may involve a merger or consolidation in
which case the above principles also find application. Likewise, if there are more parties involved
than Mr. Flores, then Mr. Flores together with others not more than four should obtain control of the
corporation. If the exchange is not solely in kind (for example, money plus property was exchanged
or shares of stock or vice-versa), then there is no tax-free exchange because the gain is taxed but
the loss is not allowed to be deductible.
86. In tax-free exchanges solely in kind, what is meant by boot ? What about basis ?
SUGGESTED ANSWER:
Boot is the property exchanged for stocks or securities. For example, Mr. Leon exchanges
his parcel of land for shares of stock in Mickey, Inc. The boot is the parcel of land. Basis is the
value assigned to the land or the shares of stock.

TRANSFER TAXES
*** 87. Don Cesar Soriano, a Spanish national, died on September 5, 2000 in his villa at
Lucerne, Switzerland. He executed a will before his death leaving all of his properties to his
girl friend Maricel Montano, a Filipino residing in Bruge, Belgium. The girl friend decided to
bring the remains of Don Cesar, who was a resident of the Philippines from 1935 up to 1997
to the Philippines for burial because that was his wish as most of his friends are still living
in the Philippines. She spent about P750,000.00 for funeral expenses. On September 17,
2000 Maricel met you in Hongkong and engaged your services in order to settle the estate of
Don Cesar in accordance with the will which was properly probated in Switzerland. She
presents to you an inventory of the properties left by Don Cesar with their corresponding
values as of September 5, 2000, Don Cesars date of death. The villa in Switzerland US$1
million; an apartment building located in New York, US$5 million; a hacienda in Davao P25
million but the present valuation is now P40 million because of road constructions which
enhanced the value of the property; US$15 million the value of life insurance proceeds from
an insurance taken out by Don Cesar on his own life designating his estate as beneficiary
from the Canton Swiss Insurance at Canton, Switzerland; P25 million proceeds of life
insurance taken by Don Cesar on his own life from Philamlife Insurance in the Philippines
payable to Maricel as irrevocable beneficiary; outstanding bank balance with Philippine
Bank of Commerce in the amount of P5 million with Nanette as his and/or co-depositor.
Shares of stock of a Hongkong company but managed from the Philippines and a P15
million apartment located in Manila, Philippines which he donated to his close friend on April
25, 1989 subject to the condition that the friend remits to Don Cessar all the rentals of the
property during the lifetime of Don Cesar.
a. What should be reported as part of Don Cesars gross estate and what deductions
are allowable to determine his net estate? Explain.
b. Are the proceeds of the P25 million life insurance to be considered as part of the
gross estate of Don Cesar or Maricels income? Why?
c. Supposing Maricel wants to withdraw the P5 million from the bank, what advise
should you give her?
d. Is Maricel being the sole beneficiary liable for the payment of the estate taxes?
SUGGESTED ANSWER:
a. Since Don Cesar was a non-resident decedent who at the time of his death was not a
citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines,
shall be included in his taxable estate. (Sec. 85, NIRC of 1997) The problem is clear that Don
Cesar resided in the Philippines only from 1935 to 1997.
Specifically, the part of his gross estate which are situated outside of the Philippines and
excluded from the taxable estate are the US$1 million villa in Switzerland, the US$5 million
apartment building in New York, U.S.A., and the proceeds of the US$15 million life insurance from
the Canton Swiss Insurance.
The following properties are part of his gross estate because they are situated in the
Philippines. The P25 million Davao Hacienda, the P5 million bank balance with the Philippine Bank
of Commerce, the shares of stock in the Hongkong corporation and the P15 million apartment.
The shares of stock have acquired a business situs in the Philippines because the foreign
corporation is managed from the Philippines hence, includible as part of Don Cesarss gross
estate.

40

The P15 million apartment is part of the gross estate because it was transferred in
contemplation of death. Don Cesar has retained for his life the enjoyment of the fruits of the
property. (Sec. 85 (B), NIRC of 197)
b. The proceeds of the P25 million life insurance is neither part of the gross estate nor
income to Maricel. The proceeds are not part of the estate because the beneficiary is not the
estate of Don Cesar, his executor or administrator and the designation of the beneficiary is
irrevocable. (Sec. 85 (E), NIRC of 1997) The P25 million is not also income to Maricel because life
insurance proceeds paid to beneficiaries upon the death of the insured are exclusions from gross
income. (Sec. 32 [B] {1}, NIRC of 1997)
c. I would advise Maricel to first secure a certification from the Commissioner of Internal
Revenue that the appropriate estate taxes were already paid. If the amount to be withdrawn does
not exceed P20,000.00, she should secure an authorization from the Commissioner even if said
taxes have not yet been paid. (2nd par., Sec. 97, NIRC of 1997)
d. If Maricel is at the same time the executor or administrator of the estate, then she is
primarily liable. If she is not the executor or administrator, then being the beneficiary, she is
subsidiary liable to the said executor or administrator. (Sec. 91 [C}, NIRC of 1997)
NOTES AND COMMENTS: The valuation to be used is the valuation at the time of the
decedents death NOT at the time of filing return or payment of estate tax.
*** 88. The NIRC of 1997 allows as a deduction from the gross estate of a citizen or
resident of the Philippines judicial expenses of the testamentary or intestate proceedings
in order to arrive at the net estate subject to estate taxes. [Sec. 86 (A) (b)]. Are notarial fees
paid for the extrajudicial settlement of the estate as well as attorneys fees for the guardian
deductible from the gross estate as judicial expenses ? Explain briefly.
SUGGESTED ANSWER: Yes. The notarial fee paid for the extrajudicial settlement is clearly
a deductible expense since such settlement effected a distribution of the estate to his lawful heirs,
Similarly, the attorneys fees for a guardian of the property during the decedents lifetime should
also be considered as a deductible administration expense. The guardian gives a detailed
accounting of decedents property and gives advice as to the proper settlement of the estate, acts
which contributed towards the collection of decedents assets and the subsequent settlement of the
case. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 123206, prom.
March 22, 2000)
NOTES AND COMMENTS:
Judicial expenses are expenses of administration.
Administration expenses, as an allowable deduction from gross estate of the decedent for purposes
of arriving at the value of the net estate, have been construed to include all expenses essential to
the collection of the assets, payment of debts or the distribution of the property to the persons
entitled to it. In other words, the expenses must be essential to the proper settlement of the estate.
Not deductible are expenditures incurred for the individual benefit of the heirs, devisees or
legatees. Thus, in Lorenzo v. Posadas, the Court construed the phrase judicial expenses of the
testamentary or intestate proceedings as not including the compensation paid to a trustee of the
decedents estate when it appeared that such trustee was appointed for the purpose of managing
the decedents real property for the benefit of the testamentary heir. In another case, the Court
disallowed the premiums paid on the bond filed by the administrator as an expense of
administration since the giving of a bond is in the nature of a qualification for the office, and not
necessary in the settlement of the estate. Neither may attorneys fees incident to litigation incurred
by the heirs in asserting their respective rights be claimed as a deduction from the gross estate.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 123206, prom. March 22,
2000)
89. In 1999 Atty. Chari T. Able made the following donations:
a. P 250,000.00 alumni association of her alma mater, the University of
the
Philippines;
b. P350,000.00 to Quezon City High School, a public school located in
Kamuning, Quezon City;
c. P500,000.00 as prize to M. Alakas, a Filipino athlete who garnered the gold
medal in an international weight lifting contest held in Moscow which contest was
sanctioned by the Philippine Weightlifting Association, the national weightlifting
association;
d. P50,000.00 to a friend she has not seen for a long time;
e. On December 31, 1998 she donated one-half of her parcel of land
worth P2.5 million to her son, and on January 2, 1999, she donated the remaining one-half of the same parcel of land to the same son; and
f. P750,000.00 to the Holy Order of Friars, a religious congregation
to be used for the construction of a church.

41

Atty. Chari T. Able derives her income solely from the practice of her profession. a)
Should she be subject to donors taxes on the above donations ? b) Is she entitled to any
exemptions ? c) Should the donation made to her son be treated as a single donation
because only two days separate the donations ? d) Should she be allowed to deduct the
donations from her income derived from the exercise of her profession ?
SUGGESTED ANSWER:
a. Atty. Able is subject to the payment of donors taxes on the following donations: 1)
P250,000.00 donation to the alumni association of the University of the Philippines because the
alumni association is not a school; 2) The P50,000.00 donation to a friend (not related to Atty. Able
by consanguinity within the fourth degree) which is considered as a donation to a stranger hence
subject to a donors tax of thirty percent (30%) of the net gift; and 3) the donation to her son.
b. She is entitled to an exemption on the first P100,000.00 of the 1999 net donations.
Furthermore, the following donations are exempt from donors taxes: 1) P250,000.00 donation to
Quezon City High School as the same is considered as a donation to the government; 2) the
donation to M.A. Lakas under the provisions of Republic Act No. 7549, as it is clear that the
conditions in the said law are met; and 3) the donation to the religious congregation because it is
evident that the whole amount is not to be used for administration purposes.
c. The donation to the son should be treated as separate donations because donors taxes
are computed on the basis of net gifts made during a calendar year.
d. The donation to M.A. Lakas is allowed as a deduction because it is a prize to an athlete in
an international sports tournament held abroad and sanctioned by the national sports association.
(Sec. 1, R.A. No. 7549) Also allowed as a deduction is the donation to Quezon City High School.
90. On September 29, 1989, former President Marcos died in Hawaii, U.S.A. A special
audit team created to conduct investigations and examinations of the tax liability of the late
president disclosed that the Marcoses failed to file a written notice of death of the decedent
and an estate tax return in violation of the NIRC.
The Commissioner of Internal Revenue thereby caused the preparation and filing of
the Estate Tax Return for the estate of the late president. On July 26, 1991, the BIR issued a
deficiency tax assessment against the estate which were served constructively upon Ms.
Imelda Marcos (through her caretaker Mr. Martinez) at her last known address at No. 204
Ortega St., San Juan, M .M.
The deficiency tax assessment was not protested administratively by Mrs. Marcos and
the other heirs of the late president. On February 22, 1993, the BIR Commissioner issued
twenty-two notices of levy on real property against certain parcels of land owned by the
Marcoses - to satisfy the alleged estate tax, among others.
Other notices of levy were made until the properties were sold at public auction, with
the lots being forfeited in favor of the government for lack of bidders.
The validity of the BIR's actions is now raised.
SUGGESTED ANSWER: The approval of the court sitting in probate, or as a settlement
tribunal over the estate of the deceased is not a mandatory requirement for the collection of the
estate. The probate court is determining issues which are not against the property of the decedent,
or a claim against the estate as such, but is against the interest or property right which the heir,
legatee, devisee, etc. has in the property formerly held by the decedent.
The notices of levy were regularly issued within the prescriptive period.
The tax assessment having become final, executory and enforceable, the same can no
longer be contested by means of a disguised protest. (Marcos, II v. Court of Appeals, et al., 273
SCRA 47)
91. Mr. Fil I. Pino, a Canadian citizen and a resident of Ontario, Canada, sends a gift of
US$20,000.00 to his future daughter-in-law who is to be married to his only son in the
Philippines. The marriage actually took place on the date the gift was received.
a. Is the donation by Mr. Pino subject to tax ? Explain. Would your answer be the
same if Mr. Pino is a Filipino citizen but is a non-resident ?
b. What is the tax consequence, if any, to the Mr. Pinos daughter-in-law ?
SUGGESTED ANSWER:
a. Yes, because a non-resident alien is exempt only from the payment of donors taxes if his
gifts are made to or for the use of the National Government or any entity created by any of its
agencies which is not conducted for profit, or to any political subdivision of the said Government.
He is subject to tax because the gift was not made in favor of an educational and/or
charitable, religious, cultural or social welfare corporation, institution, foundation, trust or
philanthropic organization or research institution or corporation which does not use more than 30%
of the donation for administration purposes.
If Mr. Pino was a non-resident Filipino my answer would still be the same.

42

b. None. the amount should not be considered as part of her income as the same is one of
the exclusions, Neither is there any donors tax due from her because the tax is to be paid by the
donor and not the recipient.

RETURNS
92. What is the probative value of income tax returns as evidence ?
SUGGESTED ANSWER: Income tax returns being public documents, until controverted by
competent evidence, are competent evidence, are prima facie correct with respect to the entries
therein. (Ropali Trading v. NLRC, et al., 296 SCRA 309, 317)
NOTES AND COMMENTS: While the above cited case is a labor case, the author suggests
that the same could find application in taxation as well.
93. Bill and Hillary are married to each other. Bill is employed as a government
employee deriving annual gross compensation income amounting to P120,000.00 while
Hillary derives income from selling baby dresses. Her monthly income fluctuates, but for
the year 2000, she grossed P500,000.00. The couple have no children. Are they allowed to
file separate income tax returns ? Why ?
SUGGESTED ANSWER: No. As a general rule, they are not allowed to file separate returns
as only married individuals who are both earning purely compensation income are allowed to file
separate income tax returns.
Section 51 (D) of the NIRC of 1997 provides that, Married individuals, whether citizens,
resident or non-resident aliens, who do not derive income purely from compensation shall file a
return for the taxable year to include the income of both spouses, but where it is impracticable for
the spouses to file one return, each spouse may file a separate return of income but the returns so
filed shall be consolidated by the Bureau for purposes of verification There is no showing in the
problem that it is impracticable for Bill and Hillary to file one return, hence they should file a single
return.
*** 94. Who are the individuals required to file an income tax return ?
SUGGESTED ANSWER:
a. Every Filipino citizen residing in the Philippines;
b. Every Filipino citizen residing outside the Philippines on his income from sources within
the Philippines;
c. Every alien residing in the Philippines on income derived from sources within the
Philippines; and
d. Every nonresident alien engaged in trade or business or in the exercise of profession in
the Philippines. (Sec. 51 [A] {1}, NIRC of 1997)
***95. Who are the individuals who are not required to file an income tax return ?
SUGGESTED ANSWER:
a. An individual whose gross income does not exceed his total personal and additional
exemptions for dependents, Provided, That a citizen of the Philippines and any alien individual
engaged in business or practice of profession within the Philippines shall file an income tax return
regardless of the amount of gross income;
b. An individual with respect to pure compensation income for services in whatever form
paid, including, but not limited to fees, salaries, wages, commissions, and similar items, derived
from sources within the Philippines, the income tax on which has been correctly withheld, Provided,
That an individual deriving compensation concurrently from two or more employers at any time
during the taxable year shall file an income tax return: Provided, further, That an individual whose
pure compensation income derived from sources within the Philippines exceeds Sixty thousand
pesos (P60,000.00), shall also file an income tax return;
c. An individual whose sole income has been subject to final withholding tax;
d. An individual who is exempt from income tax pursuant to the provisions of the NIRC of
1997, and other laws, general or special. (Sec. 51 [A] {2}, NIRC of 1997)
NOTES AND COMMENTS: An individual who is not required to file an income tax return
may nevertheless be required to file an information return. (Sec. 51 [A] {3}, NIRC of 1997)
96. F Corporation brought to court the issue of whether it should be made liable for
the payment of the withholding tax at source since it is merely an agent and not the tax
payer. Rule on the issue with reasons.
SUGGESTED ANSWER: F Corporation as the withholding agent is explicitly made
personally liable under the Tax Code for the payment of the tax required to be withheld.

43

Reason: The law sets no condition for the personal liability of the withholding agent to
attach. This is in order to compel the withholding agent to withhold the tax under any and all
circumstances. In effect, the responsibility for the collection of the tax as well as the payment
thereof is concentrated upon the person over whom the Government has jurisdiction.
Thus, the withholding agent is the constituted agent both of the government and the
taxpayer. With respect to the collection and/or withholding of the tax, he is the Governments agent.
In regard to the filing of the necessary income tax return and the payment to the Government, he is
the agent of the taxpayer. The withholding agent, therefore, is no ordinary government agent
especially because under the Tax Code he is personally liable for the tax he is duty bound to
withhold; whereas, the Commissioner of Internal Revenue and his deputies are not made liable
under the law. (Filipinas Synthetic Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 &
124377, prom. October 12, 1999)
NOTES AND COMMENTS: Do not confuse the above holding with question no. 97, infra.
The issue in this question is the liability of the withholding agent for the unpaid taxes WHILE under
question no. 97 the issue is whether a withholding agent is within legal contemplation a taxpayer
who could avail of the tax amnesty.
The two (2) types of withholding at source are the 1) final withholding tax; and 2) creditable
withholding tax.
Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income due from the payee on the
said income. [1st sentence, 1st par., Sec. 2.57 (A), Rev. Regs. No. 2-98]
The liability for payment of the tax rests primarily on the payor or the withholding agent..
Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax
shall be collected from the payor withholding agent. The payee is not required to file an income tax
return for the particular income.
Example: Mara won P200,000.00 from the Pera or Bayong contest. It should be the
sponsor-payor who is required to deduct the appropriate withholding tax from the P200,000.00 prize
before it is given to Mara. Mara, the payee is not required to file an income tax return for the
P200,000.00. Failure to withhold subjects the sponsor-payee to the tax.
Under the creditable withholding tax system, taxes withheld on certain income payments
are intended to equal or at least approximate he tax due from the payee on the said income. The
income recipient is still required to file an income tax return and/or pay the difference between the
tax withheld and the tax due on the income. [1 st and 2nd sentences, Sec. 257(B), Rev. Regs. No. 298]
The two kinds of creditable withholding taxes are 1) taxes withheld on income payments
covered by the expanded withholding tax; and 2) taxes withheld on compensation income.
Exemptions from the requirement of withholding or when no withholding taxes required:
Payments to the following:
1. National Government and its instrumentalities including provincial, city, or municipal
governments;
2. Persons enjoying exemption from payment of income taxes pursuant to the provisions of
any law, general or special, such as but not limited to the following:
a. Sales of real property by a corporation which is registered with and certified by the
HLURB or HUDCC as engaged in socialized housing project where the selling price of the
house and lot or only the lot does not exceed P180,000.00 in Metro Manila and other highly
urbanized areas and P150,000.00 in other areas or such adjusted amount of selling price for
socialized housing as may later be determined and adopted by the HLURB;
b. Corporations registered with the Board of Investments and enjoying exemptions
from income under the Omnibus Investment Code of 1997;
c. Corporations exempt from income tax under Sec. 30, of the Tax Code, like the
SSS, GSIS, the PCSO, etc. However, income payments arising from any activity which is
conducted for profit or income derived from real or personal property shall be subject to a
withholding tax. (Sec. 57.5, Rev. Regs. No. 2-98)
97. Andres Soriano, a U.S. citizen and resident, formed A. Soriano Y Cia, which
was subsequently renamed ANSCOR. He owned originally issued common shares which
subsequently earned stock dividends. When he died, part of the shares passed on to his
widow and another part to his estate. Stock dividends were again declared. Subsequently,
ANSCOR reclassified its existing common shares into common and preferred shares. The
widow and the estate exchanged their common stockholdings for preferred shares, with the
estate retaining some common shares.
ANSCOR then redeemed the common shares belonging to the estate after which the
BIR assessed ANSCOR for deficiency withholding tax-at source on the transactions of
exchange and redemption of stocks.

44

May ANSCOR, as the withholding agent avail of the beneficent provisions of P.D. No.
67, which condones, the collection of all internal revenue taxes including the increments of
penalties on account of non-payment as well as all civil, criminal or administrative liabilities
arising from or incident to (voluntary) disclosures under the NIRC of previously untaxed
income and/or wealth realized here or abroad by any taxpayer, natural or juridical. ?
SUGGESTED ANSWER: No. In the operation of the withholding tax system, the withholding
agent is the payor, a separate entity acting no more than an agent of the government for the
collection of the tax in order to ensure its payments. The payor of the tax is the taxpayer, he is the
person subject to tax imposed by law; and the payee is the taxing authority.
In other words, the withholding agent is merely a tax collector, not a taxpayer.
Under the withholding system, however, the agent-payor becomes a payee by fiction of law.
His (agent) liability is direct and independent from the taxpayer, because the income tax is still
imposed on and due from the latter. The agent is not liable for the tax as no wealth flowed into him,
he earned no income. The Tax Code only makes the agent personally liable for the tax arising from
the breach of its legal duty to withhold as distinguished from its duty to pay tax since, the
government cause of action against the withholding agent is not for the collection of income tax, but
for the enforcement of the withholding provisions of the Tax Code, compliance with which is
imposed on the withholding agent and not upon the taxpayer.
A withholding agent, not being a taxpayer is not covered by the protective embrace of a tax
amnesty because the provisions of the implementing rules of P.D. No. 370 which expanded
amnesty on previously untaxed income is explicit in excluding tax liabilities on withholding tax at
source. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January
20, 1999)
NOTES AND COMMENTS:
The above Commissioner of Internal Revenue v. Court of Appeals, et al., (ANSCOR), case
may have an impact on the doctrine enunciated in Commissioner of Internal Revenue v. Procter &
Gamble Philippine Manufacturing Corporation, 204 SCRA 377, 383-386.
Procter & Gamble held that a taxpayer is defined under the NIRC as any person
subject to tax. Since, the withholding agent who is required to deduct and withhold any tax is
made personally liable for such tax, subject to and liable for deficiency assessments, surcharges
and penalties should the amount of the tax be finally determined to be less than that required to he
withheld by law, then he is a taxpayer. He has sufficient legal interest to bring a suit for refund of
taxes he believes were illegally collected from him. (citing Philippine Guaranty Company, Inc. v.
Commissioner of Internal Revenue, 15 SCRA 1)
The reader should take note that, in case of doubt, tax amnesties are to be strictly construed
against the government. Tax statutes being burdens are not to be presumed beyond what the tax
amnesty expressly and clearly declares. (Republic v. Intermediate Appellate Court, 196 SCRA 335)
To summarize, if the issue is application for refund, the withholding agent is a taxpayer
(Procter & Gamble), but for tax amnesty purposes, he is not. (Anscor)

TARIFF AND CUSTOMS CODE

98. When does importation begin and when does it end ?
SUGGESTED ANSWER: Importation begins when the conveying vessel or aircraft enters
the jurisdiction of the Philippines with intention to unlade therein.
Importation is deemed terminated upon payment of the duties, taxes and other charges due
upon the agencies, or secured to be paid, at the port of entry and the legal permit for withdrawal
shall have been granted.
In case the articles are free of duties, taxes and other charges, until they have legally left the
jurisdiction of the customs. (Sec. 1202, TCCP)
99. What is meant by the flexible tariff clause ?
SUGGESTED ANSWER: This is a provision in the Tariff and Customs Code, which
implements the constitutionally delegated power of the President of the Philippines, in the interest of
national economy, general welfare and/or national security upon recommendation of the NEDA to
increase, reduce or remove existing protective rates of import duty, PROVIDED THAT, the increase
should not be higher than 100% ad valorem; to establish import quota or to ban imports of any
commodity, to impose additional duty on all imports not exceeding 10% ad valorem.
*** 100. The Tariff and Customs Code provides for the imposition of special customs
duties. What are these duties and what is their nature and purpose ?
SUGGESTED ANSWER: Special customs duties are additional import duties imposed on
specific kinds of imported articles under certain conditions.
The special customs duties are the anti-dumping duty, the countervailing duty, the
discriminatory duty and the marking duty.

45

The special customs duties are imposed for the protection of consumers and manufacturers,
as well as Philippine products.
*** 101. Explain briefly what is meant by anti-dumping duty and when is it imposed ?
SUGGESTED ANSWERS: A special duty imposed on the importation of a product,
commodity or article of commerce into the Philippines at less than its normal value when destined
for domestic consumption in the export country, which is the difference between the export price
and the normal value of such product, commodity or article. (Sec. 301 (s) (1), TCC, as amended by
R.A. No. 8752, Anti-Dumping Act of 1999.)
The anti-dumping duty is imposed where the importation of the product, commodity or article
of commerce described above is causing or is threatening to cause material injury to a domestic
industry, or materially retards the establishment of a domestic industry producing the like product.
(Sec. 301 (a), TCC, Ibid.)
NOTES AND COMMENTS:
The definition under the R.A. No. 8752, the Anti-Dumping Act of 1999, is substantially the
definition provided for under R.A. No. 7843, the Anti-Dumping Act of 1994.
102. Explain the meaning of normal value for purposes of imposing the anti-dumping
duty.
SUGGESTED ANSWER: It is the comparable price at the date of sale of like product,
commodity, or article in the ordinary course of trade when destined for consumption in the country
of export. (Sec. 301 (s) (3 ), TCC, as amended by R.A. No. 8752, Anti-Dumping Act of 1999.)
103. What is meant by dumped import/product ?
SUGGESTED ANSWER: Any product, commodity or article of commerce introduced into the
Philippines at an export price less than its normal value in the ordinary course of trade, for the like
product, commodity or article destined for consumption in the exporting country, which is causing or
is threatening to cause material injury to a domestic industry, or materially retarding the
establishment of a domestic industry producing the like product. (Sec. 301 (s) (5), TCC, as
amended by R.A. No. 8752, Anti-Dumping Act of 1999.)
*** 104. Who imposes the anti-dumping duty.
SUGGESTED ANSWER: The Secretary of Trade and Industry in the case of non-agricultural
product, commodity, or article or the Secretary of Agriculture, in the case of agricultural product,
commodity or article, after formal investigation and affirmative finding of the Tariff Commission.
Even when all the requirements for the imposition have been fulfilled, the decision on
whether or not to impose a definitive anti-dumping duty remains the prerogative of the Tariff
Commission. (Sec. 301 (a), TCC, as amended by R.A. No. 8752, Anti-Dumping Act of 1999.)
NOTES AND COMMENTS: R.A. No. 8752, Anti-Dumping Act of 1999 abolished the
Special Committee on Anti-Dumping created under R.A. No. 7843, the Anti-Dumping Act of 1994.
Criteria used by the Tariff Commission whether or not to impose the anti-dumping
duty. It may consider among others, the effect of imposing an anti-dumping duty on the welfare of
the consumers and/or the general public, and other related local industries. (Sec. 301 (a), TCC, as
amended by R.A. No. 8752, Anti-Dumping Act of 1999.)
*** 105. What is the amount of anti-dumping duty that may be imposed ?
SUGGESTED ANSWER: The difference between the export price and the normal value of
such product, commodity or article. (Sec. 301 (s) (1), TCC, as amended by R.A. No. 8752, AntiDumping Act of 1999.)
The anti-dumping duty shall be equal to the margin of dumping on such product, commodity
or article thereafter imported to the Philippines under similar circumstances, in addition to ordinary
duties, taxes and charges imposed by law on the imported product, commodity or article,
*** 106. What are countervailing duties ?
SUGGESTED ANSWER: Additional customs duties imposed on any product, commodity or
article of commerce which is granted directly or indirectly by the government in the country of origin
or exportation, any kind or form of specific subsidy upon the production, manufacture or exportation
of such product commodity or article, and the importation of such subsidized product, commodity, or
article has caused or threatens to cause material injury to a domestic industry or has materially
retarded the growth or prevents the establishment of a domestic industry. (Sec. 302, TCCP as
amended by Section 1, R.A. No. 8751)
*** 107. What are marking duties ?
SUGGESTED ANSWER: Additional customs duties imposed on foreign articles (or its
containers if the article itself cannot be marked), not marked in any official language in the

46

Philippines, in a conspicuous place as legibly, indelibly and permanently in such manner as to

indicate to an ultimate purchaser in the Philippines the name of the country of origin.
*** 108. What is a discriminatory duty ?
SUGGESTED ANSWER: New and additional customs duty imposed upon articles wholly or
in part the growth or product of, or imported in a vessel, of any foreign country which imposes,
directly or indirectly, upon the disposition or transportation in transit through or reexportation from
such country of any article wholly or in part the growth or product of the Philippines, any
unreasonable charge, exaction, regulation or limitation which is not equally enforced upon like
articles of every foreign country, or discriminates against the commerce of the Philippines, directly
or indirectly, by law or administrative regulation or practice, by or in respect to any customs,
tonnage, or port duty, fee, charge, exaction, classification, regulation, condition, restriction or
prohibition, in such manner as to place the commerce of the Philippines at a disadvantage
compared with the commerce of any foreign country.
109. What is the doctrine of primary jurisdiction ?
SUGGESTED ANSWER: The Bureau of Customs has exclusive administrative jurisdiction to
conduct searches, seizures and forfeitures of contraband without interference from the courts. It
could conduct searches and seizures without need of a judicial warrant except if the search is to be
conducted in a dwelling place.
***110. The Collector of Customs issued a Warrant of Seizure and Detention of 25,000
baga of rice, bearing the name of SNOWMAN, Milled in Palawan shipped on board the M/V
Alberto which was then docked at Pier 6 at Cebu City. The warrant was issued on the
basis of a report that the rice had been illegally imported as it was landed in Palawan by a
foreign vessel and then placed in sacks marked SNOWMAN, Milled in Palawan. It was
then shipped to Cebu City on board the M/V Alberto. Forfeiture proceedings were then
started in the Cebu City customs office.
The consignee then filed a civil suit for injunction before the Cebu City RTC, which
issued the injunction because there was alleged lack of probable cause for customs to effect
the seizure. Was the issuance of the injunction proper ?
SUGGESTED ANSWER: No. There is no question that RTCs are devoid of any
competence to pass upon the validity or regularity of seizure and forfeiture proceedings conducted
by the Bureau of Customs and to enjoin or otherwise interfere with these proceedings. The
Collector of Customs sitting in seizure and forfeiture proceedings has exclusive jurisdiction to hear
and determine all questions touching on the seizure and forfeiture of dutiable goods. RTCs are
precluded from assuming cognizance over such matters even through petitions of certiorari,
prohibition or mandamus. (The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, prom.
March 20, 2000)
NOTES AND COMMENTS:
a. The Tariff and Customs Code and the Act Creating the Court of Tax Appeals specify
the proper fora and procedure for the ventilation of ant legal objections or issues raised
concerning seizure and forfeiture proceedings. Thus, actions of the Collector of Customs are
appealable to the Commissioner of Customs, whose decision, in turn, is subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals and from there to the Court if Appeals.
The rule that RTCs have no review powers over such proceedings is anchored upon the
policy of placing no unnecessary hindrance on the governments drive, not only to prevent
smuggling and other frauds upon Customs, but more importantly, to render effective and efficient
the collection of import and export duties due the State, which enables the government to carry out
the functions it has been instituted to perform.
b. The customs authorities do not have to prove to the satisfaction of the court that
the articles on board a vessel were imported from abroad or are intended to be shipped
abroad before they may exercise the power to effect customs searches, seizures, or arrests
provided by law and continue with the administrative hearings. (The Bureau of Customs, et al.,
v. Ogario, et al., G.R. No. 138081, prom. March 20, 2000)
111. Acting on information that a shipment from Hongkong on board the S/S Sa
Dragon violated the Tariff and Customs Code, as amended, agents of the EIIB seized the
shipment. It was found that the 40 ft. van was made to appear as a consolidation shipment
consisting of 232 packages with Translink Intl. Freight Forwarded as shipper and
Transglobe Intl. Inc., as consignee; that there were eight (8) shippers and eight (8)
consignees declared as co-loaders and co-owners of the contents of the van, when in truth
the entire shipment belongs only to one entity; that the items as declared (various industrial
items) were found in the van, instead it was found to be fully stuffed with textile piece goods.

47

As a result of the above, the appropriate warrant of seizure was issued and the goods
forfeited in favor of the government.
The consignee filed a petition for redemption of the shipment and the hearing officer
recommended the release of the shipment upon the payment of its domestic value as the
shipment consists of goods which are in legal contemplation not prohibited, nor the release
thereof to the claimant contrary to law.
The Commissioner of Customs denied the offer of redemption on the grounds (1) that
the shipment was made to appear an innocuous consolidation shipment destined for
shipment outside of the CY-CFS in order to conceal the textile fabrics; (2) the eight coloaders/consignes of the shipment are all fictitious; and (3) CMO 87-92 provides for a denial
of an offer of redemption when the seized shipment is consigned to a fictitious person.
Would you allow the redemption ? Why ?
SUGGESTED ANSWER: Yes. There is absent the following circumstances hence, it would
be proper to allow the redemption of forfeited property upon payment of its computed domestic
market value. (Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January
25, 1999)
a. There is fraud;
b. The importation is absolutely prohibited, or
c. The release of the property would be contrary to law. (Ibid.)
Misdeclarations in manifest and rider cannot be ascribed to a consignee since it was not the
one that prepared them. As said in Farolan, if at all, the wrongful making or falsity of the documents
can only be attributed to the foreign suppliers or shippers. .(Ibid.)
NOTES AND COMMENTS: Fraud as defined in Sec. 1, par. 1.a., CMO-87-92 must be
actual, not constructive.
Sec. 1.a., CMO-87-92 is of the same tenor as Sec. 2530, pars., (f) and (m), subpars. 3, 4
and 5, which deals with falsities committed by the owner, importer, exporter or consignee or
importation/exportation through any other practice or device.
In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in Farolan, Jr. v. Court of Tax
appeals, et al., 217 SCRA 298, the Supreme court clarified that the fraud contemplated by law must
be actual and not constructive. It must be intentional, consisting of deception, willfully and
deliberately done or resorted to in order to induce another to give up some right.
*** Forfeiture proceedings are in the nature of proceedings in rem.
Forfeiture of seized goods in the Bureau of Customs is a proceeding against the goods and
not against the owner.
It is in the nature of a proceeding in rem, i.e. directed against the res or imported goods and
entails a determination of the legality of their importation. In this proceeding, it is in legal
contemplation the property itself which commits the violation and is treated as the offender, without
reference whatsoever to the character or conduct of the owner.
The issue is limited to whether the imported goods should be forfeited and disposed of in
accordance with law for violation of the Tariff and Customs Code. .(Transglobe International, Inc. v.
Court of Appeals, et al., G.R. No. 126634, January 25, 1999)
The one-year prescriptive period for forfeiture proceedings applies only in the absence of
fraud. (Commissioner of Customs v. Clurt of Tax Appeals, et al., G.R. No. 132929, prom. March 27,
2000)
112. On April 10, 1997, the Collector of Customs conducted a public auction sale of
Lot No. 15 consisting of various marble processing machine and grinding machine which
included a Special Circular Saw and a Diamond Sawing Machine. The award was made to
Engr. Franklin Policarpio, the highest bidder. After Engr. Policarpio signed the Gate Pass
evidencing withdrawal of Lot No. 15 from customs custody, he found that the two saws were
missing and upon his investigation found that the items were installed in the compound of
Carrara Marble Philippines, Inc.
Consequently, for alleged violations of Section 2536 (non-payment of duties and
taxes) and Section 2530 [e] (illegal removal of articles from warehouse) of the Tariff and
Customs Code (TCC) the saws were seized by authority of a Warrant of Seizure and
Detention dated May 29, 1991, from the compound of Carrara Marble.
Carrara Marble failed to present evidence of payment of duties and taxes and its
defense is an alleged local sale evidenced by notarized Deeds of Sale. In the meantime,
Engr. Policarpio intervened and claimed ownership of the saws. Carrara Marble then offered
to settle the case in accordance with the provisions of the TCC. However, the offer was
refused by the Bureau of Customs, which then declared the articles forfeited in favor of the
Government. Resolve the following issues explaining briefly the reasons for your answer:
a. Is it valid to forfeit an article found in the possession of a third party after the sale
at public auction ?
b. Has the importation been terminated ?

48

c. Who has the right to retain possession over the two (2) saws ?
SUGGESTED ANSWERS:
a. Yes, because there is showing that the imported saws were acquired by Carrara Marble
while they were in customs custody without showing that the correct duties and taxes were paid
thereon.
The TCC subjects to forefeiture any article which is removed contrary to law from any public
or private warehouse under customs supervision, or released irregularly from customs custody.
Before forfeiture proceedings are instituted, the law requires the presence of probable cause. Once
established the burden of proof is shifted to the claimant. Customs officers with proper
authorization from the Commissioner in writing, may demand evidence of payment of duties and
taxes on foreign articles openly offered for sale or kept in storage; and if no such evidence can be
produced, such articles may be seized and subjected to forfeiture proceeding; provided however,
that during such proceedings the person or entity from whom such articles were seized shall be
given an opportunity to prove or show the source of such articles and the payment of duties and
taxes thereon. Under the circumstances, it is clear that before the delivery of the items to Engr.
Policarpio, the Bureau of Customs had custody of said saws. It was only when the whole was
handed over to Engr. Policarpio that it was discovered that the two saws were missing.
In this case the forfeiture takes effect immediately upon the commission of the offense. The
forfeiture of the subject machineries, retroacted to the date they were illegally withdrawn from
customs custody. The governments right to recover the machineries proceeds from its right as
lawful owner and possessor thereof upon abandonment by the importer. Such right may be
asserted no matter in whose hands the property may have come, and the condemnation when
obtained avoids all intermediate alienations.
The forfeiture of the saws rests on a different statutory basis from Policarpios right to receive
the property as the winning bidder in the auction sale. It was based upon the governments right
to recover property illegally withdrawn from its custody.
b. Importation was already terminated after Engr. Policarpio has signed the Gate Pass
evidencing withdrawal of Lot 15 from customs custody.
Importation is deemed terminated upon payment of duties, taxes and other charges due or
secured to be paid upon the articles at a port of entry, and upon the grant of a legal permit for
withdrawal; or in case said articles are free of duties, taxes and other charges, until they have
legally left the jurisdiction of the customs. The forfeiture of the subject saws however, is not
dependent on whether or not the importation was terminated; rather it is premised on the illegal
withdrawal of goods from customs custody.
Thus, regardless of the termination of importation, customs authorities may validly seize
goods which, for all intents and purposes, still belong to the government.
c. Compromise could not be allowed anymore since the subject machineries had already
been awarded to Policarpio, being the highest bidder in the public auction. The government has the
rightful possession of the saws but it should turnover the same to Policarpio. (Carrara Marble
Philippines, Inc., v. Commissioner of Customs, G.R. No. 129680, prom. September 1, 1999)
NOTES AND COMMENTS: Administrative and judicial procedures relative to customs
searches, seizures and forfeitures:
a. Determination of probable cause and issuance of warrant. The Collector of Customs
upon probable cause that the articles are imported or exported, or are attempted to be imported or
exported, in violation of the tariff and customs laws shall issue a warrant of seizure. (Sec. 6, Title
III, CAO No. 9-93)
If the search and seizure is to be conducted in a dwelling place, then a search warrant
should be issued by the regular courts not the Bureau of Customs.
There may be instances where no warrants issued by the Bureau of Customs or the regular
courts is required, as in search and seizures of motor vehicles and vessels.
b. Actual seizure of the articles. Master this procedure.
Requirements for release under bond of seized articles : This is a probable area so
master.
Settlement of seizure case by payment of fine or redemption of forfeited property.
This is another probable area.

LOCAL TAXATION
*** 113. What are the fundamental principles of local taxation ?
SUGGESTED ANSWER: The fundamental principles of local taxation are:
a. Uniformity;
b. Taxes, fees, charges and other impositions shall be equitable and based on ability to pay,
for public purposes, not unjust, excessive, oppressive or confiscatory, not contrary to law, public
policy, national economic policy or in restraint of trade;
c. The levy and collection shall not be let to any private person;

49

d. Inures solely to the local government unit levying the tax;

e. The progressivity principle must be observed.
*** 114. On June 26, 1992, the Sangguniang Panlalawigan of Bulacan passed Provincial
Ordinance No. 3, to take effect on July 1, 1992, which levies a tax of 10% of the fair market
value in the locality per cubic meter of ordinary stones, gravel, sand, earth and other quarry
resources extracted from areas of public land within its territorial jurisdiction.
It now collects the said tax upon quarry resources extracted from private lands by
Republic Cement. It claims authority to do so under the provisions of the Local Government
Code as well as under the Regalian theory of State ownership over all natural resources. Is
the collection correct ?
SUGGESTED ANSWER: No, because the authority under the Local Government Code to
collect taxes on quarry resources applies only to those extracted from public lands. (Sec. 134 in
relation to Sec. 138, Local Government Code)
Furthermore, the Local Government Code prohibits local government units from collecting
excise taxes on articles enumerated under the NIRC, and taxes, fees or charges on petroleum
products. (Sec. 133 [h], Local Government Code in relation to the Tax Code) The tax imposed is an
excise tax upon the performance, carrying on, or the exercise of an activity. While the Tax Code
levies a tax on all quarry resources, regardless of origin, whether extracted from public or private
lands, the Local Government Code authorizes the local government unit to impose such taxes on
those taken from public lands. Thus, those extracted from private lands are taxable under the NIRC
and not by local government units.
The Regalian doctrine may not be applied because taxes, being burdens, are not to be
presumed beyond what the applicable statute expressly and clearly declares, tax statutes being
construed stricitssimi juris against the government. (The Province of Bulacan, et al., v. The Court of
Appeals, etc., et al., 299 SCRA 442)
*** 115. Philippine Basketball Association contested the deficiency amusement tax
assessed against it by the BIR for conducting the professional basketball games and for the
cession of advertising and streamer spaces to Vintage Enterprises, Inc.
a)
Should the
amusement taxes be paid to the local government instead of the BIR ?
b) Is the cession of advertising and streamer spaces to Vintage Enterprises, Inc.
subject to the payment of amusement taxes ?
SUGGESTED ANSWER:
a. No. Professional basketball games should pay the amusement taxes collected by the
BIR and not the amusement taxes collected by the local governments. The amusement tax which
provinces and cities are allowed to collect under Sec. 140 of the Local Government Code, refers to
an amusement tax to be collected from proprietors, lessees, or operators of theaters, cinemas,
concert halls, circuses, boxing stadia, and other places of amusement. The authority to tax
professional basketball games is not included therein because it is a national tax provided for under
Sec. 125 of the 1997 Tax Code which provides that, There shall be collected from the proprietor,
lessee or operator of cockpits, cabarets, night or day clubs, boxing exhibitions, professional
basketball games, Jai-Alai and racetracks, a tax equivalent to: xxxx (d) Fifteen percent (15%) in
the case of professional basketball games envisioned in Presidential Decree No. 971: Provided,
however, That the tax herein shall be in lieu of all other percentage taxes of whatever nature and
description; xxx
b) Yes. The second to the last paragraph of Sec. 125 of the 1997 Tax Code provides that,
the term gross receipts embraces all the receipts of the proprietor, lessee or operator of the
amusement place.. This term is broad enough to embrace the cession of advertising and streamer
spaces as the same embraces all the receipts of the proprietor, lessee or operator of the
amusement place. It is thus, a national tax not a local tax.
The recognition by the BIR of such income from cession as a local tax is of no moment
because the Government is never estopped by the mistake or error on the part of its agents,
specially on the matter of taxes. (Philippine Basketball Association v. Court of Appeals, et al., G.R.
No. 119122, prom. August 8, 2000)
116. The City Treasurer discovered that the Knechts failed to pay their real property
taxes on their property consisting of a parcel of land with an area of 8,102 sq.m. The
property was subsequently sold at public auction for the tax delinquency. However, the
Knechts did not receive any notice of their tax delinquency and that the Rgister of Deeds did
not order them to surrender their owners duplicate for annotation of the tax lien prior to the
sale. Neither did they have notice of the auction sale nor was the certificate of sale
annotated on their title nor with the title in the possession of the Register of Deeds.
Is the tax sale valid ? Reason out your answer.

50

SUGGESTED ANSWER: No. It has been ruled that the notice and publication, as well as
the legal requirements for a tax delinquency sale, are mandatory, and the failure to comply
therewith can invalidate the sale. The prescribed notices must be sent to comply with the
requirements of due process. (De Knecht, et al,. v. Court of Appeals; De Knecht, et al., v.
Honorable Sayo, 290 SCRA 223,236)
The reason behind the notice requirement is that tax sales are administrative proceedings
which are in personam in nature. (Puzon v. Abbellera, 169 SCRA 789, 795; De Asis v. I.A. C., 169
SCRA 314)
NOTES AND COMMENTS: All of the above cases were decided interpreting the provisions
of C.A. No. 470, the old Assessment Law, and P.D. No. 464, the Real Property Tax Code, both of
which required personal notice to the taxpayer in addition to the requisite advertisement.
The provisions of Sec. 260 of the Local Government Code on Advertisement and Sale does
not require personal notice to the delinquent taxpayer.
In view of the above, the author believes that personal notice of the auction sale is not
required anymore under the provisions of the Local Government Code of 199 which repealed C.A.
No. 470 and P.D. No. 464)

REAL PROPERTY TAXATION

***117. What are the fundamental principles of real property taxation ?
a. Appraisal at current and fair market value;
b. Classification for assessment on the basis of actual use;
c. Assessment on the basis of uniform classification;
d. Appraisal, assessment, levy and collection shall not be let to a private person;
e. Appraisal and assessment shall be equitable.
118. Determination of various items:
a. The reasonable market value is determined by the assessor in the form of a schedule of
fair market values. The schedule is then enacted by the local sanggunian.
b. The assessment level is fixed by ordinances of the appropriate sanggunian.
c. The tax rate is also fixed by ordinances of the appropriate sanggunian.
119. Property exempt from the payment of real property tax:
a. Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted to a taxable person for a consideration or
otherwise;
b. Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,
non-profit or religious cemeteries, and all lands, buildings and improvements actually, directly and
exclusively used for religious, charitable and educational purposes;
c. Machineries and equipment, actually, directly and exclusively used by local water districts;
and government owned and controlled corporations engaged in the supply and distribution of water
and generation and transmission of electric power;
d. Real property owned by duly registered cooperatives;
e. Machinery and equipment used for pollution control and environmental protection.
120. The protest contemplated under Section 252 of R.A. No. 7160 is needed where there is
a question of reasonableness of the amount assessed, not where the question raised is on the very
authority and power of the assessor to impose the assessment and of the treasurer to collect the
tax. (Ty v. Trampe, 250 SCRA 500)
121. On April 3, 1987, Raul purchased from Estrella two lots, both located in Cebu
City. Lot no. 1 contained an area of 49 sq.m. while lot no. 2 contained an area of 48 sq.m.
more or less. Both lots had improvements, which were described as "a residential house of
strong materials constructed on the lots above-mentioned."
Raul declared the real property constructed on the said lots for purposes of tax
assessment as a residential house of strong materials with a floor area of 60 sq.m. Effective
1987, the declared property was assessed by the City Assessor under Tax Declaration 1 at a
market value of P60,000.00 and an assessed value of P36,900.00.
During a tax-mapping operation conducted in February 1996, the City Assessor
discovered that the real property declared and assessed under Tax Declaration No. 1 was
actually a residential building consisting of four (4) storeys with a fifth storey used as a roof
deck. The building has a total floor area of 500.20 sq. m. The area for each floor was 100.04
square meters.
As a result of the findings, the City Assessor issued Tax Declaration No. 2 effective in
the year 1996, canceling the previous Tax Declaration and assessing the building therein at a

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net market value of P499,860.00 and an assessed value of P374,900.00. The 1987-1991
Schedule of Market Value was applied in the assessment.
Raul protested the new assessment for being "excessive and unconscionable,"
contending that it was increased by more than 1,000% as compared to its previous market of
P60,000.00 or assessed value of P36,900.00 under Tax Declaration No. 02-20454 and "that he
bought the building including the lots for only P100,000.00 on April 3, 1987, which amount
should be the market value of the building for purposes of determining its assessed value."
He questioned the new assessment before the Local Board of Assessment Appeals of Cebu
City, which dismissed his appeal on January 11, 1997. Raul elevated his case to the Central
Board of Assessment Appeals.
On September 17, 1998, the CBAA rendered a decision ordering the Cebu City
Assessor to issue a new Tax Declaration in the amount of P281,588.00. Raul then filed a
motion for the reconsideration of the CBAA's decision. Raul and the City Assessor jointly
agreed that the revised valuation of the property is P78,330.00 as assessed value,
classifying the property at P1,110 per sq. m., the building having been completed and
occupied in 1957 or forty-two (42) years ago.
The CBAA then ruled that for purposes of determining the back taxes due on the
excess area of subject building from 1988 to 1996, the Cebu City Assessor should issue in
accordance with Sec. 222 of the Local Government Code:
a. Tax Declaration effective 1988 to June 30, 1996, based on the minimum rate per sq.
m. for the type of building in accordance with the 1985-1986 Schedule of Values;
b. Tax Declaration to supersede Tax Declaration No. 1 to be effective from July 1,
1994 to the year 1995, based on the minimum rate per sq. m. for the type of building, in
accordance with the 1988-1991 Schedule of Values; and
c. Tax Declaration to supersede Tax Declaration No. 2 to take effect in 1996, based on
the revised valuation of the property as agreed upon by the parties.
Raul disagrees with the above findings, based on the following:
a) The CBAA erred in resolving the issue of back taxes from 1988 to 1995, despite the
fact that such issue was not raised in the appeal to it, under its pretext that it is applying
Sec. 222 of the Local Government Code.
b) The CBAA erred in not strictly applying par. (l), Sec. 199 of the Local Government
Code, defining "Fair Market Value" as basis for computing the "assessed value."
c) The CBAA's ruling is discriminatory, unjust, confiscatory and unconstitutional.
To what court should Raul elevate the adverse decision of the CBAA ? Would his
appeal prosper ?
SUGGESTED ANSWER:
Raul should appeal the decision of the CBAA to the Court of Appeals, under Rule 43 of the
1997 Rules of Civil Procedure, by filing a petition for review within a period of fifteen (15) days from
receipt of the adverse CBAA decision.
Raul's appeal would not prosper for the following reasons:
a. The facts of the case do not show that Raul has paid under protest the tax assessed
against his property. This is a mandatory requirement under Sec. 252 of the Local Government
Code. This is so, because the issue is reasonableness of the amount assessed and not on the very
authority and power of the assessor to impose the assessment and of the treasurer to collect the
tax. (Ty v. Trampe, 250 SCRA 500)
b. Appellate courts as well as appellate administrative agencies, have inherent authority to
review unassigned errors (1) which are closely related to an error properly raised, or (2) upon
which the determination of the error properly assigned is dependent, or (3) where the court or
administrative agency finds that consideration of them is necessary in arriving at a just decision of
the case. There was no error, because Raul himself is assailing the subject assessment as
"excessive and unconscionable." Thus, CBAA was duty-bound to review the factual antecedents of
the case and to apply hereon the pertinent provisions of law. In the process, CBAA has to apply
Sec. 222 of the Local Government Code which authorizes the collection of back taxes.
c. The excess areas resulting from the revision must be understood as never having been
declared before. This is evident from the provisions of Sec. 222 of the Local Government Code
which reads:
"Sec. 222. Assessment of Property Subject to Back Taxes. -Real property declared for the
first time shall be assessed for taxes for the period during which it would have been liable but in no
case for more than ten (10) years prior to the date of initial assessment: Provided, however, That
such taxes shall be computed on the basis of the applicable schedule of values in force during the
corresponding period."
It is neither just that a landowner should be permitted by an involuntary mistake or through
other causes, not to say bad faith, to state an area far less than that actually contained in his land
and pay a tax to the State a tax far below that which he should really pay.

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d. Raul's contention on the use of market value for the computation of the assessed value is
erroneous. Par. (l) Sec. 199 of the Local Government Code merely defines "Fair Market Value." It
does not in any way direct that the "Fair Market Value" should be used as a basis for purposes of
real property taxation. On the other hand, par. (a), Sec. 198 of the same Code provides
unequivocally that, "Real property shall be appraised at its current and fair market value." The
current value of like properties and their actual or potential uses, among others, are also
considered.
Unscrupulous sellers of real estate often understate the selling price in the deed of sale to
minimize their tax liability. Moreover, the value of real property does not remain stagnant, it is
unrealistic to expect that the current market value of a property is the same as its cost of acquisition
ten years ago. In this light, a general revision of real property assessment is required by law within
two (2) years after the effectivity of the Local Government Code and every three (3) years
thereafter. (Sec. 219, Local Government Code)
e. When back taxes were imposed on Raul's property, there was no violation of the rule that
laws shall have only prospective applicability. The provisions of Sec. 25 of P.D. No. 464, The Real
Property Tax Code (now Sec. 222 of the Local Government Code) is not penal in character, hence it
may not be considered as an ex post facto law. (Sesbreno v. Central Board of Assessment
Appeals, et al., G.R. No. 106588, March 24, 1997)
122. What are the administrative remedies that are provided for under the provisions
of R.A. No. 7160, the Local Government Code, before resort to courts is made relative to real
property taxes ?
SUGGESTED ANSWER: A taxpayer may question the constitutionality or legality of a tax
ordinance on appeal within thirty (30) days from effectivity thereof, to the Secretary of Justice. The
taxpayer after finding that his assessment is unjust, confiscatory, or excessive, must bring the case
before the Secretary of Justice for questions of legality or constitutionality of a city ordinance.
An owner of real property who is not satisfied with the assessment of his property may, within
sixty (60) days from notice of assessment, appeal to the Local Board of Assessment Appeals.
Should the taxpayer question the excessiveness of the amount of tax, he must first pay the
amount due. Then, he must request the annotation of the phrase paid under protest and
accordingly appeal to the Local Board of Assessment Appeals by filing a petition under oath
together with copies of the tax declarations and affidavits or documents to support his appeal.
(Lopez v. City of Manila, et al., G.R. No. 127139, February 19, 1999)
NOTES AND COMMENTS:
Remedies of real property owner who questions validity of tax ordinance:
Secretary of Justice can take cognizance of a case involving the constitutionality or legality of tax
ordinances where there are factual issues involved. (Figuerres v. Court of Appeals, et al., G.R. No.
119172, March 25, 1999)
Questions on validity or legality of a tax ordinance. Taxpayer files appeal to the
Secretary of Justice, within 30 days from effectivity thereof. In case the Secretary decides the
appeal, a period also of 30 days is allowed for an aggrieved party to go to court. But if the
Secretary does not act thereon, after the lapse of 60 days, a party could already seek relief in court.
These three separate periods are clearly given for compliance as a prerequisite before
seeking redress in a competent court. Such statutory periods are set to prevent delays as well as
enhance he orderly and speedy discharge of judicial functions. For this reason the courts construe
these provisions of statutes as mandatory. (Reyes, et al., v. Court of Appeals, et al., G.R. No.
118233, prom. December 10, 1999)
Public hearings are mandatory prior to approval of tax ordinance, but this still requires the
taxpayer to adduce evidence to show that no public hearings ever took place. (Ibid.)
123. What are the steps to be followed for the mandatory conduct of General Revision
of Real Property Assessments ?
a. Preparation of Schedule of Fair Market Values;
b . Enactment of Ordinances;
1) levying an annual ad valorem tax on real property and an
additional tax accruing to the Special Education Fund;
2) Fixing the assessment levels to be applied to the market values of real properties;
3) Providing the necessary appropriations to defray expenses incident to general
revision of real property assessments,; and
4) Adopting the Schedule of Fair Market Values prepared by the assessors. (Lopez v.
City of Manila, et al., G.R. No. 127139, February 19, 1999)
NOTES AND COMMENTS:
Public hearings are required to be conducted prior to the enactment of an ordinance
imposing real property taxes. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25,
1999)

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124. What are the steps to be followed in the preparation of fair market values ?
a. The city or municipal assessor shall prepare a schedule of fair market values for the
different classes of real property situated in their respective Local Government Units for the
enactment of an ordinance by the sanggunian concerned; and
b. The schedule of fair market values shall be published in a newspaper of general
circulation in the province, city or municipality concerned or the posting in the provincial capitol or
other places as required by law. (Lopez v. City of Manila, et al., G.R. No. 127139, February 19,
1999)
NOTES AND COMMENTS: Proposed fair market values of real property in a local
government unit as well as the ordinance containing the schedule must be published in full for three
(3) consecutive days in a newspaper of local circulation, where available, within ten (10) days of its
approval, and posted in at lease two (2) prominent places in the provincial capitol, city, municipal or
barangay hall for a minimum of three (3) consecutive weeks. (Figuerres v. Court of Appeals, et al,.
G.R. No. 119172, March 25, 1999)
125. What is the procedure to be followed in computing real property taxes ?
SUGGESTED ANSWER:
a. Ascertain the assessment level of the property;
b. Multiply the market value by the applicable assessment level of the property; and
c. Find the tax rate which corresponds to the class (use) of the property and multiply the
assessed value by the applicable tax rate. For easy reference, the computation of real property tax
is cited below:
Market value
Pxxx
Multiplied by Assessment Level
( x %)
Assessed value
Pxxx
Multiplied by Rate of Tax
( x %)
Real Property Tax
P x x x (Lopez v. City of Manila, et al., G.R. No.
127139, prom. February 19, 1999)
NOTES AND COMMENTS: It is farfetched that the above question would be given. It was
included only for illustrative purposes. However the following concept relative to the determination
of real property taxes in order to ease the predicament of the low and middle-income groups of
taxpayers, may be asked:
With the introduction of assessment levels, tax rates could be maintained, although tax
payments can be made either higher or lower depending on their percentage (assessment level)
applied to the fair market value of property to derive its assessed value which is subject to tax.
Moreover, classes and values of real properties can be given proper consideration, like assigning
lower assessment levels to residential properties and higher levels to properties used in business.
(Lopez v. City of Manila, et al., G.R. No. 127139, prom. February 19, 1999)

GOOD LUCK AND PRAYERS FOR YOUR PASSING THE BAR.