SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001 Strictly for Bedans Only

T A X A T I O N
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A. Does the Commissioner have the authority to compromise the payment of assessed delinquency tax? YES, but subject to the approval of the Evaluation Board. The Commissioner may compromise the payment of any internal revenue tax when: A) A reasonable doubt as to the validity of the claim against the taxpayer exists; or B) The financial position of the taxpayer demonstrate a clear inability to pay the assessed tax. The compromise settlement of any tax liability shall be subject to the following minimum amounts: For cases of financial incapacity, a minimum compromise rate equivalent to 10% of the basic assessed tax; and For other cases, a minimum compromise rate equivalent to 40% of the basic assessed tax.

Where the basic tax involved exceed 1 million pesos or where the settlement offered is less than the prescribed minimum rate, compromise shall be subject to approval of the Evaluation Board which shall be composed of the Commissioner and the four deputy Commissioners (Sec. 204 par. A) B. Can the power to compromise be delegated? No, The power cannot be delegated EXCEPT in cases where the Basic Deficiency Taxes do not exceed P500,000. II Government Service Insurance System (GSIS) and Busuego entered into a contract to sell real property on installments whereby Busuego would be in possession but GSIS would retain title until full payment. Busuego agreed to pay real estate taxes. When Busuego discovered that GSIS was tax-exempt he claimed a refund. If Busuego entitled to a refund of the real estate taxes? No, he is not entitled to a refund . First, because having agreed to pay real estate taxes, he was put in estoppel to deny his liability; and secondly, because the test of exemption is not ownership but beneficial use of the property. (City of Baguio vs. Busuego) III What is a long term deposit or long term investment certificate?

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SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001 Strictly for Bedans Only
It is a certificate of time deposits or investment in the form of savings, common or individual trust funds, deposits substitutes or investment management accounts, and other investment with a maturity period of not less than 5 years (Sec. 22 par. Ff of the NIRC) Interest income from long-term deposit or investment under Sec. 22 (FF), NIRC shall be exempt from the 20% tax imposed on interests, royalties, prizes and other winning under Sec. 24 (B)(1) of the NIRC. Should the holder of the certificates preterminate the deposit or investment before the 5th year, a final tax shall be imposed on entire income. IV What is the rule regarding the deductibility of taxes? Are there any exceptions? Taxes paid or incurred within the taxable year in connection with the taxpayers profession, trade or business, shall be allowed as deduction, EXCEPT: 1) 2) 3) 4) Income tax; Income taxes imposed by authority of any foreign country; Estate and donors taxes; Assessments. V What is the jurisdiction of the CTA over the decisions of the CIR/ Commissioner of Customs with respect to disputed assessments? As a rule the CTA has jurisdiction only if there is a decision of the CIR or the Commissioner of Customs concerning disputed assessment. Exceptions: A) If the Commisioner of Customs has not rendered a decision and the suit is about to prescribe. B) If the CIR has not acted in a refund case and the 2 year prescriptive period is about to expire. C) Where the CIR has not acted upon a disputed assessment within 180 days from the submission of all relevant documents. The taxpayer adversely affected by the inaction may appeal to the CTA within 30 days from the lapse of the 180 day period. VI What are the basic principles governing deductions? A) The taxpayer seeking deductions must point out some specific provisions of a statute authorizing the deductions. B) He must be able to prove that he is entitled to the deductions authorized or allowed.

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SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001 Strictly for Bedans Only
VII What are the itemized deductions? A) Bad debts B) Research and Development C) Ordinary and necessary expenses D) Depreciation E) Depletion F) Taxes G) Interest H) Losses I) Pension Trust J) Charitable and other Contributions BRED2-TIL-PC VIII What is the nature of the tax on Improperly Accumulated Earnings? The 10% tax is a form of penalty on corporate earnings permitted to accumulate instead of being divided or distributed. The earnings and the profits are not taxable as dividends. Hence, they are penalized at source. (Sec.29(A), NIRC) IX Cite instances wherein the taxpayer is allowed to deduct expenses not incurred during taxable year. At the option of the taxpayer: 1) Interest incurred to acquire property used in trade, business or exercise of a profession as a deduction or treated as a capital expenditure. 2) Exploration and development expenditures in computing taxable income from mining operations. The election by the taxpayer to deduct the exploration and development expenditure is irrevocable and shall be binding in succeeding taxable year. X Can the Secretary of Finance impose a higher withholding tax on members of the entertainment industry? YES. Because it is within his power.

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SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001 Strictly for Bedans Only
XI When is interest expense deductible? When is it not deductible despite compliance with the requisites of deductibility? To be deductible: 1) The indebtedness must be related to the taxpayers business or trade. 2) Indebtedness should be legally due. The agreement to pay interest must be in writing otherwise it is void. 3) The interest is paid or accrued during the taxable year (Sec. 34B{1}, CTRP). Not deductible: 1) When the taxpayer incurs an indebtedness during the taxable year on which an interest is paid in advance through discount or otherwise. 2) If both the taxpayer and the person to whom payment has been made or is to be paid are related parties under Sec. 36 (B). 3) If the indebtedness is incurred to finance petroleum exploration (Sec. 34B{2}, CTRP) XII Is uniformity of taxation the same as equality of taxation? No. Uniformity of taxation requires that persons or things belonging to the same class shall be taxed at the same rate, while equality of taxation means that the tax shall be strictly proportional to the relative value of the property. XIII What are the remedies available to local government units who seek to enforce the collection of taxes, fees and charges? The remedies available to the local government units to enforce collection of taxes, fees and charges are: 1. administrative remedies of distraint of personal property of whatever kind whether tangible or intangible, and levy of real property and interest therein; and 2. Judicial remedy by institution of an ordinary civil action for collection with the regular courts. XIV What are the prescriptive periods in the assessment and collection of local taxes? 1. Period of Assessment within 5 years from the date that they become due a. in case of fraud or intent to evade payment within 10 years 2. Period of Collection within 5 years from the date of the assessment 3. Suspension of Prescriptive Periods: a. Treasurer legally prevented from making the assessment or collection; b. Taxpayer requests for reinvestigation and executes waiver in writing c. Taxpayer out of the country d. Taxpayer cannot be located (Sec. 194, LGC)

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SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001 Strictly for Bedans Only
XV What are the reglementary periods imposed upon the taxpayer in case of protest of assessment? a. Assessment made by Local Treasurer b. Taxpayer has 60 days from receipt to file written protest with Treasurer, otherwise, it shall become final and executory c. Treasurer has 10 days within which to decide 1.) Treasurer cancels assessment 2.) Treasurer denies protest A.) taxpayer appeal the competent court within 30 days after receipt of denial 3.) Treasurer does not act within 60 days A.) taxpayer has 30 days from lapse of 60 days period to appeal to competent court XVI On what grounds may a local tax ordinance be challenged before the Secretary of Justice? 1. Same procedures as other ordinances (public hearings prior to enactment is mandatory; publication requirement) 2. Question of constitutionality or legality a. within 30 days from effectivity, appeal to the Secretary of Justice b. when the Secretary of Justice -1.) rejects appeal taxpayer has 30 days from receipt to file appropriate proceedings before competent court. 2.) Does not act within 60 days taxpayer has thirty days from lapse of 60 day period to file appropriate proceedings before competent court. (Sec. 187, LGC) XVII A, single, cohabits with B, who is legally married to C. A and Bs 3 minor children as well as Bs 70-year-old father all live and depend upon A for chief support. a.) May A be considered as head of the family for income tax purposes? b.) May A deduct from her gross income additional exemption for each illegitimate children? If so, how much? c.) May A deduct from her gross income additional exemption for Bs father? a.) Yes. A head of a family includes an unmarried or legally separated man or woman with: (1) one or both parents, or (2) one or more brothers or sisters, or (3) one or more legitimate, recognized natural, or legally adopted children living with and dependent upon him or her for their chief support. Such brothers, sisters or children must not be more than 21 years of age, unmarried and not gainfully employed or where such children, brothers or sisters, regardless of age, even if more than 21 years of age are incapable of self-support because of mental or physical defect. (Sec. 35 [A], NIRC) b.) Yes. She may claim an additional exemption for each of her 3 illegitimate children. Sec. 35 (B) provides that there shall be allowed an additional exemption of P8,000.00 for each dependent not exceeding four. Hence, he can claim up to P24,000.00 as additional exemption.

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SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001 Strictly for Bedans Only
c) Yes. Under Sec. 5, RA 7432, (Senior Citizens Law), it is stated that the senior citizens shall be treated as dependents provided for in the National Internal Revenue Code and as such, individual taxpayers caring for them, be they relatives or not shall be accorded the privileges granted by the Code insofar as having dependents are concerned. A senior citizen has been defined as any resident Filipino citizen who is at least 60 years old and has an income of not more than P60,000 per annum. XVIII What are the exchanges of property solely in kind? If in pursuance of a plan of merger or consolidation a. A corporation party to a merger or consolidation exchanges property b. A shareholder exchanges stock in a corporation party to the merger or consolidation c. A security holder of a corporation, party to the merger or consolidation, exchanges his security solely for stock in another corporation party to the merger or consolidation No gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation or which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of the said corporation: Provided, that said stock issued for services shall not be considered as issued in return for property [Sec. 40(C), CTRP]. XIX What is the effect of acquittal on tax liability? If a taxpayer is acquitted in the criminal case, such acquittal does not exonerate him from his civil liability to pay the tax due. The Government may still collect the tax on the same action. The reason is that payment of the tax is an obligation imposed by the statute and does not arise from criminal act (Castro vs. Coll., April 26, 1962). Thus the taxpayer is still liable where the acquittal is based on the fact that the failure to pay was due to a reasonable cause and not to willful neglect. XX What is the extent of the power of the commissioner in obtaining information relative to assessment or collection? The CIR is authorized to: a. obtain information on regular basis other than the person whose tax liability is subject to investigation or to any office as officer of the Government; b. summon person liable for tax or required to file a return, or any office of employee of such person c. take testimony of the person concerned d. cause revenue officers and employees to make a canvass and inquire concerning all persons who are liable to pay any internal revenue tax. e. Examine documents material to the inquiry; f. When necessary, make arrests and seizures.

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SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001 Strictly for Bedans Only
XXI What is the formula for determining the tax due on Real Property Tax? Market Value x Assessment Level*** = Assessed Value Assessed Value x Tax Rate = Tax Due ***Assessment levels are those applied to the fair market value (FMV) of real property to determine its assessed value. Such levels shall be fixed by Ordinances of the Sangguniang Panlalawigan, Panlungsod or Barangay which shall not exceed those rates prescribed in the Local Government Code (Sec 199[g], LGC). XXII To what extent may the extent may the Commissioner delegate his or her powers under the Code? The Commissioner may delegate the powers vested in him under the code to any subordinate official with the rank equivalent to a Division Chief or higher, except for the power to: (a) (b) (c) Recommend the promulgation of rules and regulations by the Secretary of Finance; Issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau; Compromise of abate any tax liability, provided that the assessments issued by regional offices involving basic deficiency taxes of P 500,000 or less, and minor criminal violations, discovered by regional and district officials, may be compromised by a regional evaluation board; and Assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept.

(d)

XXIII
X owns a piece of land, an ordinary asset, with a cost of P100,000, which he sold to Y for P 200,000 and payable at an amount of P40,000 a year for a period of five (5) years. A. How much is the amount of gain reportable? Explain fully supporting your answer with the appropriate computations. B. Assuming that the property in the abovementioned problem is a capital asset subject to capital gains tax. How much is the tax due? Explain fully and with computations. A. The taxpayer has the option of whether to declare his reportable income outright or to report it under the installment method. The income from a sale or disposition of property may be reported on the installment method in the following cases: i. Installment sale by dealer of personal property regularly selling on installment; ii. Casual sale or casual disposition on installment of personal property other than inventory where: The initial payments do not exceed 25% of the selling price; and The selling price exceeds P 1, 000.00.

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SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001 Strictly for Bedans Only
iii. Sale or other disposition of real property on installment where the initial payments do not exceed 25% of the selling price. If the taxpayer decide on reporting the income outright, the reportable gain shall be P100,000 computed as follows: Selling Price Less: Cost Reportable gain P P 200,000 100,000 100,000

Under the installment method, the gain reportable is P20,000 computed as follows: Gross Profit x Collections during the year = Income for the year Contract Price P 100,000 P 200,000 x P 40,000 = P 20, 000

B. The taxpayer has the option of whether to declare the capital gains tax outright or to report it under the installment method (see A above for the conditions). If the capital gains tax is reported outright, the tax is P12,000 computed as follows: Fair market value or Gross selling price (whichever is higher) x 6% P200,000 x 6% = P 12,000 If the capital gains tax is reported on installment basis, the tax due is P2,400 computed as follows: Installment Payment received Contract Price P 40,000 P 200, 000 x x Capital Gains Tax

P 12,000 = P 2,400

XXIV
In taxable year 2000, the Nissin Autofluids Corporation, a domestic corporation, had a net income from Philippine sources of P400,000 and from Tokyo, Japan of P200,000. The actual tax paid to the government of Japan is P72,000. In this connection, the net income from both countries cited above shall be understood to mean net income before income taxes. A. What is tax credit? B. For the purposes of Philippine income taxation, how much tax credit is Nissin allowed? Support your answer.

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SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001 Strictly for Bedans Only
A. A tax credit is an amount allowed as reduction of Philippine Income Tax on account of other income taxes paid to foreign countries. This is a form if relief from the onerous burden of taxation in case where the same income is taxed in the Philippines and a foreign country. A tax credit on income tax paid to foreign countries is allowed to: a) citizens of the Philippines, and b) domestic corporations. B. The allowable tax credit is the lesser amount between the limit of foreign tax credit and the tax actually paid to the foreign government. To illustrate: Taxable Income from Philippines Taxable Income from Japan Taxable Income from all sources Tax Rate PHILIPPINE INCOME TAX TAX CREDIT Taxable Income for foreign country x Phil. Income Tax = Limit of Foreign Taxable Income from all sources Tax Credit P 200, 000.00 x 192, 000.00 P 600, 000.00 Tax Actually Paid to the Government of Japan Thus, Nissin shall be allowed a tax credit of P 64,000. = P 64, 000 P 72, 000 P P P 400,000 200,000 600,000 32 % 192,000

XXV
Mr. Pesigan leased his vacant lot in Alabang to Mr. Mendoza for a term of 10 years at an annual rental of P30,000. The contract provides that Mendoza will put up a building on a lot and after 10 years the building will belong to Pesigan. The building was erected at a cost of P300,000, and has an estimated useful life of 30 years. The parties agreed that the lease shall commence upon the completion of the building. a. Compute the total income Pesigan should report assuming he reports his income on the improvements in the year it was completed. b. Compute the yearly income Pesigan, assuming he will spread his income over the term of the lease. a. If the taxpayer opts to report the income from permanent improvements at the time they were completed, the income is equal to the fair market value of such improvements subject of the lease. Thus, assuming that the cost of construction is the same as the fair market value of the completed building, he should report an income of P330,000, computed as follows: Fair Market value of the building in the year completed Add: Annual rental Total Income P P 300,000 30,000 330,000

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SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001 Strictly for Bedans Only
b. If the taxpayer opts to report his income from permanent improvements over the term of the lease, the total income of Mr. Pesigan is P50,000 computed as follows: Cost of the building Less: Depreciation for 10 yrs Cost of the building Divided by: Estimated Useful Life Annual Depreciation Multiply by the term of the lease Value of the building after 10 years Divide by the term of the lease Annual Income on the Building Annual rental Total Income P 300,000 30 years 10,000 10 years P P P 300,000

100,000 200,000 10 years 20,000 30,000 50,000

XXVI
Triple A Condominium was constructed at a cost of P2,400,000. Subsequent additions and improvements, which were properly capitalized, amounted to P100,000. The building was insured for P1,500,000 against fire and has an accumulated depreciation of P 1,000,000. A claim for fire was settled with the LRB Insurance Corp. paying P1,300,000.00. Compute the loss deductible by the owner. Under Section 34 (D) of the NIRC, losses actually sustained during the taxable year and not compensated for by insurance and other forms of indemnity shall be allowed as deduction. In the case at bar, the book value of the property will only be P 1,500, 000 after deducting the accumulated depreciation. Since P1,300,000 was actually paid by LRB Insurance, the only deductible loss that can be claimed by the owner is P200,000. To illustrate: Cost of Building Plus Improvements TOTAL COST OF BUILDING Less: Accumulated Depreciation Value of the burned building Less: Actual Payment of LRB Insurance DEDUCTIBLE LOSS BY THE OWNER P P P P 2, 400,000 100,000 2, 500,000 1, 000,000 1,500,000 1,300,000 200,000

XXVII
In 1999, Mr. Dino Natuto, a married man with two minor children, an adopted child, an orphaned niece aged 10, and one acknowledged natural child, living with him and wholly dependent upon him for support earned the following: a. Salary from St. Peters Holdings, Inc. P 700,000 b. Housing allowance from St. Peters Holdings P 200,000 c. Commission from Sale of Real Estate P 50,000 d. Interest from time deposit certificate From BPI (net of withholding tax) P 75,000 e. Dividends from Boracay, Inc. (net of withholding tax) P 25,000 f. Lotto Winning P 100,000

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SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001 Strictly for Bedans Only
g. Distributive share in general partnership (net of withholding tax) h. Pension from US Veterans Admin i. Gain from share of PLDT shares (net of withholding tax) j. Gift from Jose Velarde P 30,000 P 60,000 P 10,000 P 1, 000,000

Compute Mr. Natutos net taxable income, explaining the details thereof. Salary from St. Peters Holdings, Inc. Housing allowance from St. Peters Commission from Sale of Real Estate GROSS TAXABLE INCOME Less: Basic Personal Exemption Additional Exemptions - Two (2) Minor Children - Adopted Child - Acknowledged Natural Child NET TOTAL INCOME P P 32,000 16,000 8,000 8,000 P P 700,000 100,000 50,000 850,000

64,000 786, 000

Interest in time deposit certificates, dividends from Boracay, Inc., distributive shares in the general partnership and gain from sale of PLDT Shares, are all subject to final tax. The lotto winnings, pension from US Veterans Admin., and the gifts are items of exclusion. XVIII Outline the Procedure of appeal in cases involving Real Property Tax: A. Appeal within 60 days from assessment of provincial, city or municipal assessor to LBAA (Sec. 226, LGC) - within 30 days from receipt of decision of LBAA to CBAA (Sec. 230, LGC) - In case of denial of refund or credit, appeal to BAA as in protest case (Sec. 253, LGC) B. Court Action appeal of CBAAs decision to Supreme Court by Certiorari. C. Suit assailing validity of tax; recovery of refund of taxes paid (Sec. 64, PD 464) D. Suit to declare the invalidity of tax due to irregularity in assessment and collection (Sec. 64, PD 464) E. Suit assailing the validity of tax sale (Sec. 83, PD 464)

TANDAAN : LITO LAPID, ANG PAGBABALIK NG LAWIN!!!

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