taxpayer to deduct an annual depreciation of

INCOME TAXATION Php4,500, arrived at by dividing the depreciable

Basic: Allowable Deductions vs. Personal Exemptions (2001) value (Php l00.000-Phpl0.000) of Php90,000 by
Distinguish Allowable Deductions from Personal Exemptions. the estimated useful life (20 years).
5 Give an example of an allowable deduction and another example 65 NOTE: The bar candidate may give a different
for personal exemption. (5%) figure depending on the method he used in
SUGGESTED ANSWER: computing the annual depreciation.
The distinction between allowable deductions and personal
exemptions are as follows: The facts given in the problem are sufficient to
10 a. As to amount — Allowable deductions generally refer to 70 compute the annual depreciation either under the
actual expenses incurred in the pursuit of trade, business or declining-balance method or sum-of-years-digit
practice of profession while personal exemptions are arbitrary method. Any answer arrived at by using any of the
amounts allowed by law. recognized methods should be given full credit. It
As to nature — Allowable deductions constitute business is suggested that no question requiring
15 expenses while personal exemptions pertain to personal expenses.75 computation should be given in future bar
As to purpose — Deductions are allowed to enable the taxpayer examinations.
to recoup his cost of doing business while personal exemptions Basic: Sources of Income: Taxable Income
are allowed to cover personal, family and living expenses. (1998)
As to claimants — Allowable deductions can be claimed by all From what sources of income are the following
20 taxpayers, corporate or otherwise, while personal exemptions can
80 persons/corporations taxable by the Philippine
be claimed only by individual taxpayers. government? 2) Citizen of the Philippines residing
therein; [1%] 3) Non-resident citizen; [1%1 4) An
Basic: Meaning of Taxable Income (2000) individual citizen of the Philippines who is
What is meant by taxable income? (2%) working and deriving income from abroad as an
25 SUGGESTED ANSWER: 85 overseas contract worker; [1%] 5) An alien
TAXABLE INCOME means the pertinent items of gross income individual, whether a resident or not of the
specified in the Tax Code, less the deductions and/or personal and Philippines; [1%] 6) A domestic corporation; [1%]
additional exemptions, if any, authorized for such types of income
by the Tax Code or other special laws. (Sec. 31, NIRC of 1997) SUGGESTED ANSWER: (Section 23, NIRC of
30 90 1997) 1) A citizen of the Philippines residing
Basic: Principle of Mobilia Sequuntur Personam (1994) therein is
What is the principle of mobilia sequuntur personam in income taxable on all income derived from sources within
taxation? and without the Philippines. 2) A nonresident
SUGGESTED ANSWER: citizen is taxable only on income derived from
35 Principle of Mobilia Sequuntur Personam in income taxation 95 sources within the Philippines.
refers to the principle that taxation follows the property or person 3) An individual citizen of the Philippines who is
who shall be subject to the tax. working and deriving income from abroad as an
Basic: Proper Allowance of Depreciation (1998) overseas contract worker is taxable only on income
1 What is the proper allowance for depreciation of any property from sources within the Philippines.
40 used in trade or business? [3%) 100 4) An alien individual, whether a resident or not of
2 What is the annual depreciation of a depreciable fixed asset the Philippines, is taxable only on income derived
with a cost of P100,000 and an estimated useful life of 20 years from sources within the Philippines.
and salvage value of P 10,000 after its useful life? 5) A domestic corporation is taxable on all income
derived from sources within and without the
45 SUGGESTED ANSWER: 105 Philippines.
1. The proper allowance of depreciation of any property used in
trade or business refers to the reasonable allowance for the Basic: Tax Benefit Rule (2003)
exhaustion, wear and tear (including reasonable allowance for (a) What is meant by the "tax benefit rule"?
obsolescence) of said property. The reasonable allowance shall SUGGESTED ANSWER:
50 include, but not limited to, an allowance computed under any 110
of (a) TAX BENEFIT RULE states that the taxpayer
the following methods: is obliged to declare as taxable income subsequent
(a) straight-line method; recovery of bad debts in the year they were
(b) declining-balance method; collected to the extent of the tax benefit enjoyed by
(c) sum-of-years-digit method; and the taxpayer when the bad debts were written-off
55 (d) any other method which may be prescribed by the Secretary115
of and claimed as a deduction from income. It also
Finance upon recommendation of the Commissioner of Internal applies to taxes previously deducted from gross
Revenue (Sec. 34(F). NIRC) income but which were subsequently refunded or
credited. The taxpayer is also required to report as
2. The annual depreciation of the depreciable fixed asset may be taxable income the subsequent tax refund or tax
60 computed on the straight-line method which will allow the 120 credit granted to the extent of the tax benefit the
 taxpayer enjoyed when such taxes were previously claimed as Income differs from capital in that INCOME is any
deduction from income. wealth which flows into the taxpayer other than a
(b) Give an illustration of the application of the tax benefit rule. return of capital while capital constitutes the
investment which is the source of income.
5 SUGGESTED ANSWER: 65 Therefore, capital is fund while income is the flow.
(b) X Company has a business connected receivable amounting to Capital is wealth, while income is the service of
P100,000.00 from Y who was declared bankrupt by a competent wealth. Capital is the tree while income is the fruit
court. Despite earnest efforts to collect the same, Y was not able (Vicente Madrigal et al v. James Rqfferty, 38
to pay, prompting X Company to write-off the entire liability. Phil. 414).
10 During the year of write-off, the entire amount was claimed as 70a
deduction for income tax purposes reducing the taxable net Basic; Schedular Treatment vs. Global
income of X Company to only P1,000,000.00. Three years later, Treatment (1994)
Y voluntarily paid his obligation previously written-off to X Distinguish "schedular treatment" from "global
Company. In the year of recovery, the entire amount constitutes treatment" as used in income taxation.
15 part of gross income of X Company because it was able to get full
75 SUGGESTED ANSWER:
tax benefit three years earlier. Under a SCHEDULER SYSTEM, the various
types/items of income (compensation;
Basic; Basis of Income Tax (1996) business/professional income) are classified
X is employed as a driver of a corporate lawyer and receives a accordingly and are accorded different tax
20 monthly salary of P5,000.00 with free board and lodging with an 80 treatments, in accordance with schedules
equivalent value of P1,500.00. characterized by graduated tax rates. Since these
1 What will be the basis of X's income tax? Why types of income are treated separately, the
2 Will your answer in question (a) be the same if X's employer is allowable deductions shall likewise vary for each
an obstetrician? Why? type of income.
25 85 Under the GLOBAL SYSTEM, all income
SUGGESTED ANSWERS: received by the taxpayer are grouped together,
1) The basis of X’s income tax would depend on whether his without any distinction as to the type or nature of
employer is an employee or a practicing corporate lawyer. the income, and after deducting therefrom
• If his employer is an employee, the basis of X's income tax is expenses and other allowable deductions, are
30 P6,500.00 equivalent to the total of the basic salary and the value
90 subjected to tax at a fixed rate.
of the board and lodging. This is so because the
employer/corporate lawyer has no place of business where the Compensation; Income Tax: Due to Profitable
free board and lodging may be given. Business Deal (1995)
• On the other hand, if the corporate lawyer is a "practicing Mr. Osorio, a bank executive, while playing golf
35 lawyer (self-employed), X should be taxed only on P5,000.00 95 with Mr. Perez, a manufacturing firm executive,
provided that the free board and lodging is given in the business mentioned to the latter that his (Osorio) bank had
premises of the lawyer and for his convenience and that the free just opened a business relationship with a big
lodging was given to X as a condition for employment. foreign importer of goods which Perez' company
manufactures. Perez requested Osorio to introduce
40 2) If the employer is an obstetrician who is self-employed, the 100 him to this foreign importer and put in a good word
basis of X's income will only be P5,000.00 if it is proven that the for him (Perez), which Osorio did. As a result,
free board and lodging is given within the business premises of Perez was able to make a profitable business deal
said employer for his convenience and that the free lodging is with the foreign Importer.
required to be accepted by X as condition for employment.
45 Otherwise, X would be taxed on P6,500.00. 105 In gratitude, Perez, in behalf of his manufacturing
firm, sent Osorio an expensive car as a gift. Osorio
Basic; Gross Income: Define (1995) called Perez and told him that there was really no
What is "gross Income" for purposes of the Income tax? obligation on the part of Perez or his company to
SUGGESTED ANSWER: give such an expensive gift. But Perez insisted that
50 GROSS INCOME means all income from whatever source 110 Osorio keep the car. The company of Perez
derived, including (but not limited to) compensation for services, deducted the cost of the car as a business expense.
including fees, commissions, and similar items; gross income The Commissioner of Internal Revenue included
from business; gains derived from dealings in property; interest; the fair market value of the car as Income of
rents; royalties; dividends; annuities; prizes and winnings; Osorio who protested that the car was a gift and
55 pensions; and partner's distributive share of the gross income 115
of therefore excluded from income. Who is correct,
general professional partnership (Sec. 28, NIRC). the Commissioner or Osorio? Explain.
SUGGESTED ANSWER:
Basic; Income vs. Capital (1995) The Commissioner is correct. The car having been
How does "Income" differ from "capital"? Explain. given to Mr. Osorio in consideration of having
60 SUGGESTED ANSWER: 120 introduced Mr. Perez to a foreign Importer which
 resulted to a profitable business deal is considered to be a and (2) is normal in relation to the business of the
compensation for services rendered. The transfer is not a gift taxpayer and the surrounding circumstances (p.
because it is not made out of a detached or disinterested 316, Ibid).
generosity but for a benefit accruing to Mr. Perez. The fact that
5 the company of Mr. Perez takes a business deduction for the 65 To determine the reasonableness of the bonus it
payment indicates that it was considered as a pay rather than a must be commensurate with services performed by
gift. Hence, the fair market value of the car is includable in the the officials and employees. Other factors to
gross income pursuant to Section 28(a)(l) of the Tax Code (See consider are whether the payment was made in
1974 Federal Tax Handbook, p. 145). A payment though good faith; the character of the taxpayer's business;
10 voluntary, if it is in return for services rendered, or proceeds from
70 the volume and amount of its net earnings; its
the constraining force of any moral or legal duty or a benefit to locality; the type and extent of the services
the payer is anticipated, is a taxable income to the payee even if rendered; the salary policy of the corporation; the
characterized as a 'gift' by the payor (Commissioner vs. size of the particular business; the employees'
Duberstein, 363 U.S. 278). qualification and contributions to the business
15 75 venture; and general economic conditions (Atlas
Corporate: Income: Donor’s tax; Tax Liability (1996) Mining v. CIR, G.R. No. L26911, January 27,
X, a multinational corporation doing business in the Philippines 1981). However, since the business suffers from a
donated 100 shares of stock of said corporation to Mr. Y, its net operating loss, I will rule that the bonus is an
resident manager in the Philippines. 1) What is the tax liability, if unreasonable expense.
20 any, of X corporation? 2) Assuming the shares of stocks were 80
given to Mr. Y Corporate; Income: Coverage; "Off-Line"
in consideration of his services to the corporation, Airline (1994)
what are the tax implications? Explain. Caledonia Aircargo is an off-line international
SUGGESTED ANSWERS: carrier without any flight operations in the
25 1) Foreign corporations effecting a donation are subject to donor's 85 Philippines. It has, however, a liaison office in the
tax only if the property donated is located in the Philippines. Philippines which is duly licensed with the
Accordingly, donation of a foreign corporation of its own shares Securities and Exchange Commission, established
of stocks in favor of resident employee is not subject to donor's for the purpose of providing passenger and flight
tax (BIR Ruling No. 018-87, January 26, 1987). However, if 85% information, reservation and ticketing services. Are
30 of the business of the foreign corporation is located in the 90 the revenues of Caledonia Aircargo from tickets
Philippines or the shares donated have acquired business situs in reserved by its Philippine office subject to tax?
the Philippines, the donation may be taxed in the Philippines SUGGESTED ANSWER:
subject to the rule of reciprocity. The revenues in the Philippines of Caledonia
Aircargo as an "off-line" airline from ticket
35 2) If the shares of stocks were given to Mr. Y in consideration of
95 reservation services are taxable income from
his services to the corporation, the same shall constitute taxable "whatever source" under Sec. 28(a) of the Tax
compensation income to the recipient because it is a Code. This case is analogous to Commissioner
compensation for services rendered under an employer-employee v. BOAC, G.R No. No. 65773-74, April 30, 1987
relationship, hence, subject to income tax. where the Supreme Court ruled that the income
40 The par value or stated value of the shares issued also constitutes
100 received in the Philippines from the sale of tickets
deductible expense to the corporation provided it is subjected to by an "off-line" airline is taxable as income from
withholding tax on wages. whatever source.

Corporate; Income Tax; Reasonableness of the Bonus (2006) Corporate; Income: Coverage; "Off-Line"
45 Gold and Silver Corporation gave extra 14th month bonus to 105 all Airline (2005)
its officials and employees in the total amount of P75 Million. An international airline with no landing rights in
When it filed its corporate income tax return the following year, the Philippines sold tickets in the Philippines for
the corporation declared a net operating loss. When the income air transportation. Is income derived from such
tax return of the corporation was reviewed by the BIR the sales of tickets considered taxable income of the
50 following year, it disallowed as item of deduction the P75 Million
110 said international air carrier from Philippine
bonus the corporation gave its officials and employees on the sources under the Tax Code? Explain. (5%)
ground of unreasonableness. The corporation claimed that the
bonus is an ordinary and necessary expense that should be ALTERNATIVE ANSWER:
allowed. If you were the BIR Commissioner, how will you Yes. The income derived from the sales of tickets
55 resolve the issue? (5%) 115 in the Philippines is considered taxable income of
SUGGESTED ANSWER: the international air carrier from Philippine
I will disallow the expense. A bonus is ordinary and necessary sources.
where said expenditure is (1) appropriate and helpful in the The source of income is the property, activity or
development of the taxpayers business service that produced the income. The sale of
60 (Martens, Law of Federal Income Taxation, Volume IV, p. 315) 120 tickets in the Philippines is the activity that
 produces the income. The absence of landing rights in the Explain.
Philippines cannot alter the fact that revenues were derived from
ticket sales within the Philippines. (Commissioner of Internal SUGGESTED ANSWER:
Revenue v. Japan Air Lines, G.R. No. 60714, October 4, 1991 No, Mr. Francisco did not derive any income from
5 reiterating British Overseas Airways Corp., Air India and 65 the cancellation or condonation of his
American Airlines, Inc.) indebtedness. Since it is obvious that the creditor
merely desired to benefit the debtor in view of the
absence of consideration for the cancellation, the
Dividends: Disguised dividends (1994) amount of the debt is considered as a gift from the
10 Disguised dividends in income taxation? Give an example. 70 creditor to the debtor and need not be included in
SUGGESTED ANSWER: the latter's gross income.
Disguised dividends are those income payments made by a Fringe Benefit Tax: Covered Employees (2001)
domestic corporation, which is a subsidiary of a nonresident X was hired by Y to watch over V’s fishponds with
foreign corporation, to the latter ostensibly for services rendered a salary of Php 10,000.00. To enable him to
15 by the latter to the former, but which payments are 75 perform his duties well, he was also provided a
disproportionately larger than the actual value of the services small hut, which he could use as his residence in
rendered. In such case, the amount over and above the true value the middle of the fishponds. Is the fair market
of the service rendered shall be treated as a dividend, and shall be value of the use of the small hut by X a "fringe
subjected to the corresponding tax of 35% on Philippine sourced benefit" that is subject to the 32% tax imposed by
20 gross income, or such other preferential rate as may be provided 80 Section 33 of the National Internal Revenue Code?
under a corresponding Tax Treaty. Example: Royalty payments Explain your answer. (5%)
under a corresponding licensing agreement. SUGGESTED ANSWER:
No. X is neither a managerial nor a supervisory
Dividends; Income Tax; Deductible Gross Income (1999) employee. Only managerial or supervisory
25 A Co., a Philippine corporation, issued preferred shares of stock
85 employees are entitled to a fringe benefit subject to
with the following features: the fringe benefits tax. Even assuming that he is a
managerial or supervisory employee, the small hut
1) Non-voting; is provided for the convenience of the employer,
2) Preferred and cumulative dividends at the rate of hence does not constitute a taxable fringe benefit.
30 10% per annum, whether or not in any period the 90 (Section 33, NERC).
amount is covered by earnings or projects; 3) In the event of
dissolution of the issuer, holders of Fringe Benefit Tax: Employer required to Pay
preferred stock shall be paid in full or ratably as the (2003)
assets of the issuer may permit before any A "fringe benefit" is defined as being any good,
35 distribution shall be made to common stockholders; 95 service or other benefit furnished or granted in
and 4) The issuer has the option to redeem the preferred cash or in kind by an employer to an individual
stock. employee. Would it be the employer or the
A Co. declared dividends on the preferred stock and claimed the employee who is legally required to pay an income
dividends as interests deductible from its gross Income for tax on it? Explain. (4%)
40 income tax purposes. The BIR disallowed the deduction. A Co. 100 SUGGESTED ANSWER:
maintains that the preferred shares with their features are really It is the employer who is legally required to pay an
debt and therefore the dividends are realty interests. Decide. income tax on the fringe benefit. The fringe benefit
(10%) tax is imposed as a FINAL WITHHOLDING TAX
placing the legal obligation to remit the tax on the
45 SUGGESTED ANSWER: 105 employer, such that, if the tax is not paid the legal
The dividends are not deductible from gross income. Preferred recourse of the BIR is to go after the employer.
shares shall be considered capital regardless of the conditions Any amount or value received by the employee as
under which such shares are issued and, therefore, dividends paid a fringe benefit is considered tax paid hence, net of
thereon are not considered 'interest' which are allowed to be the income tax due thereon. The person who is
50 deducted from the gross income of the corporation. (Revenue 110 legally required to pay (same as statutory
Memorandum Circular No. 17-71, July 12, 1971). incidence as distinguished from economic
Effect; Condonation of Loan in Taxation (1995) incidence) is that person who, in case of non-
Mr. Francisco borrowed P10,000.00 from his friend Mr. Gutierrez payment, can be legally demanded to pay the tax.
payable in one year without interest. When the loan became due
55 Mr. Francisco told Mr. Gutierrez that he (Mr. Francisco) was 115 Interest: Deficiency Interest: define (1995 Bar)
unable to pay because of business reverses. Mr. Gutierrez took What is a "deficiency interest" for purposes of the
pity on Mr. Francisco and condoned the loan. Mr. Francisco was income tax? Illustrate.
solvent at the time he borrowed the P 10,000.00 and at the time SUGGESTED ANSWER:
the loan was condoned. Did Mr. Francisco derive any income DEFICIENCY INTEREST for purposes of the
60 from the cancellation or condonation of his indebtedness? 120 income tax is the interest due on any amount of tax
 due or installment thereof which is not paid on or before the date SUGGESTED ANSWER:
prescribed for its payment computed at the rate of 20% per annum The gross receipts from trading business is
or the Manila Reference Rate, whichever is higher, from the date includible as an item of income in the corporate
prescribed for its payment until it is fully paid. income tax return and subject to corporate income
5 If for example after the audit of the books of XYZ Corp. for 65 tax rate based on net income.
taxable year 1993 there was found to be due a deficiency income The other items of revenue will not be included in
tax of P125,000.00 inclusive of the 25% surcharge imposed under the corporate income tax return. The interest
Section 248 of the Tax Code, the interest will be computed on the from money market placements is subject to a final
P125.000.00 from April 15, 1994 up to its date of payment. withholding tax of 20%; The dividends from
10 70 domestic corporation are exempt from income tax;
Interest: Delinquency Interest: define (1995) and gains from stock transactions with the
What is a "delinquency interest" for purposes of the income tax? Philippine Stock Exchange are subject to
Illustrate. transaction tax which is in lieu of the income tax.
SUGGESTED ANSWER: The proceeds under an insurance policy on the
15 Delinquency interest is the interest of 20% or the Manila 75 loss of goods is not an item of income but merely a
Reference Rate, whichever is higher, required to be paid in case return of capital hence not taxable.
of failure to pay:
(a) the amount of the tax due on any return required to be filed; or ITR; Domestic Corporate Taxation (2001)
(b) the amount of the tax due for which return is required; or a) How often does a domestic corporation file
20 (c) the deficiency tax or any surcharge or interest thereon, on the80 income
due date appearing in the notice and demand of the Commissioner tax return for income earned during a single
of Internal Revenue. taxable
If in the above illustration the assessment notice was released on year? Explain the process. (3%)
December 31, 1994 and the amount of deficiency tax, inclusive of SUGGESTED ANSWER:
25 surcharge and deficiency interest were computed up to January 85 a) A domestic corporation is required to file
30, 1995 which is the due date for payment per assessment notice, income tax returns four (4) times for income
failure to earned during a single taxable year. Quarterly
pay on this latter date will render the tax delinquent and will returns are required to be filed for the first three
require the payment of delinquency interest. quarters where the corporation shall declare its
30 90 quarterly summary of gross income and deductions
ITR: Personal Income; Exempted to File ITR (1997) on a cumulative basis. (Section 75, NIRC). Then, a
A bachelor was employed by Corporation A on the first working final adjustment return is required to be filed
day of January 1996 on a part-time basis with a salary of covering the total taxable income for the entire
P3,500.00 a month. He then received the 13th month pay. In year, calendar or fiscal. (Section 76, NIRC).
35 September 1996, he accepted another part-time Job from 95 b) What is the reason for such procedure? (2%)
Corporation B from which he received a total compensation of SUGGESTED ANSWER:
P14,500.00 for the year 1996. The correct total taxes were b) The reason for this procedure is to ensure the
withheld from both earnings. With the withholding taxes already timeliness of collection to meet the budgetary
paid, would he still be required to file an income tax return for his needs of the government. Likewise, it is designed
40 1996 income? 100 to ease the burden on the taxpayer by providing it
SUGGESTED ANSWER: with an installment payment scheme, rather than
Yes, because what is exempt from filing are those individuals requiring the payment of the tax on a lump-sum
who have total compensation income not exceeding P60.000 with basis after the end of the year.
the taxes correctly withheld only by one employer. In this case,
45 even if his aggregate compensation income from both his 105 ITR; Personal Income: Two Employment (2001)
employers does not exceed P60.000 and that total withholding In the year 2000, X worked part time as a waitress
taxes were correctly withheld by his employers, the fact that he in a restaurant in Mega Mall from 8:00 a.m. to 4:00
derives compensation income concurrently from two employers at p.m. and then as a cashier in a 24-hour
anytime during the taxable year, does not exempt him from filing convenience store in her neighborhood. The total
50 his income tax return (RA 7497, as implemented by RR No. 4-93). 110 income of X for the year from the two employers
does not exceed her total personal and additional
ITR; Domestic Corporate Taxation (1997) exemptions for the year 2000. Was she required to
During the year, a domestic corporation derived the following file an income tax return last April? Explain your
items of revenue: (a) gross receipts from a trading business; (b) answer. (5%)
55 interests from money placements in the banks; (c) dividends from
115 SUGGESTED ANSWER:
its stock investments in domestic corporations; (d) gains from Yes. An individual deriving compensation
stock transactions through the Philippine Stock Exchange; (e) concurrently from two or more employers at any
proceeds under an insurance policy on the loss of goods. In time during the taxable year shall file an income
preparing the corporate income tax return, what should be the tax tax return (Sec. 51(A)(2)(b), NIRC.)
60 treatment on each of the above items? 120
 ITR; Personal Income; GSIS Pension (2000) professional partnership and the partners are
Mr. Javier is a non-resident senior citizen. He receives a monthly covered by R.A. 7496. Thus, in determining profit
pension from the GSIS which he deposits with the PNB-Makati of the partnership, only the direct costs mentioned
Branch. Is he exempt from income tax and therefore not required in said law are to be deducted from partnership
5 to file an income tax return? (5%) 65 income. Also, the expenses paid or Incurred by
SUGGESTED ANSWER: partners in their individual capacities in the
Mr. Javier is exempt from income tax on his monthly GSIS practice of their profession which are not
pension (Sec. 32(B)(6)(f), NIRC of 1997) but not on the interest reimbursed or paid by the partnership but are not
income that might accrue on the pensions deposited with PNB considered as direct costs are not deductible from
10 which are subject to final withholding tax. Consequently, since 70 his gross income.
Mr. Javier's sole taxable income would have been subjected to a
final withholding tax, he is not required anymore to file an 1) Marquez and Peneyra Law Offices filed a
income tax return. (Sec. 51 (A) (2) (c). Ibid]. taxpayer's suit alleging that Revenue Regulation
No. 2-93 violates the principle of uniformity in
15 ITR; Personal Income; Married Individual (2004) 75 taxation because general professional partnerships
RAM got married to LISA last January 2003. On November 30, are now subject to payment of income tax and that
2003, LISA gave birth to twins. Unfortunately, however, LISA there is a difference in the tax treatment between
died in the course of her delivery. Due to complications, one of individuals engaged in the practice of their
the twins also died on December 15, 2003. respective professions and partners in general
20 In preparing his Income Tax Return (ITR) for the year 2003, what 80 professional partnerships. Is this contention
should RAM indicate in the ITR as his civil status: (a) single; (b) correct? Explain.
married; (c) Head of the family; (d) widower; (e) none of the
above? Why? Reason. (5%) SUGGESTED ANSWER:
SUGGESTED ANSWER: 1) The contention is not correct. General
25 RAM should indicate "(b) married" as his civil status in preparing
85 professional partnerships remain to be a non-
his Income Tax Return for the year 2003. The death of his wife taxable entity. What is taxable are the partners
during the year will not change his status because should the comprising the same and they are obligated to
spouse die during the taxable year, the taxpayer may still claim report as income their share in the income of the
the same exemptions (that of being married) as if the spouse died general professional partnership during the taxable
30 at the close of such year (Section 35/Cj, NIRC). 90 year whether distributed or not. The SNITS treat
professionals as one class of taxpayer so that they
ITR; Taxpayer; Liabilities; Falsified Tax Return (2005) shall be treated alike irrespective of whether they
Danilo, who is engaged in the trading business, entrusted to his practice their profession alone or in association
accountant the preparation of his income tax return and the with other professionals under a general
35 payment of the tax due. The accountant filed a falsified tax return 95 professional partnership. What are taxed
by underdeclaring the sales and overstating the expense differently are individuals and corporations. All
deductions by Danilo. Is Danilo liable for the deficiency tax and individuals similarly situated are taxed alike under
the penalties thereon? What is the liability, if any, of the the regulations, therefore, the principle of
accountant? Discuss. (5%) uniformity in taxation is not violated. On the
40 SUGGESTED ANSWER: 100 contrary, all the requirements of a valid
Danilo is liable for the deficiency tax as well as for the deficiency classification have been complied with (Ton vs.
interest. He should not be held liable for the Del Rosario et al G.R No. 109289, Octobers,
fraud penalty because the accountant acted beyond the limits of 1994).
his authority. There is no showing in the problem that Danilo 2) Is Revenue Regulation No. 2-93 now considered
45 signed the falsified return or that it was prepared under his 105 as having adopted a gross income method instead
direction. {On the other hand the accountant may be held of retaining the net income taxation scheme?
criminally liable for violation of the Tax Code when he falsified Explain.
the tax return by underdeclaring the sale and overstating the SUGGESTED ANSWER:
expense deductions. If Danny's accountant is a Certified Public 2) No. Revenue Regulation No. 2-93 implementing
50 Accountant, his certificate as a CPA shall automatically 110 be RA No. 7496 have indeed significantly reduced the
revoked or cancelled upon conviction. items of deduction by limiting it to direct costs and
expenses or the 40% of gross receipts maximum
Partnership: Income Tax (1995) deduction in cases where the direct costs are
Five years ago Marquez, Peneyra, Jayme, Posadas and Manguiat, difficult to determine. The allowance of limited
55 all lawyers, formed a partnership which they named Marquez and
115 deductions however, is still in consonance with the
Peneyra Law Offices. The Commis-sioner of Internal Revenue net income taxation scheme rather than the gross
thereafter issued Revenue Regu-lation No. 2-93 implementing RA. income method. While it is true that not all the
7496 known as the Simplified Net Income Taxation Scheme expenses of earning the income might be allowed,
(SNITS). Revenue Regulation No. 2-93 provides in part: this can well be justified by the fact that deductions
60 Sec. 6. General Professional Partnership. — The general 120 are not matters of right but are matters of
 legislative grace. three brothers thus each received shares of stock of
the corporation with a total par value of P2.0
Personal; Income Tax: Non-Resident Alien (2000) million or, altogether, a total of P6.0 million. No
Mr. Cortez is a non-resident alien based in Hong Kong. During business was done by the Corporation, and the
5 the calendar year 1999, he came to the Philippines several times65 property remained idle. In the early part of 1997,
and stayed in the country for an aggregated period of more than one of the brothers, who was in dire need of funds,
180 days. How will Mr. Cortez be taxed on his income derived sold his shares to the two brothers for P2.0 million.
from sources within the Philippines and from abroad? (5%) Is the transaction subject to any internal revenue
SUGGESTED ANSWER: tax (other than the documentary stamp tax)?
10 Mr. Cortez being a non-resident alien individual who has stayed 70
for an aggregated period of more than 180 days during the SUGGESTED ANSWER:
calendar year 1999, shall for that taxable year be deemed to be a Yes. The exchange in 1995 is a tax-free exchange
non-resident alien doing business in the Philippines. so that the subsequent sale of one of the brothers of
Considering the above, Mr. Cortez shall be subject to an income his shares to the other two (2) brothers in 1997 will
15 tax in the same manner as an individual citizen and a resident 75 be subject to income tax. This is so because the
alien individual, on taxable income received from all sources tax-free exchange merely deferred the recognition
within the Philippines. [Sec. 25 (A) (1), NIRC of 1997] Thus, he of income on the exchange transaction. The gain
is allowed to avail of the itemized deductions including the subject to income tax in the sale is measured by the
personal and additional exemptions but subject to the rule on difference between the selling price of the shares
20 reciprocity on the personal exemptions. (Sec. 34 (A) to (J) and 80 (P2 Million) and the basis of the real property in
(M) in relation to Sec. 25 (A) (1), Ibid, Sec. 35 (D), Ibid.] the hands of the transferor at the time of exchange
NOTE: It is suggested that full credit should be given if the which is the fair market value of his share in the
examinee's answer only cover the first two paragraphs. real property at the time of inheritance (Section
34(b)(2), NIRC). The net gain from the sale of
25 Personal; Income Tax: Non-Resident Citizen (1999) 85 shares of stock is subject to the schedular capital
A Co., a Philippine corporation, has an executive (P) who is a gains tax of 10% for the first P100.000 and 20%
Filipino citizen. A Co. has a subsidiary in Hong Kong (HK Co.) for the excess thereof (Section 2l(d), NIRC).
and will assign P for an indefinite period to work full time for HK
Co. P will bring his family to reside in HK and will lease out his
30 residence in the Philippines. The salary of P will be shouldered 90 Personal; Income Tax; Contract of Lease (1995)
50% by A Co. while the other 50% plus housing, cost of living Mr. Domingo owns a vacant parcel of land. He
and educational allowances of P's dependents will be shouldered leases the land to Mr. Enriquez for ten years at a
by HK Co. A Co. will credit the 50% of P's salary to P's rental of P12,000.00 per year. The condition is that
Philippine bank account. P will sign the contract of employment Mr. Enriquez will erect a building on the land
35 in the Philippines. P will also be receiving rental income for the 95 which will become the property of Mr. Domingo at
lease of his Philippine residence. Are these salaries, allowances the end of the lease without compensation or
and rentals subject to the Philippine income tax? (5%) reimbursement whatsoever for the value of the
SUGGESTED ANSWER: building.
The salaries and allowances received by P are not subject to Mr. Enriquez erects the building. Upon completion
40 Philippine income tax. P qualifies as a nonresident citizen because
100 the building had a fair market value of P1 Million.
he leaves the Philippines for employment requiring him to be At the end of the lease the building is worth only
physically present abroad most of the time during the taxable P900.000.00 due to depreciation.
year. (Section 22(E), NIRC). A nonresident citizen is taxable only Will Mr. Domingo have income when the lease
on income derived from Philippine sources. (Section 23, NIRC). expires and becomes the owner of the building
45 The salaries and 105 with a fair market value of P900.000.00? How
allowances received from being employed abroad are incomes much income must he report on the building?
from without because these are compensation for services Explain.
rendered outside of the Philippines. (Section 42, NIRC).
SUGGESTED ANSWER:
50 However, P is taxable on rental income for the lease of his
110 When a building is erected by a lessee in the leased
Philippine residence because this is an income derived from premises in pursuance of an agreement with the
within, the leased property being located in the Philippines. lessor that the building becomes the property of the
(Section 42, NIRC). lessor at the end of the lease, the lessor has the
option to report income as follows: 1) The lessor
55 Personal; Income Tax: Tax-Free Exchange (1997) 115 may report as income the market value of the
Three brothers inherited in 1992 a parcel of land valued for real building at the time when such building is
estate tax purposes at P3.0 million which they held in co- completed; or 2) The lessor may spread over the
ownership. In 1995, they transferred the property to a newly life of the lease the estimated depreciated value of
organized corporation as their equity which was placed at the such building at the termination of the lease and
60 zonal value of P6.0 million. In exchange for the property, the120 report as income for each year of the lease an
 aliquot part thereof (Sec. 49, RR No. 2). tax return. (Sees. 32 and 39, NIRC)
Under the first option, the lessor will have no income when the Personal; Income Taxation: Non-Resident
lease expires and becomes the owner of the building. The second Citizen (1997)
option will give rise to an income during the year of lease Juan, a Filipino citizen, has immigrated to the
5 expiration of P90.000.00 or 1/10 of the depreciated value of the
65 United States where he is now a permanent
building. resident. He owns certain income-earning property
in the Philippines from which he continues to
The availment of the first option will require Mr. Domingo to derive substantial income. He also receives income
report an income of P1.000,000.00 during the year when the from his employment in the United States on
10 building was completed. A total of P900.000.00 income will be 70 which the US income tax is paid. On which of the
reported under the second option but will be spread over the life above income is the taxable, if at all, in the
of the lease or P90.000.00 per year. Philippines, and how, in general terms, would such
income or incomes be taxed?
Personal; Income Tax; Married Individual (1997)
15 Mar and Joy got married in 1990. A week before their marriage. 75 SUGGESTED ANSWER:
Joy received, by way of donation, a condominium unit worth Juan, shall be taxed on both his income from the
P750.000.00 from her parents. After marriage, some renovations Philippines and on his Income from the United
were made at a cost of P150.000.00. The spouses were both States because his being a citizen makes him
employed in 1991 by the same company. On 30 December 1992, taxable on all Income wherever derived. For the
20 their first child was born, and a second child was born on 07 80 income he derives from his property in the
November 1993. In 1994, they sold the condominium unit and Philippines, Juan shall be taxed on his net income
bought a new unit. Under the foregoing facts, what under the Simplified Net Income Taxation
were the events in the life of the spouses that had income tax Scheme (SNITS) whereby he shall be considered
incidences? as a self-employed individual. His Income as
25 85 employee in the United States, on the other hand,
SUGGESTED ANSWER: shall be taxed in
The events in the life of spouses. Mar and Joy, which have accordance with the schedular graduated rates of
income tax incidences are the following: 1) Their marriage in 1%, 2% and 3%. based on the adjusted gross
1990 qualifies them to claim income derived by non-resident citizens from all
30 personal exemption for married individuals; 2) Their employment 90 sources without the Philippines during each taxable
in 1991 by the same company year.
will make them liable to the income tax imposed on
gross compensation income; 3) Birth of their first child in Taxable Income: Illegal Income (1995 Bar)
December 1992 would Mr. Lajojo is a big-time swindler. In one year he
35 give rise to an additional exemption of P5,000 for 95 was able to earn P1 Million from his swindling
taxable year 1992; 4) Birth of their second child in November activities. When the Commissioner of Internal
1993 would Revenue discovered his income from swindling,
likewise entitle them to claim additional exemption the Commissioner assessed him a deficiency
of P5,000 raising their additional personal income tax for such income. The lawyer of Mr.
40 exemptions to P 10,000 for taxable year 1993; and 5) Sale of their
100 Lajojo protested the assessment on the following
condominium unit in 1994 shall make grounds: 1) The income tax applies only to legal
the spouses liable to the 5% capital gains tax on the income, not to
gain presumed to have been realized from the sale. illegal income; 2) Mr. Lajojo's receipts from his
swindling did not constitute income because he
45 Personal; Income Tax; Retiring Alien Employee (2005) 105 was under obligation
An alien employee of the Asian Development Bank (ADB) who to return the amount he had swindled, hence, his
is retiring soon has offered to sell his car to you which he receipt from swindling was similar to a loan, which
imported tax-free for his personal use. The privilege of exemption is not income, because for every peso borrowed he
from tax is granted to qualified personal use under the ADB has a corresponding liability to pay one peso; and
50 Charter which is recognized by the tax authorities. If you decide
110 3) If he has to pay the deficiency income tax assess
to purchase the car, is the sale subject to tax? Explain. (5%) ment, there will be hardly anything left to return to
SUGGESTED ANSWER: the victims of the swindling. How will you rule on
The sales transaction is subject to value added tax (VAT) under each of the three grounds for the protest? Explain.
Sec. 107(B) of the NIRC, although this provision is expressly
55 excluded from the coverage of the 2005 bar exam. 115 SUGGESTED ANSWERS:
1) The contention that the income tax applies to
The proceeds from the sale are subject to income tax. The car is legal income and not to illegal income is not
considered a capital asset of the retiring alien employee because correct. Section 28(a) of the Tax Code includes
he is not engaged in the business of buying and selling cars. He within the purview of gross income all Income
60 therefore derived income, which should be reported in his income
120 from whatever source derived. Hence, the illegality
 of the income will not preclude the imposition of the income tax debts previously allowed as deduction in the
thereon. preceding years shall be included as part of the
2) The contention that the receipts from his swindling did not gross income in the year of recovery to the extent
constitute income because of his obligation to return the amount of the income tax benefit of said deduction. (Sec.
5 swindled is likewise not correct. When a taxpayer acquires 65 34[E][1], NIRC) This is sometimes referred as the
earnings, lawfully or unlawfully, without the consensual RECAPTURE RULES.
recognition, express or implied, of an obligation to repay and
without restriction as to their disposition, he has received taxable e) Gain on the sale of a car used for personal
income, even though it may still be claimed that he is not entitled purposes.
10 to retain the money, and even though he may still be adjudged to 70 SUGGESTED ANSWER:
restore its equivalent (James vs. U.S.,366 U.S. 213, 1961). To Taxable. Since the car is used for personal
treat the embezzled funds not as taxable income would perpetuate purposes, it is considered as a capital asset hence
injustice by relieving embezzlers of the duty of paying income the gain is considered income. (Sec. 32[A][3] and
taxes on the money they enrich themselves with through Sec. 39[A][1], NIRC)
15 embezzlement, while honest people pay their taxes on every 75
conceivable type of income. (James vs. U.S.) Withholding Tax: Non-Resident Alien (2001)
Is a non-resident alien who is not engaged in trade
3) The deficiency income tax assessment is a direct tax imposed or business or in the exercise of profession in the
on the owner which is an excise on the privilege to earn an Philippines but who derived rental income from
20 income. It will not necessarily be paid out of the same income 80 the Philippines required to file an income tax
that were subjected to the tax. Mr. Lajojo's liability to pay the tax return on April of the year following his receipt of
is based on his having realized a taxable income from his said income? If not, why not? Explain your answer.
swindling activities and will not affect his obligation to make (5%)
restitution. Payment of the tax is a civil obligation imposed by SUGGESTED ANSWER:
25 law while restitution is a civil liability arising from a crime. 85 No. The income tax on all income derived from
Philippine sources by a non-resident alien who is
Taxable or Non-Taxable; Income and Gains (2005) not engaged in trade or business in the Philippines
Explain briefly whether the following items are taxable or non- is withheld by the lessee as a Final Withholding
taxable: (5%) a) Income from JUETENG; Tax. (Section 57(A), NIRC). The government can
30 90 not require persons outside
SUGGESTED ANSWER: of its territorial jurisdiction to file a return; for this
Taxable. Gross income includes "all income derived from reason, the income tax on income derived from
whatever source" (Sec. 32[A], NIRC), which was interpreted as within must be collected through the withholding
all income not expressly excluded or exempted from the class of tax system and thus relieve the recipient of the
35 taxable income, irrespective of the voluntary or involuntary action
95 income the duty to file income tax returns. (Section
of the taxpayer in producing the income. Thus, the income may 51, NIRC).
proceed from a legal or illegal source such as from jueteng.
Unlawful gains, gambling winnings, etc. are subject to income Withholding Tax: Retirement Benefit (2000)
tax. The tax code stands as an indifferent neutral party on the To start a business of his own, Mr. Mario de
40 matter of where the income comes from. 100 Guzman opted for an early retirement from a
private company after ten (10) years of service.
b) Gain arising from EXPROPRIATION OF PROPERTY; Pursuant to the company's qualified and approved
SUGGESTED ANSWER: private retirement benefit plan, he was paid his
Taxable. Sale exchange or other disposition of property to the retirement benefit which was subjected to
45 government of real property is taxable. It includes taking by the
105 withholding tax. Is the employer correct in
government through condemnation proceedings. (Gonzales v. withholding the tax? Explain. (2%)
Court of Tax Appeals, G.R. No. L-14532, May 26, 1965) SUGGESTED ANSWER:
(a) It depends. An employee retiring under a
c) TAXES paid and subsequently refunded; company's qualified and private retirement plan
50 SUGGESTED ANSWER: 110 can only be exempt from income tax on his
Taxable only if the taxes were paid and claimed as deduction and retirement benefits if the following requisites are
which are subsequently refunded or credited. It shall be included met:
as part of gross income in the year of the receipt to the extent of (1) that the retiring employee must have been in
the income tax benefit of said deduction. (Sec. 34[C][1], NIRC) service of the same employer for at least ten (10)
55 Not taxable if the taxes refunded were not originally claimed 115as years;
deductions. (2) that he is not less than 50 years of age at the
time of retirement; and
d) Recovery of BAD DEBTS previously charged off; (3) the benefit is availed of only once.
SUGGESTED ANSWER: In the instant case, there is no mention whether the
60 Taxable under the TAX BENEFIT RULE. Recovery of bad
120 employee has likewise complied with requisites
 number provides that salaries of judges shall be fixed by
(2) and (3). law and that during their continuance in office their
salary shall not be decreased, a judge of MM
Withholding Tax: Retirement Benefit (2000) Regional Trial Court questioned the deduction of
5 Under what conditions are retirement benefits received by 65 withholding taxes from his salary since it results
officials and employees of private firms excluded from gross into a net deduction of his pay. Is the contention of
income and exempt from taxation? (3%) the judge correct? Reason briefly. (5%)
SUGGESTED ANSWER:
The conditions to be met in order that retirement benefits received SUGGESTED ANSWER:
10 by officials and employees of private firms are excluded from 70 No. The contention is incorrect. The salaries of
gross income and exempt from taxation are as follows: judges are not tax-exempt and their taxability is not
2. Under Republic Act No. 4917 (those received under a contrary to the provisions of Section 10, Article
reasonable private benefit plan): VIII of the Constitution on the non-diminution of
a. the retiring official or employee must have been in service of the salaries of members of the judiciary during
15 the same employer for at least ten (10) years; 75 their continuance in office. The clear intent of the
b. that he is not less than fifty (50) years of age at the time of Constitutional Commission that framed the
retirement; and Constitution is to subject their salaries to tax as in
c. that the benefit is availed of only once. the case of all taxpayers. Hence, the deduction of
3. Under Republic Act No. 7641 (those received from employers withholding taxes, being a manner of collecting the
20 without any retirement plan): 80 income tax on their salary, is not a diminution
contemplated by the fundamental law. (Nitafan et.
• Those received under existing collective bargaining agreement al. v. CIR, 152 SCRA 284 [1987]).
and other agreements are exempt; and Withholding Tax; Domestic Corporation; Cash
• In the absence of retirement plan or agreement providing for Dividends(2001)
25 retirement benefits the benefits are excluded from gross income 85 What do you think is the reason why cash
and exempt from income tax if: dividends, when received by a resident citizen or
i. retiring employee must have served at least five(5) years; and alien from a domestic corporation, are taxed only
ii. that he is not less than sixty (60) years of age but not more than at the final tax of 10% and not at the progressive
sixty five (65). tax rate schedule under Section 24(A) of the Tax
30 90 Code? Explain your answer. (5%)
Withholding Tax: Royalty (2002)
SUGGESTED ANSWER:
The MKB-Phils. is a BOI-registered domestic corporation The reason for imposing final withholding tax
licensed by the MKB of the United Kingdom to distribute, rather than the progressive tax schedule on cash
35 support and use in the Philippines its computer software systems,95 dividends received by
including basic and related materials for banks. The MKB-Phils. a resident citizen or alien from a domestic
provides consultancy and technical services incidental thereto by corporation, is to ensure the collection of income
entering into licensing agreements with banks. Under such tax on said income. If we subject the dividend to
agreements, the MKB-Phils. will not acquire any proprietary the progressive tax rate, which can only be done
40 rights in the licensed systems. The MKB-Phils. pays royalty 100 to through the filing of income tax returns, there is no
the MKB-UK, net of 15% withholding tax prescribed by the RP- assurance that the taxpayer will declare the
UK Tax Treaty. income, especially when there are other items of
Is the income of the MKB-Phils. under the licensing agreement gross income earned during the year. It would be
with banks considered royalty subject to 20% final withholding extremely difficult for the BIR to monitor
45 tax? Why? If not, what kind of tax will its income be subject to?
105 compliance considering the huge number of
Explain. (5%) stockholders. By shifting the responsibility to remit
the tax to the corporation, it is very easy to check
SUGGESTED ANSWER: compliance because there are fewer withholding
Yes. The income of MKB-Phils. under the licensing agreement agents compared to the number of income
50 with banks shall be considered as royalty subject to the 20% final
110 recipients.
withholding tax. The term royalty is broad enough to include
technical advice, assistance or services rendered in connection Likewise, the imposition of a final withholding tax
with technical management or administration of any scientific, will make the tax available to the government at an
industrial or commercial undertaking, venture, project or scheme. earlier time. Finally, the final withholding tax will
55 (Sec. 42(4)(f), NIRC). Accordingly, the consultancy and technical
115 be a sure revenue to the government unlike when
services rendered by MKB-Phils, which are incidental to the the dividend is treated as a returnable income
distribution, support and use of the computer systems of MKB- where the recipient thereof who is in a tax loss
UK are taxable as royalty. position is given the chance to offset such loss
Withholding Tax; Coverage (2004) against dividend income thereby depriving the
60 Citing Section 10, Article VIII of the 1987 Constitution which 120 government of the tax on said dividend income.
 [Note: It is recommended that any of the foregoing answers can withhold such tax? [5%]
be given full credit because the question involves a policy issue SUGGESTED ANSWER:
which can only be found in the deliberations of Congress.] 1.It depends. If the prize is considered as winnings
derived from sources within the Philippines, it is
5 Withholding Tax; Income subject thereto (2001) 65 subject to withholding of final tax (Sec. 24[B]
What is meant by income subject to "final tax"? Give at least two inrelation to Sec. 57[A], NIRC). If derived from
examples of income of resident individuals that is subject to the sources without the Philippines, it is not subject to
final tax. (3%) withholding of final tax because the Philippine tax
SUGGESTED ANSWER: law and regulations could not reach out to foreign
10 Income subject to final tax refers to an income wherein the tax 70 Jurisdictions.
due is fully collected through the withholding tax system. Under
this procedure, the payor of the income withholds the tax and 2) The tax shall be withheld by the Reader's Digest
remits it to the government as a final settlement of the income tax or local agent who has control over the payment of
due on said income. The recipient is no longer required to include the prize.
15 the item of income subjected to "final tax" as part of his gross 75
income in his income tax returns. Examples of income subject to 3) Any person required to withhold or who
final tax are dividend income, interest from bank deposits, willfully fails to withhold, shall, in addition to the
royalties, etc. other penalties provided under the Code, be liable
upon conviction to a penalty equal to the total
20 Withholding Tax; Non-Resident Alien (1994) 80 amount of tax not withheld (sec. 251, NIRC)
Four Catholic parishes hired the services of Frank Binatra, a
foreign non-resident entertainer, to perform for four (4) nights at Withholding Tax; Time Deposit Interest; GSIS
the Folk Arts Theater. Binatra was paid P200.000.00 a night. The Pension (1994)
parishes earned P1,000,000.00 which they used for the support of Maribel Santos, a retired public school teacher,
25 the orphans in the city. Who are liable to pay taxes? 85 relies on her pension from the GSIS and the
SUGGESTED ANSWER: Interest Income from a time deposit of
The following are liable to pay income taxes: P500.000.00 with ABC Bank. Is Miss Santos liable
(a) The four catholic parishes because the income received by to pay any tax on her Income?
them, not being income earned "as such" in the performance of SUGGESTED ANSWER:
30 their religious functions and duties, is taxable income under the90 Maribel Santos is exempt from tax on the pension
last paragraph of Sec. 26, in relation to Sec. 26(e) of the Tax from the GSIS (Sec. 28(b((7)(F), Tax Code).
Code. In promoting and operating the Binatra Show, they engaged However, as regards her time deposit, the interest
in an activity conducted for profit. (Ibid.) she receives thereon is subject to 20% final
withholding tax. (Sec. 21(a)(c), Tax Code).
35 (b) The income of Frank Binatra, a non-resident alien under our 95 DEDUCTIONS, EXEMPTIONS,
law is taxable at the rate of 30%, final withholding tax based on EXCLUSIONS & INCLUSIONS
the gross income from the show. Mr. Binatra is not engaged in Deduction: Facilitation Fees or "kickback"
any trade or business in the Philippines. (1998)

40 Withholding Tax; Non-Resident Corporation (1994) 100 MC Garcia, a contractor who won the bid for the
Bates Advertising Company is a non-resident corporation duly construction of a public highway, claims as
organized and existing under the laws of Singapore. It is not expenses, facilitation fees which according to him
doing business and has no office in the Philippines. Pilipinas is standard operating procedure in transactions
Garment Incorporated, a domestic corporation, retained the with the government. Are these expenses allowable
45 services of Bates to do all the advertising of its products abroad.
105 as deduction from gross income? [5%]
For said services, Bates' fees are paid through outward SUGGESTED ANSWER:
remittances. Are the fees received by Bates subject to any No. The alleged facilitation fees which he claims
withholding tax? as standard operating procedure in transactions
SUGGESTED ANSWER: with the government comes in the form of bribes
50 The fees paid to Bates Advertising Co., a non-resident foreign 110 or "kickback" which are not allowed as deductions
corporation are not subject to withholding tax since they are not from gross income (Section 34(A)(l)(c), NIRC).
subject to Philippine tax. They are exempt because they do not
constitute income from Philippine sources, the same being Deductions: Ordinary Business Expenses (2004)
compensation for labor or personal services performed outside the OXY is the president and chief executive officer of
55 Philippines (Sec. 36{c) (3) and Sec. 25(b)(l), Tax Code). 115 ADD Computers, Inc. When OXY was asked to
join the government service as director of a bureau
Withholding Tax; Reader's Digest Award (1998) under the Department of Trade and Industry, he
Is the prize of one million pesos awarded by the Reader's Digest took a leave of absence from ADD. Believing that
subject to withholding of final tax? Who is responsible for its business outlook, goodwill and opportunities
60 withholding the tax? What are the liabilities for failure 120 to improved with OXY in the government, ADD
 proposed to obtain a policy of insurance on his life. On ethical subject to lower taxes to an area subject to higher
grounds, OXY objected to the insurance purchase but ADD taxes, thereby unnecessarily resulting in leakage of
purchased the policy anyway. Its annual premium amounted to tax revenues. Capital gains are generally taxed at a
P100,000. Is said premium deductible by ADD Computers, Inc.? lower rate to prevent, among others, the bunching
5 Reason. (5%) 65 of income in one taxable year which is a liberality
SUGGESTED ANSWER: in the law begotten from motives of public policy
No. The premium is not deductible because it is not an ordinary (Rule on Holding Period). It stands to reason
business expense. The term "ordinary" is used in the income tax therefore, that if the transaction results in loss, the
law in its common significance and it has the connotation of same should be allowed only from and to the
10 being normal, usual or customary (Deputy v. Du Pont, 308 US 70 extent of capital gains and not to be deducted from
488 [1940]). Paying premiums for the insurance of a person not ordinary gains which are subject to a higher rate of
connected to the company is not normal, usual or customary. income tax. (Chirelstein, Federal Income Taxation,
1977 Ed.)
Another reason for its non-deductibility is the fact that it can be
15 considered as an illegal compensation made to a government 75 Deductions: Deductible Items from Gross
employee. This is so because if the insured, his estate or heirs Income (1999)
were made as the beneficiary (because of the requirement of Explain if the following items are deductible from
insurable interest), the payment of premium will constitute bribes gross income for income tax purposes. Disregard
which are not allowed as deduction from gross income (Section who is the person claiming the expense. (5%) 1)
20 34[A][l][c], NIRC). 80 Interest on loans used to acquire capital equipment
On the other hand, if the company was made the beneficiary, or machinery. 2) Depreciation of goodwill.
whether directly or indirectly, the premium is not allowed as a
deduction from gross income (Section 36[A}14], NIRC). SUGGESTED ANSWER:
1) Interest on loans used to acquire capital
25 Deductions: Amount for Bribe (2001) 85 equipment or machinery is a deductible item
In order to facilitate the processing of its application for a license from gross income. The law gives the taxpayer the
from a government office, Corporation A found it necessary to option to claim as a deduction or treat as capital
pay the amount of Php 100,000 as a bribe to the approving expenditure interest incurred to acquire property
official. Is the Php 100,000 deductible from the gross income of used in trade, business or exercise of a profession.
30 Corporation A? On the other hand, is the Php 100,000 taxable 90 (Section 34(B) (3), NIRC).
income of the approving official? Explain your answers. (5%) 2) Depreciation for goodwill is not allowed as
SUGGESTED ANSWER: deduction from gross income. While intangibles
Since the amount of Phpl00.000 constitutes a bribe, it is not maybe allowed to be depreciated or amortized, it is
allowed as a deduction from gross income of Corporation A, only allowed to those intangibles whose use in the
35 (Section 34(A)(l)(c), NIRC). However, to the recipient 95 business or trade is definitely limited in duration.
government official, the same constitutes a taxable income. All (Basilan Estates, Inc. v, CIR, 21 SCRA 17). Such
income from legal or illegal sources are taxable absent any clear is not the case with goodwill.
provision of law exempting the same. This is the reason why
gross income had been defined to include income from whatever Deductions: Income Tax: Donation: Real
40 source derived. (Section 32(A), NIRC). Illegally acquired income 100 Property (2002)
constitutes realized income under the claim of right doctrine. On December 06, 2001, LVN Corporation donated
a piece of vacant lot situated in Mandaluyong City
Deductions: Capital Losses; Prohibitions (2003) to an accredited and duly registered non-stock,
What is the rationale for the rule prohibiting the deduction of non-profit educational institution to be used by the
45 capital losses from ordinary gains? Explain. 105 latter in building a sports complex for students.
SUGGESTED ANSWER: A. May the donor claim in full as deduction from
It is to insure that only costs or expenses incurred in earning the its gross income for the taxable year 2001 the
income shall be deductible for income tax purposes consonant amount of the donated lot equivalent to its fair
with the requirement of the law that only necessary expenses are market value/zonal value at the time of the
50 allowed as deductions from gross income. The term 110 donation? Explain your answer. (2%)
"NECESSARY EXPENSES" presupposes that in order to be SUGGESTED ANSWER:
allowed as deduction, the expense must be business connected, A. No. Donations and/or contributions made to
which is not the case insofar as capital losses are concerned. This qualified donee institutions consisting of property
is also the reason why all non-business connected expenses like other than money shall be based on the acquisition
55 personal, living and family expenses, are not allowed 115 as cost of the property. The donor is not entitled to
deduction from gross income (Section 36(A)(1) of the 1997 Tax claim as full deduction the fair market value/zonal
Code). value of the lot donated. (Sec. 34(H), NIRC).
B. In order that donations to non-stock, non-profit
The prohibition of deduction of capital losses from ordinary gains educational institution may be exempt from the
60 is designed to forestall the shifting of deductions from an area
120 donor's gift tax, what conditions must be met by
 the donee? (3%) Correct his accounting records to reflect the actual
deductions made
SUGGESTED ANSWER: Reduce his gross income
B. In order that donations to non-stock, non-profit educational Reduce his output value-added tax liability
5 institution may be exempt from the donor's gift tax, it is required 65 Reduce his gross estate Choose the correct answer.
that not more than 30% of the said gifts shall be used by the Explain. (5%)
donee-institution for administration purposes. (Sec. 101(A)(3),
NIRC). SUGGESTED ANSWER:
C. (D) reduce his gross estate. Vanishing deduction or
10 Deductions: Non-Deductible Items; Gross Income (1999) 70 prop-erty previously taxed is one of the items of
Explain if the following items are deductible from gross income deduction allowed in computing the net estate of a
for income tax purposes. Disregard who is the person claiming decedent (Section 86[A][2] and 86[B][2], NIRC).
the deduction. (5%)
1. Reserves for bad debts. Exclusion & Inclusion; Gross Receipts (2006)
15 2. Worthless securities 75 Congress enacts a law imposing a 5% tax on gross
SUGGESTED ANSWER: receipts of common carriers. The law does not
1 RESERVE FOR BAD DEBTS are not allowed as deduction define the term "gross receipts." Express Transport,
from gross income. Bad debts must be charged off during the Inc., a bus company plying the Manila-Baguio
taxable year to be allowed as deduction from gross income. The route, has time deposits with ABC Bank. In 2005,
20 mere setting up of reserves will not give rise to any deduction. 80 Express Transport earned P1 Million interest, after
(Section 34(E). NTRC). deducting the 20% final withholding tax from its
2 WORTHLESS SECURITIES, which are ordinary assets, are time deposits with the bank. The BIR wants to
not allowed as deduction from gross income because the loss is collect a 5% gross receipts tax on the interest
not realized. However, if these worthless securities are capital income of Express Transport without deducting the
25 assets, the owner is considered to have incurred a capital loss as 85 20% final withholding tax. Is the BIR correct?
of the last day of the taxable year and, therefore, deductible to the Explain. (5%)
extent of capital gains. (Section 34(D)(4), NIRC). This deduction, ALTERNATIVE ANSWER:
however, is not allowed to a bank or trust company. (Section Yes. The term "Gross Receipts" is broad enough to
34(E)(2), NIRC). include income constructively received by the
30 90 taxpayer. The amount withheld is paid to the
Deductions: Requisites; Deducibility of a Loss (1998) government on its behalf, in satisfaction of
Give the requisites for deducibility of a loss. (5%1 withholding taxes. The fact that it did not actually
SUGGESTED ANSWER: receive the amount does not alter the fact that it is
The requisites for deducibility of a loss are 1) loss belongs to the remitted in satisfaction of its tax obligations. Since
35 taxpayer; 2) actually sustained and charged off during the taxable95 the income withheld is an income owned by
year; 3) evidenced by a closed and completed transaction; 4) not Express Transport, the same forms part of its gross
compensated by Insurance or other forms of receipts (CIR v. Solidbank Corp., G.R. No.
indemnity; 5) not claimed as a deduction for estate tax purposes 148191, November 25, 2003).
in case of individual taxpayers; and 6) if it is a casualty loss it is
40 evidenced by a declaration of loss filed within 45 days with the 100 Exclusion vs. Deduction from Gross Income
BIR. (2001)
Distinguish "Exclusion from Gross Income" from
Deductions; Income Tax: Allowable Deductions (2001) "Deductions From Gross Income". Give an
Taxpayers whose only income consists of salaries and wages from example of each. (2%)
45 their employers have long been complaining 105 SUGGESTED ANSWER:
that they are not allowed to deduct any item from their gross EXCLUSIONS from gross income refer to a flow
income for purposes of computing their net taxable income. With of wealth to the taxpayer which are not treated as
the passage of the Comprehensive Tax Reform Act of 1997, is this part of gross income, for purposes of computing
complaint still valid? Explain your answer. (5%) the taxpayer’s taxable income, due to the following
50 SUGGESTED ANSWER: 110 reasons: (1) It is exempted by the fundamental law;
No more. Gross compensation income earners are now allowed at (2) It is exempted by statute; and (3) It does not
least an item of deduction in the form of premium payments on come within the definition of income. (Section 61,
health and/or hospitalization insurance in an amount not RR No. 2). DEDUCTIONS from gross income,
exceeding P2,400 per annum [Section 34(M)]. This deduction is on the other hand, are the amounts, which the law
55 allowed if the aggregate family income do not exceed P250.000115 allows to be deducted from gross income in order
and by the spouse, in case of married individual, who claims to arrive at net income.
additional personal exemption for dependents. Exclusions pertain to the computation of gross
income, while deductions pertain to the
Deductions; Vanishing Deduction; Purpose (2006) computation of net income. Exclusions are
60 Vanishing deduction is availed of by taxpayers to: 120 something received or earned by the taxpayer
 which do not form part of gross income while deductions are Makati and Citibank Orlando, Florida; (b) a
something spent or paid in earning gross income. resthouse in Orlando, Florida; (c) a condominium
unit in Makati; (d) shares of stock in the Philippine
Example of an exclusion from gross income is proceeds of life subsidiary of the U.S. Company where he worked;
5 insurance received by the beneficiary upon the death of the 65 (e) shares of stock in San Miguel Corp. and PLOT;
insured which is not an income or 13th month pay of an employee (f) shares of stock in Disney World in Florida; (g)
not exceeding P30.000 which is an income not recognized for tax U.S. treasury bonds; and (g) proceeds from a life
purposes. Example of a deduction is business rental. insurance policy issued by a U.S. corporation.
Exclusions & Inclusions: Benefits on Account of Injury (1995) Which of the foregoing assets shall be included in
10 Mr. Infante was hit by a wayward bus while on his way to work. 70 the taxable gross estate in the Philippines? Explain.
He survived but had to pay P400.000.00 for his hospitalization. (5%)
He was unable to work for six months which meant that he did
not receive his usual salary of P 10,000.00 a month or a total of SUGGESTED ANSWER:
P60.000.00. He sued the bus company and was able to obtain a All of the properties enumerated except (g), the
15 final judgment awarding him P400.000.00 as reimbursement for 75 proceeds from life insurance, are included in the
his hospitalization, P60.000 for the salaries he failed to receive taxable gross estate in the Philippines. Ralph
while hospitalized, P200,000.00 as moral damages for his pain Donald is considered a resident alien for tax
and suffering, and P 100,000.00 as exemplary damages. He was purposes since he is an American Citizen and was
able to collect in full from the judgment. How much income did a permanent resident of the Philippines at the time
20 he realize when he collected on the judgment? Explain. 80 of his death. The value of the gross estate of a
resident alien decedent shall be determined by
SUGGESTED ANSWER: including the value at the time of his death of all
None. The P200.000 moral and exemplary damages are property, real or personal, tangible or intangible,
compensation for injuries sustained by Mr. Infante. The wherever situated. (Sec. 85, NIRC) The other item,
25 P400.000.00 reimbursement for hospitalization expenses and the 85 (g) proceeds from a life insurance policy, may also
P60.000.00 for salaries he failed to receive are 'amounts of any be included on the assumption that it was Ralph
damages received whether by suit or agreement on account of Donald who took out the insurance upon his own
such injuries.' Section 28(b)(5) of the Tax Code specifically life, payable upon his death to his estate. (Sec.
exclude these amounts from the gross income of the individual 85[E], NIRC)
30 injured. (Section 28(b), NIRC and Sec. 63 Rev. Reg. No. 2) 90 Exclusions & Inclusions; Benefits on Account of
Death (1996)
Exclusions & Inclusions: Executive Benefits (1995) X, an employee of ABC Corporation died. ABC
Mr. Adrian is an executive of a big business corporation. Aside Corporation gave X’s widow an amount equivalent
from his salary, his employer provides him with the following to X’s salary for one year. Is the amount considered
35 benefits: free use of a residential house in an exclusive 95 taxable income to the widow? Why?
subdivision, free use of a limousine and membership in a country
club where he can entertain customers of the corporation. Which SUGGESTED ANSWER:
of these benefits, if any, must Mr. Adrian report as income? No. The amount received by the widow from the
Explain. decedent's employer may either be a gift or a
40 SUGGESTED ANSWER: 100 separation benefit on account of death. Both are
Mr. Adrian must report the imputed rental value of the house and exclusions from gross income pursuant to
limousine as income. If the rental value exceeds the personal provisions of Section 28(b) of the Tax Code.
needs of Mr. Adrian because he is expected to provide
accommodation in said house for company guests or the car is Exclusions & Inclusions; Benefits on Account of
45 used partly for business purpose, then Mr. Adrian is entitled only
105 Injury (2005)
to a ratable rental value of the house and limousine as exclusion JR was a passenger of an airline that crashed. He
from gross income and only a reasonable amount should be survived the accident but sustained serious
reported as income. This is because the free housing and use of physical injuries which required hospitalization for
the limousine are given partly for the convenience and benefit of 3 months. Following negotiations with the airline
50 the employer (Collector vs. Henderson). 110 and its insurer, an agreement
was reached under the terms of which JR was paid
Exclusions & Inclusions; Assets; Resident Alien (2005) the following amounts: P500,000.00 for his
Ralph Donald, an American citizen, was a top executive of a U.S. hospitalization; P250,000.00 as moral damages;
company in the Philippines until he retired in 1999. He came to and P300,000.00 for loss of income during the
55 like the Philippines so much that following his retirement, 115 he period of his treatment and recuperation. In
decided to spend the rest of his life in the country. He applied for addition, JR received from his employer the
and was granted a permanent resident status the following year. In amount of P200,000.00 representing the cash
the spring of 2004, while vacationing in Orlando, Florida, USA, equivalent of his earned vacation and sick leaves.
he suffered a heart attack and died. At the time of his death, he Which, if any, of the amounts he received are
60 left the following properties: (a) bank deposits with Citibank 120 subject to income tax? Explain. (5%)
 SUGGESTED ANSWER: The Commissioner of Internal Revenue taxed the
All amounts received from the airline company are excluded from P1 Million as part of the gross compensation
gross income. Under Sec. 32(B)(4) of the NIRC, amounts of income of Quiroz who protested that it was
damages received, whether by suit or agreement, on account of excluded from income because (a) it was a
5 personal injuries or sickness are excluded from gross income. 65 retirement pay, and (b) it was a gift.
Since the amounts received from the airline company were 1) Is Mr. Quiroz correct in claiming that the
received as damages by agreement on account of personal additional
injuries, all shall be excluded from JR's gross income. P1 Million was retirement pay and therefore
The amount of P200,000.00, less the equivalent of not more than excluded from income? Explain.
10 10 days of vacation leave, received by JR from his employer, is 70 3) Is Mr. Quiroz correct in claiming that the
subject to income tax under Sec. 2.78.1 (a) (7) of R.R. No. 2-98. additional P1 Million was gift and therefore
excluded from income? Explain.
Exclusions & Inclusions; Compensation for personal injuries
or sickness (2003) SUGGESTED ANSWERS:
15 X, while driving home from his office, was seriously injured 75 1) No. The additional P1 million is not a retirement
when his automobile was bumped from behind by a bus driven by pay but a part of the gross compensation income of
a reckless driver. As a result, he had to pay P200,000.00 to his Mr. Quiroz. This is not a retirement benefit
doctor and P100, 000.00 to the hospital where he was confined received in accordance with a reasonable private
for treatment. He filed a suit against the bus driver and the bus benefit plan maintained by the employer as it was
20 company and was awarded and paid actual damages of P300, 80 not paid out of the retirement plan. Accordingly,
000.00 (for his doctor and hospitalization bills), P100,000.00 by the amount received in excess of the retirement
way of moral damages, and P50,000.00 for what he had to pay his benefits that he is entitled to receive under the
attorney for bringing his case to court. Which, if any, of the BIR-approved retirement plan would not qualify as
foregoing awards are taxable income to X and which are not? an exclusion from gross income.
25 Explain. (8%) 85 2) No. The amount received was in consideration
SUGGESTED ANSWER: of his loyalty and invaluable services to the
Nothing is taxable. Under the Tax Code, any amount received as company which is clearly a compensation income
compensation for personal injuries or sickness, plus the amounts received on account of employment. Under the
for any damages received whether by suit or agreement, on employer's 'motivation test,' emphasis should be
30 account of such injuries or sickness shall be excluded from gross 90 placed on the value of Mr. Quiroz services to the
income. Since the entire amount of P450, 000.00 received are company as the compelling reason for giving him
award of damages on account of the injuries sustained; all shall be the gratuity, hence it should constitute a taxable
excluded from his gross income. Obviously, these damages are income. The payment would only qualify as a gift
considered by law as mere return of capital. (Section 32(B)(4), if there is nothing but 'good will, esteem and
35 1997 Tax Code) 95 kindness' which motivated the employer to give the
Exclusions & Inclusions; Facilities or Privileges; gratuity. (Stonton vs. U.S., 186 F. Supp. 393).
MilitaryCamp (1995) Such is not the case in the herein problem.
Capt. Canuto is a member of the Armed Forces of the Philippines.
Aside from his pay as captain, the government gives him free Exclusions & Inclusions; ITR; 13th month pay
40 uniforms, free living quarters in whatever military camp he100 is and de minimis benefits (2005)
assigned, and free meals inside the camp. Are these benefits State with reasons the tax treatment of the
income to Capt. Canuto? Explain. following in the preparation of annual income tax
SUGGESTED ANSWER: returns: 13th month pay and de minimis benefits;
No, the free uniforms, free living quarters and the free meals SUGGESTED ANSWER:
45 inside the camp are not income to Capt. Canute because these are105 The 13th month pay not exceeding P30,000.00
facilities or privileges furnished by the shall not be reported in the income tax return
employer for the employer's convenience which are necessary because it is excluded from gross income (Sec.
incidents to proper performance of the military personnel's duties. 32[B][7], [e], NIRC) The amount of the 13th
month pay in excess of P30,000.00 shall be
50 Exclusions & Inclusions; Gifts over and above the Retirement 110 reported in the annual income tax return.
Pay (1995) De minimis benefits which do not exceed the
Mr. Quiroz worked as chief accountant of a hospital for forty-five ceilings are excluded from gross income, and not
years. When he retired at 65 he received retirement pay to be considered for determining the P30,000.00
equivalent to two months' salary for every year of service as ceiling hence not reportable in the annual income
55 provided in the hospital BIR approved retirement plan. The Board
115 tax return. (Sec. 2.78.1[A][3], R.R. 2-98 as
of Directors of the hospital felt that the hospital should give amended by Sec. 2.33 [C] and further amended by
Quiroz more than what was provided for in the hospital's R.R. No. 8-2000)
retirement plan in view of his loyalty and invaluable services for
forty-five years; hence, it resolved to pay him a gratuity of P1 Exclusions & Inclusions; ITR; Dividends
60 Million over and above his retirement pay. 120 received by a domestic corporation (2005)
 State with reasons the tax treatment of the following in the (b) Are the proceeds of the insurance to form part
preparation of annual income tax returns: Dividends received by a of the gross estate of X? Explain.
domestic corporation from (i) another domestic corporation; and SUGGESTED ANSWERS:
(ii) a foreign corporation; (a) No. The law explicitly provides that proceeds
5 SUGGESTED ANSWER: 65 of life insurance policies paid to the heirs or
(i) Dividends received by a domestic corporation from a domestic beneficiaries upon the death of the insured are
corporation shall not be subject to tax (Sec. 27[D][4], NIRC), excluded from gross income and is exempt from
hence, excluded from the income tax return. taxation. The proceeds of life insurance received
(ii) Dividends received by a domestic corporation from a foreign upon the death of the insured constitute a
10 corporation form part of the gross income and are accordingly 70 compensation for the loss of life, hence a return of
subject to net income tax, hence included in the annual ITR (Sec. capital, which is beyond the scope of income
42[A][2][b], NIRC), hence, must be included in the income tax taxation. (Section 32(B)(1) 1997 Tax Code)
return.
(b) Only the proceeds of P1,000,000.00 given to
15 Exclusions & Inclusions; ITR; Income realized from sale 75 the son, Z, shall form part of the Gross Estate of X.
(2005) Under the Tax Code, proceeds of life insurance
State with reasons the tax treatment of the following in the shall form part of the gross estate of the decedent
preparation of annual income tax returns: Income realized from to the extent of the amount receivable by the
sale of: (i) capital assets; and (ii) ordinary assets. beneficiary designated in the policy of the
20 SUGGESTED ANSWER: 80 insurance except when it is expressly stipulated
(i) Income realized from sale of capital assets is subject to the that the designation of the beneficiary is
final withholding tax at source and therefore excluded from the irrevocable. As stated in the problem, only the
Income Tax Return (Sec. 24[C] and [D], NIRC); designation of Y is irrevocable while the
(ii) Income realized from sale of ordinary assets is part of Gross insured/decedent reserved the right to substitute Z
25 Income, included in the Income Tax Return. (Sec. 32[A][3], 85 as beneficiary for another person. Accordingly, the
NIRC) proceeds received by Y shall be excluded while the
Exclusions & Inclusions; ITR; Interest on deposits (2005) proceeds received by Z shall be included in the
State with reasons the tax treatment of the following in the gross estate of X. (Sect/on 85(E), 1997 Tax Code)
preparation of annual income tax returns: Interest on deposits (c)
30 with: (i) BPI Family Bank; and (ii) a local offshore banking unit
90 Exemptions: Charitable Institutions (2000)
of a foreign bank; Article VI, Section 28 (3) of the 1987 Philippine
Constitution provides that charitable institutions,
SUGGESTED ANSWER: churches and personages or covenants appurtenant
Both items are excluded from the income tax return: thereto, mosques, non-profit cemeteries and all
35 (i) Interest income from any currency bank deposit is considered 95 lands, buildings and improvements actually,
passive income from sources within the Philippines and subject to directly and exclusively used for religious,
final tax. Since it is subject to final tax it is not to be included in charitable or educational purposes shall be exempt
the annual ITR. (Sec. 24[B][1], NIRC) (u) Same as No. (j). from taxation. a) To what kind of tax does this
Exclusions & Inclusions; ITR; Proceeds of life insurance exemption apply? (2%)
40 (2005) 100 SUGGESTED ANSWER:
State with reasons the tax treatment of the following in the This exemption applies only to property taxes.
preparation of annual income tax returns: Proceeds of life What is exempted is not the institution itself but
insurance received by a child as irrevocable beneficiary; the lands, buildings and improvements actually,
SUGGESTED ANSWER: directly and exclusively used for religious,
45 Not to be reported in the annual income tax returns because the 105 charitable and educational purposes.
proceeds of the life insurance are excluded from gross income. (Commissioner of Internal Revenue v. Court of
Proceeds of Life insurance policies paid to the heirs or Appeals, et al, G.R. No. 124043, October 14,
beneficiaries upon the death of the insured is an exclusion from 1998).
gross income. (Sec.32[B][l],NIRC) b) Is proof of actual use necessary for tax
50 110 exemption purposes under the Constitution? (3%)
Exclusions & Inclusions; Life Insurance Policy (2003)
On 30 June 2000, X took out a life insurance policy on his own SUGGESTED ANSWER:
life in the amount of P2,000,000.00. He designated his wife, Y, as Yes, because tax exemptions are strictly construed
irrevocable beneficiary to P1,000,000.00 and his son, Z, to the against the taxpayer. There must be evidence to
55 balance of P1,000,000.00 but, in the latter designation, reserving 115 show that the taxpayer has complied with the
his right to substitute him for another. On 01 September 2003, X requirements for exemption. Furthermore, real
died and his wife and son went to the insurer to collect the property taxation is based on use and not on
proceeds of X's life insurance policy. (8%) ownership, hence the same rule must also be
(a) Are the proceeds of the insurance subject to income tax on the applied for real property tax exemptions.
60 part of Y and Z for their respective shares? Explain. 120
 Exemptions: Charitable Institutions; Churches (1996) Exemptions: Head of the Family: (1998)
The Constitution exempts from taxation charitable in-stitutions, Arnold, who is single, cohabits with Vilma, who is
churches, parsonages or convents appurtenant thereto, mosques legally married to Zachary. Arnold and Vilma have
arid non-profit cemeteries and lands, buildings and improvements six minor children who live and depend upon
5 actually, directly and exclu-sively used for religious, charitable65 Arnold for their chief support. The children are not
and educational purposes. Mercy Hospital is a 100-bed hospital married and not gainfully employed.
organized for charity patients. Can said hospital claim exemption 1) For income tax purposes, may Arnold be
from taxation under the above-quoted constitutional provision? considered as "head of a family?" [3%]
Explain. 2) Is Arnold entitled to deduct from his gross
10 SUGGESTED ANSWER: 70 income, an additional exemption for each of his
Yes. Mercy Hospital can claim exemption from taxation under the illegitimate child? [2%]
provision of the Constitution, but only with respect to real SUGGESTED ANSWER:
property taxes provided that such real properties are used actually, 1) Yes. An unmarried man who has illegitimate
directly and exclusively for charitable purposes. minor children who live with him and depend upon
15 75 him for their chief support is considered as "head
Exemptions: Educational institution (2004) of the family" (RR No. 2-98 implementing Section
Suppose that XYZ Colleges is a proprietary educational 35, NIRC).
institution owned by the Archbishop's family, rather than the 2) No. Arnold is only entitled to deduct additional
Archdiocese, which of those above cited income and donation personal exemption for four (4) out of the six (6)
20 would be exempt from taxation? Explain briefly. (5%) 80 illegitimate children. The maximum number of
SUGGESTED ANSWER: dependents for purposes of the additional personal
If XYZ Colleges is a proprietary educational institution, all of its exemption is four. (Sec. 35, NIRC).
income from school related and non-school related activities will
be subject to the income tax based on its aggregate net income Exemptions: Non-Profit Educational
25 derived from both activities (Section 27(B), NMC). Accordingly, 85 Institutions (2000)
all of the income enumerated in the problem will be taxable. Under Article XTV, Section 4 (3) of the 1987
The donation of lot and building will likewise be subject to the Philippine Constitution, all revenues and assets of
donor's tax because a donation to an educational institution is non-stock, nonprofit educational institutions, used
exempt only if the school is incorporated as a non-stock entity actually, directly and exclusively for educational
30 paying no dividends. 90 purposes, are exempt from taxes and duties. Are
Since the donee is a proprietary educational institution, the income derived from dormitories, canteens and
donation is taxable (Section 101(AX3), NJRC). bookstores as well as interest income on bank
deposits and yields from deposit substitutes
Exemptions: Gifts & Donations (1994) automatically exempt from taxation? Explain. (5%)
35 In 1991, Imelda gave her parents a Christmas gift of P 100,000.00 95 SUGGESTED ANSWER:
and a donation of P50,000.00 to her parish church. She also No. The interest income on bank deposits and
donated a parcel of land for the construction of a building to the yields from deposit substitutes are not
PUP Alumni Association, a non-stock, non-profit organization. automatically exempt from taxation. There must be
Portions of the building shall be leased to generate income for the a showing that the incomes are included in the
40 association. 1) Is the Christmas gift of P 100,000.00 to Imelda's100 school's annual information return and duly
parents subject to tax? 2) How about the donation to the parish audited financial statements together with:
church? 3) How about the donation to the P.U.P, Alumni 1 Certifications from depository banks as to the
Association? amount of interest income earned from passive
investments not subject to the 20% final
45 SUGGESTED ANSWER: 105 withholding tax;
1)The Christmas gift of P100,000.00 given by Imelda to her 2 Certification of actual, direct and exclusive
parents is taxable up to P50,000.00 because under the law (Sec. utilization of said income for educational purposes;
92 (a) of the Tax Code), net gifts not exceeding P50,000.00 are 3 Board resolution on proposed project to be
exempt. funded out of the money deposited in banks or
50 2)The donation of P50,000.00 to the parish church even assuming
110 placed in money market placements (Finance
that it is exclusively for religious purposes is not tax-exempt Department Order No. 149-95 issued November
because the exemption granted under Article VI, Sec. 28(3) of the 24, 1995), which must be used actually, directly
Constitution applies only to real estate taxes (Lladoc v. and exclusively for educational purposes.
Commissioner, 14SCRA292).
55 3)The donation to the P.U.P. Alumni Association does not also 115 The income derived from dormitories, canteens
qualify for exemption both under the Constitution and the and bookstores are not also automatically exempt
aforecited law because it is notan educational or research from taxation. There is still the requirement for
organization, corporation, institution, foundation or trust. evidence to show actual, direct and exclusive use
for educational purposes. It is to be noted that the
60 120 1987 Philippine Constitution does not distinguish
 with respect to the source or origin of the income. The distinction cover exemption from the imposition of the
is with respect to the use which should be actual, direct and income tax which is within the context of Section
exclusive for educational purposes. 30 of the Tax Code. As a rule, non-stock nonprofit
Consequently, the provisions of Sec. 30 of the NIRC of 1997, that corporations organized for religious, charitable or
5 a non-stock and nonprofit educational institution is exempt from 65 social welfare purposes are exempt from income
taxation only "in respect to income received by them as such" tax on their income received by them as such.
could not affect the constitutional tax exemption. Where the However, if these religious, charitable or social
Constitution does not distinguish with respect to source or origin, welfare corporations derive income from their
the Tax Code should not make distinctions. properties or any of their activities conducted for
10 70 profit, the income tax shall be imposed on said
Exemptions: Non-Profit Entity; Ancillary Activity & items of income irrespective of their disposition.
Incidental Operations (1994) (Sec. 30, NIRC; CIR v, YMCA, GR No. 124043,
The University of Bigaa, a non-stock, non-profit entity, operates a 1998).
canteen for its students and a bookstore inside the campus. It also
15 operates two dormitories for its students, one of which is in the 75 B. Is the income derived by XYZ Foundation from
campus. Is the University liable to pay income taxes for the the sale of a portion of its lot, rentals from its
operation of the: 1) canteen? 2) bookstore? 3) two dormitories? boarding house and the operation of its canteen and
SUGGESTED ANSWER: gift shop subject to tax? Explain. (5%)
1) For the operation of the canteen inside the campus, the income SUGGESTED ANSWER:
20 thereon being incidental to the operations of the University as 80 a B. Yes. The income derived from the sale of lot
school, is exempt (Art. XIV (4) (3), Constitution; DECS and rentals from its boarding house are considered
Regulations No. 137-87, Dec. 16, 1987). as income from properties which are subject to tax.
2) For the same reasons, the University of Bigaa is not liable to Likewise, the income from the operation of the
pay income taxes for the operation of the bookstore, since this is canteen and gift shop are income from its activities
25 an ancillary activity the conduct of which is carried out within the
85 conducted for profit which are subject to tax. The
school premises. income tax attaches irrespective of the disposition
3) The University of Bigaa shall not be liable to pay income taxes of these incomes. (Sec. 30, NIRC; CIR v. YMCA,
for the operation of the dormitory located in the campus, for same GR No. 124043, 1998).
reasons as the foregoing. However, the latter shall be liable for
30 income taxes on income from operations of the dormitory located 90 Exemptions: Prize of Peace Poster Contest
outside the school premises. (2000)
Jose Miranda, a young artist and designer, received
Exemptions: Non-Stock/ Non-Profit Association (2002) a prize of P100,000.00 for winning in the on-the-
XYZ Foundation is a non-stock, non-profit association duly spot peace poster contest sponsored by a local
35 organized for religious, charitable and social welfare purposes. 95 Lions Club. Shall the reward be included in the
Last January 3, 2000 it sold a portion of its lot used for religious gross income of the recipient for tax purposes?
purposes and utilized the entire proceeds for the construction of a Explain. (3%)
building to house its free Day and Night Care Center for children
of single parents. In order to subsidize the expenses of the Day SUGGESTED ANSWER:
40 and Night Care Center and to support its religious, charitable and100 No. It is not includable in the gross income of the
social welfare projects, the Foundation leased the 300square recipient because the same is subject to a final tax
meter area of the second and third floors of the building for use as of 20%, the amount thereof being in excess of
a boarding house. The Foundation also operates a canteen and a P10.000 (Sec. 24(B){1), NIRC of 1997). The prize
gift shop within the premises, all the income from which is used constitutes a taxable income because it was made
45 actually, directly, and exclusively for the purposes for which the105 primarily in recognition of artistic achievement
Foundation was organized. which he won due to an action on his part to enter
the contest. [Sec. 32 (B) (7) (c), NIRC of 1997]
A. Considering the constitutional provision granting tax Since it is an on-the-spot contest, it is evident that
exemption to non-stock corporations such as those formed he must have joined the contest in order to earn the
50 exclusively for religious, charitable or social welfare purposes, 110 prize or award.
explain the meaning of the last paragraph of said Sec. 30 of the
1997 Tax Code which states that “Income of whatever kind and Exemptions: Prizes & Awards; Athletes (1996)
character of the foregoing organizations from any of their Onyoc, an amateur boxer, won in a boxing
properties, real or personal, or from any of their activities competition sponsored by the Gold Cup Boxing
55 conducted for profit regardless of the disposition made of such 115 Council, a sports association duly accredited by the
income shall be subject to tax imposed under this Code." (5%) Philippine Boxing Association. Onyoc received the
SUGGESTED ANSWER: amount of P500,000 as his prize which was
A. The exemption contemplated in the Constitution covers real donated by Ayala Land Corporation. The BIR tried
estate tax on real properties actually, directly and exclusively used to collect income tax on the amount received by
60 for religious, charitable or social welfare purposes. It does not 120 Onyoc and donor's tax from Ayala Land
 Corporation, which taxes, Onyoc and Ayala Land Corporation for occupying a redundant position. He was given
refuse to pay. Decide. P1,000.000.00 as separation pay.
SUGGESTED ANSWER: Jose Bautista was separated due to his failing
The prize will not constitute a taxable income to Onyoc, hence eyesight. He was given P500.000.00 as separation
5 the BIR is not correct in imposing the income tax. 65 pay. All the three (3) were not qualified to retire
R.A. No. 7549 explicitly provides that 'All prizes and awards under the BIR-approved pension plan of the
granted to athletes in local and international sports tournaments corporation. 1) Is the separation pay given to
and competitions held in the Philippines or abroad and sanctioned Reyes subject to income tax? 2) How about the
by their respective national sports associations shall be exempt separation pay received by Cruz? 3) How about the
10 from income tax". 70 separation pay received by Bautista?
Neither is the BIR correct in collecting the donor's tax from Ayala
Land Corporation. The law is clear when it categorically stated SUGGESTED ANSWER:
"That the donor's of said prizes and awards shall be exempt from 1) The separation pay given to Reyes is subject to
the payment of the donor's tax." income tax as compensation income because it
15 75 arises from a service rendered pursuant to an
Exemptions: Retirement Benefits: Work Separation (1999) employer-employee relationship. It is not
A Co., a Philippine corporation, has two divisions — considered an exclusion from gross income
manufacturing and construction. Due to the economic situation, it because the rule in taxation is tax construed in
had to close its construction division and layoff the employees in strictissimi juris or the rule on strict Interpretation
20 that division. A Co. has a retirement plan approved by the BIR, 80 of tax exemptions.
which requires a minimum of 50 years of age and 10 years of 2) The separation pay received by Cruz is not
service in the same employer at the time of retirement. There are subject to income tax because his separation from
2 groups of employees to be laid off: 1) Employees who are at the company was involuntary (Sec. 28 b (7), Tax
least 50 years of age and has at 10 years of service at the time of Code).
25 termination of employment. 2) Employees who do no meet either 85 3) The separation pay received by Bautista is
the age or length of service A Co. plans to give the following: likewise not subject to tax. His separation is due to
For category (A) employees - the benefits under the BIR disability, hence involuntary. Under the law,
approved plan plus an ex gratia payment of one month of every separation pay received through involuntary causes
year of service. are exempt from taxation.
30 For category (B) employees - one month for every year of 90
service. For both categories, the cash equivalent of unused Exemptions: Separation Pay (1995)
vacation and sick leave credits. Mr. Jacobo worked for a manufacturing firm. Due
A Co. seeks your advice as to whether or not it will subject any of to business reverses the firm offered voluntary
these payments to WT. Explain your advice. (5%) redundancy program in order to reduce overhead
35 95 expenses. Under the program an employee who
SUGGESTED ANSWER: offered to resign would be given separation pay
For category A employees, all the benefits received on account of equivalent to his three month's basic salary for
their separation are not subject to income tax, hence no every year of service. Mr. Jacobo accepted the
withholding tax shall be imposed. The benefits received under the offer and received P400.000.00 as separation pay
40 BIR-approved plan upon meeting the service requirement and age 100 under the program.
requirement are explicitly excluded from gross income. The ex After all the employees who accepted the offer
gratia payment also qualifies as an exclusion from gross income were paid, the firm found its overhead still
being in the nature of benefit received on account of separation excessive. Hence it adopted another redundancy
due to causes beyond the employees' control. (Section 32(B), program. Various unprofitable departments were
45 NIRC). The cash equivalent of unused vacation and sick leave 105 closed. As a result, Mr. Kintanar was separated
credits qualifies as part of separation benefits excluded from gross from the service. He also received P400.000.00 as
income (CIR v. Court of Appeals, GR No. 96O16, October 17, separation pay. 1) Did Mr. Jacobo derive income
1991). when he received his separation pay? Explain. 2)
For category B employees, all the benefits received by them will Did Mr. Kintanar derive income when he received
50 also be exempt from income tax, hence not subject to withholding 110 his separation pay? Explain.
tax. These are benefits received on account of separation due to
causes beyond the employees' control, which are specifically SUGGESTED ANSWER:
excluded from gross income. (Section 32(B), NIRC). 1) Yes, Mr. Jacobo derived a taxable income when
he received his separation pay because his
55 Exemptions: Separation Pay (1994) 115 separation from employment was voluntary on his
Pedro Reyes, an official of Corporation X, asked for an "earlier part in view of his offer to resign. What is excluded
retirement" because he was emigrating to Australia. He was paid from gross income is any amount received by an
P2.000.000.00 as separation pay in recognition of his valuable official or employee as a consequence of
services to the corporation. separation of such official or employee from the
60 Juan Cruz, another official of the same company, was separated
120 service of the employer for any cause beyond the
 control of the said official or employee (Sec 28, NIRC). Tax exemptions are strictly construed against the
ALTERNATIVE ANSWER: taxpayer because such provisions are highly
No, Mr. Jacobo did not derive any taxable income because the disfavored and may almost be said to be odious to
separation pay was due to a retrenchment policy adopted by the the law (Manila Electric Company vs. Vera, 67
5 company so that any employee terminated by virtue thereof is 65 SCRA 351). The exception contained in the tax
considered to have been separated due to causes beyond the statutes must be strictly construed against the one
employee's control. The voluntary redundancy program requiring claiming the exemption because the law does not
employees to make an offer to resign is only considered as a tool look with favor on tax exemptions they being
to expedite the lay-off of excess manpower whose services are no contrary to the life-blood theory which is the
10 longer needed by the employer, but is not the main reason or 70 underlying basis for taxes.
cause for the termination
SUGGESTED ANSWER: Exemptions: Terminal Leave Pay (1996)
2) No, Mr. Kintanar did not derive any income when he received A, an employee of the Court of Appeals, retired
his separation pay because his separation from upon reaching the compulsory age of 65 years.
15 employment is due to causes beyond his control. The separation 75 Upon compulsory retirement, A received the
was involuntary as it was a consequence of the closure of various money value of his accumulated leave credits in
unprofitable departments pursuant to the redundancy program. the amount of P500.000.00. Is said amount subject
to tax? Explain.
Exemptions: Separation Pay (2005) SUGGESTED ANSWER:
20 Company A decides to close its operations due to continuing 80 No. The commutation of leave credits, more
losses and to terminate the services of its employees. Under the commonly known as terminal leave pay, i.e., the
Labor Code, employees who are separated from service for such cash equivalent of accumulated vacation and sick
cause are entitled to a minimum of one-half month pay for every leave credits given to an officer or employee who
year of service. Company A paid the equivalent of one month pay retires, or separated from the service through no
25 for every year of service and the cash equivalent of unused 85 fault of his own, is exempt from income tax. (BIR
vacation and sick leaves as separation benefits. Are such benefits Ruling 238-91 dated November 8, 1991;
taxable and subject to withholding tax under the Tax Code? Commissioner v. CA and Efren Castaneda, GR
Decide with reasons. (5%) No. 96016, October 17, 1991).
SUGGESTED ANSWER:
30 All of the benefits are not taxable, hence they are not subject to
90 Exemptions; Charitable Institutions (2006)
withholding tax under the Tax Code. Benefits received as a The Constitution provides "charitable institutions,
consequence of separation for any cause beyond the control of the churches, personages or convents appurtenant
employees such as closure of business are excluded from gross thereto, mosques, and non-profit cemeteries and all
income. (Sec. 32[B][6][b], NIRC in relation to Sec. 2[b][2], R.R. lands, buildings, and improvements actually
35 2-98) 95 directly and exclusively used for religious,
charitable or educational purposes shall be exempt
Exemptions: Stock Dividends (2003) from taxation." This provision exempts charitable
On 03 January 1998, X, a Filipino citizen residing in the institutions and religious institutions from what
Philippines, purchased one hundred (100) shares in the capital kind of taxes? Choose the best answer. Explain.
40 stock of Y Corporation, a domestic company. On 03 January 100 (5%)
2000, Y Corporation declared, out of the profits of the company from all kinds of taxes, i.e., income, VAT, customs
earned after 01 January 1998, a hundred percent (100%) stock duties, local taxes and real property tax
dividends on all stockholders of record as of 31 December 1999 from local tax only
as a result of which X holding in Y Corporation became two from value-added tax
45 hundred (200) shares. Are the stock dividends received by 105 X from real property tax only
subject to income tax? Explain. (8%) from capital gains tax only
SUGGESTED ANSWER:
No. Stock dividends are not realized income. Accordingly, the SUGGESTED ANSWER:
different provisions of the Tax Code imposing a tax on dividend The provision exemptions charitable institutions
50 income only includes within its purview cash and property 110 and religious institutions from (d) REAL
dividends making stock dividends exempt from income tax. PROPERTY TAXES only. The exemption is only
However, if the distribution of stock dividends is the equivalent for taxes assessed as property taxes, as
of cash or property, as when the distribution results in a change of distinguished from excise taxes (CIR v. CA, CTA
ownership interest of the shareholders, the stock dividends will be & YMCA, G.R. No. 124043, October 14, 1998;
55 subject to income tax. (Section 24(B)(2); Section 25(A)&(B); 115 Lladoc v. Commissioner of Internal Revenue, L-
Section 28(B)(5)(b), 1997 Tax Code) 19201, June 16,1965).
Exemptions; Educational institution (2004)
Exemptions: Strictly Construed (1996) XYZ Colleges is a non-stock, non-profit
Why are tax exemptions strictly construed against the taxpayer? educational institution run by the Archdiocese of
60 SUGGESTED ANSWER: 120 BP City. It collected and received the following:
 (a) Tuition fees transportation and representation allowance of
(b) Dormitory fees P6,000.00 for each of the municipal employees. 1)
(c) Rentals from canteen concessionaires Is the Christmas bonus subject to any tax? 2) How
(d) Interest from money-market placements of the tuition fees about the cash gift? 3) How about the
5 (e) Donation of a lot and building by school alumni Which of 65 transportation and representation allowances?
these above cited income and donation would not be exempt from SUGGESTED ANSWER:
taxation? Explain briefly. (5%) 1) The CHRISTMAS BONUS given by the
Sangguniang Bayan to the municipal employees is
SUGGESTED ANSWER: taxable as additional compensation (Sec. 21 (a).
10 A. All of the income derived by the non-stock, nonprofit 70 Tax Code).
educational institution will be exempt from taxation provided 2) The cash gift per employee of P5.000.00 being
they are used actually, directly and exclusively for educational substantial may be considered taxable also. They
purposes. The Constitution provides that all revenues and assets partake the nature of additional compensation
of non-stock, non-profit educational institution which are actually, income as it is highly doubtful if municipal
15 directly and exclusively used for educational purposes are exempt 75 governments are authorized to make gifts in
from taxation (Section 4 par. 3, Article XIV, 1987 Constitution). substantial sums such as this. They are not further-
more gifts of "small value" which employers might
The donation is, likewise, exempt from the donor's tax if actually, give to their employees on special occasions like
directly and exclusively used for educational purposes, provided Christmas - items which could be exempt under
20 not more than 30% of the donation is used by the donee for 80 BIR Revenue Audit Memo No. 1-87.
administration purposes. The donee, being a non-stock, non-profit
educational institution, is a qualified entity to receive an exempt 4) The transportation and representation
donation subject to conditions prescribed by law (Section 4 par. allowances are actually reimbursements for
4, Art. XIV, 1987 Constitution, in relation to Section 101(AX3), expenses incurred by the employee for the
25 NJRC). 85 employer. Said allowances spent by the employee
for the employer are designed to enhance the
Accordingly, none of the cited income and donation collected and quality of the service that the employer is supposed
received by the non-stock, non-profit educational institution to perform for its clientele like the people of the
would not be exempt from taxation. municipality.
30 90
Exemptions; Exemptions are Unilateral in Nature (2004) Exemptions; Personal & Additional Exemption
A law was passed granting tax exemption to certain industries and (2006)
investments for a period of five years. But three years later, the Charlie, a widower, has two sons by his previous
law was repealed. With the repeal, the exemptions were marriage. Charlie lives with Jane who is legally
35 considered revoked by the BIR, which assessed the investing 95 married to Mario. They have a child named Jill.
companies for unpaid taxes effective on the date of the repeal of The children are all minors and not gainfully
the law. employed.
NPC and KTR companies questioned the assessments on the 1. How much personal exemption can Charlie
ground that, having made their investments in full reliance with claim? Explain. (2.5%)
40 the period of exemption granted by the law, its repeal violated 100 SUGGESTED ANSWER:
their constitutional right against the impairment of the obligations Charlie can claim the personal exemption of a
and contracts. Is the contention of the companies tenable or not? Head of a Family or P25,000.00 provided that, at
Reason briefly. (5%) least one of his minor and not gainfully employed
SUGGESTED ANSWER: children is unmarried and living with and
45 The contention is not tenable. The exemption granted is in the 105 dependent upon him for chief support (Tax Reform
nature of a unilateral tax exemption. Since the exemption given is Act, RA 8424, Chapter VII, Section 35[A]; BIR
spontaneous on the part of the legislature and no service or duty Revenue Regulation 02-98).
or other remunerative conditions have been imposed on the 2. How much additional exemption can Charlie
taxpayers receiving the exemption, it may be revoked at will by claim? Explain. (2.5%)
50 the legislature (Christ Church v. Philadelphia, 24 How. 300 110 SUGGESTED ANSWER:
[1860]). What constitutes an impairment of the obligation of His children from his previous marriage who are
contracts is the revocation of an exemption which is founded on a legitimate children and his illegitimate child with
valuable consideration because it takes the form and essence of a Jane will all entitle him to additional personal
contract (Casanovas v. Hord, 8 Phil. 125 [1907]; Manila exemption of P8,000.00 for each dependent, if
55 Railroad Company v. Insular Collector of Customs, 12 Phil. 115 apart from being minor and not gainfully
146 [1915]) employed, they are unmarried, living with and
dependent upon Charlie for their chief support
Exemptions; Gov’t Bonus, Gifts, & Allowances (1994) (Tax Reform Act, RA8424, Chapter VH, Section
In December 1993, the Sangguniang Bayan authorized a 35(A); BIR Revenue Regulation 02-98).
60 Christmas bonus of P3,000.00, a cash gift of P5,000.00 and
120
 Exemptions; Roman Catholic Church; Limitations (2005)
The Roman Catholic Church owns a 2-hectare lot, in a town in
Tarlac province. The southern side and middle part are occupied
by the Church and a convent, the eastern side by a school run by
5 the Church itself, the southeastern side by some commercial
establishments, while the rest of the property, in particular the
northwestern side, is idle or unoccupied. May the Church claim
tax exemption on the entire land? Decide with reasons.
SUGGESTED ANSWER:
10 No. The Church cannot claim tax exemption on the entire land.
Only the southern side and middle part that are occupied by the
Church and a convent and the eastern side occupied by a school
run by the Church itself are exempt, because such parts of the 2-
hectare lot are actually, directly and exclusively used for religious
15 and educational purposes. (Sec. 28[3], Art. VI, 1987 Constitution;
Sec. 234, Local Government Code)

The southeastern side occupied by some commercial

establishment is not tax exempt. If real property is used for one or
20 more commercial purposes, it is not exclusively used for the
exempted purpose but is subject to taxation. 'Solely' is
synonymous with 'exclusively.' (Lung Center of the Philippines
v. Quezon City, G.R. No. 144104, June 29, 2004) The property
must be exclusively (solely) used for religious or educational
25 purposes.
Of course, it is apparent that the northwestern side, which is idle
or unoccupied is not "actually, directly and exclusively" used for
religious or educational purposes, hence not exempt from
taxation.