2014 BAR EXAM his case, the folk saying proved to be true because he is now a

successful cardiologist. Wanting to give back to the chapel

XXVIII. and help defray the costs of its maintenance, Dr. Taimtim
Choose the correct answer. Tax laws - donated P50,000.00 to the caretakers of the chapel which was
(A) may be enacted for the promotion of private enterprise or business for evidenced by an acknowledgment receipt.In computing his net
as long as it gives incidental advantage to the public or the State taxable income, can Dr.Taimtim use his donation to the chapel
(B) are inherently legislative; therefore, may not be delegated as an allowable deduction from his gross income under the
(C) are territorial in nature; hence, they do not recognize the
generally-accepted tenets of international law National Internal Revenue Code (NIRC)?
(D) adhere to uniformity and equality when all taxable articles or kinds of
property of the same class are taxable at the same rate SUGGESTED ANSWER :
SUGGESTED ANSWER :
No. the donation is not deductible. The chapel is owned by a
D. Tax laws adhere to uniformity and equality when all taxable articles or kinds of
property of the privately-owned university hence, the donation for the
same class are taxable at the same rate. maintenance of the chapel is a donation to the university. The
donation to be deductible must comply with the requirement that
the net income of the done must not inure to the benefit of any
XXIII.
Choose the corr ect answer. Tax Avoidance -
private stockholder or individual. In the instant case, the university
(A) is a scheme used outside of those lawful means and, when availed is granting yearly dividends to its stock holders which is a clear
of, it usually subjects the taxpayer to further or additional civil or violation of the law appertaining to the so-called “private
criminal liabilities. inurement doctrine” thereby making the donation non-deductible
(B) is a tax saving device within the means sanctioned by law. (Section 34(H)(1), NIRC).
(C) is employed by a corporation, the organization of which is
prompted more on the mitigation of tax liabilities than for
legitimate business purpose.
IX.
(D) is any form of tax deduction scheme, regardless if the same
is legal or not. Mr. Gipit borrowed from Mr. Maunawain P100,000.00, payable in five (5)
equal monthly installments. Before the first installment became due, Mr.
SUGGESTED ANSWER : Gipit rendered general cleaning services in the entire office building of
B. Tax avoidance is a tax- saving device within the means sanctioned by law. Mr. Maunawain, and as compensation therefor, Mr. Maunawain cancelled
the indebtedness of Mr. Gipit up to the amount of P75,000.00. Mr. Gipit
claims that the cancellation of his indebtedness cannot be considered as
XXII. gain on his part which must be subject to income tax, because according
to him, he did not actually receive payment from Mr. Maunawain for
Choose the correct answer. Double Taxation - (1%) the general cleaning services. Is Mr. Gipit correct? Explain.
(A) is one of direct duplicate taxations wherein two (2) taxes must be
imposed on the same subject matter, by the same taxing authority, SUGGESTED ANSWER :
within the same jurisdiction, during the same period, with the No. Section 50 of Rev. Regs. No. 2, otherwise known as Income Tax Regulations,
same kind or character of tax, even if the purposes of provides that if a debtor performs services for a creditor who cancels the
imposing the same are different. debt in consideration for such services, the debtor realizes income to that
(B) is forbidden by law; and therefore, it is a valid defense amount as compensation for his services. In the given problem, the
against the validity of a tax measure. cancellation of Mr. Gipit’s indebtedness up to the amount of Php 75,000.00
(C) means taxing the same property twice when it should be
gave rise to compensation income subject to income tax, since Mr.
taxed only once; it is tantamount to taxing the same person Maunawain condoned such amount as consideration for the general cleaning
twice by the same jurisdiction for the same thing. services rendered by Mr. Gipit.
(D) exists when a corporation is assessed with local business tax as a
manufacturer, and at the same time, value-added tax as a person
selling goods in the course of trade or business. XI.
Triple Star, a domestic corporation, entered into a Management Service
SUGGESTED ANSWER : Contract with Single Star, a non-resident foreign corporation with no
A. Double taxation is one of direct duplicate taxations wherein two (2) taxes must property in the Philippines. Under the contract, Single Star shall provide
be imposed on the same subject matter, by the same taxing authority, within the managerial services for Triple Star’s Hongkong branch. All said services
same jurisdiction, during the same period, with the same kind of character of tax, shall be performed in Hongkong. Is the compensation for the services of
even if the purposes of imposing the same are different. Single Star taxable as income from sources within the Philippines?
Explain.

III. SUGGESTED ANSWER :

No. Pursuant to the case of Commissioner of Internal Revenue v. Baier-Nickel
Dr. Taimtim is an alumnus of the College of Medicine of (G.R. No. 153793,
Universal University (UU), a privately-owned center for August 29, 2006), the factor which determines the source of income for
learning which grants yearly dividends to its stockholders. UU personal services is the place where the services were actually rendered.
has a famous chapel located within the campus where the old Since Single Star, a non-resident foreign corporation, will perform all the
managerial services for Triple Star’s branch in Hong Kong, all compensation
folks used to say that anyone who wanted to pass the income arising from the performance of such services will be considered
medical board examinations should offer a dozen roses income from sources outside the Philippines, and therefore not subject to
on all the Sundays of October. This was what Dr. Taimtim Philippine income tax.
did when he was still reviewing for the board examinations. In
XIII. sale of the aforesaid commercial building to escape the higher
Hopeful Corporation obtained a loan from Generous Bank and executed corporate income tax rate of thirty percent (30%). What is the liability
a mortgage on its real property to secure the loan. When opeful of Haeltown Corporation, if any?
Corporation failed to pay the loan, Generous Bank extrajudicially
foreclosed the mortgage on the property and acquired the same as the SUGGESTED ANSWER :
highest bidder. A month after the foreclosure, Hopeful Corporation exercised The tax planning scheme adopted by Haeltown Corporation constitutes tax
its right of redemption and was able to redeem the property. Is Generous evasion. According to CIR v. Estate of Benigno Toda
Bank liable to pay capital gains tax as a result of the foreclosure sale? (G.R. No. 147188, September 14, 2004), a transaction where a taxpayer made it
Explain. appear that there were two sales of the property was considered “tainted
with fraud.” The sole purpose of acquiring and transferring title of the property on
SUGGESTED ANSWER : the same day was to create a tax shelter. The sale to Mr. Belly (which is subject to
No. Since Hopeful Corporation exercised its right to redeem the property, individual capital gains tax) was to mislead the BIR and avoid the higher corporate
Generous Bank is not liable to pay capital gains tax on the foreclosure sale. As income tax.
stated in the analogous case of Supreme Transliner, Inc., v. BPI Family Savings
Bank, Inc. (G.R. No. 165617, February 25, 2011, 644 SCRA 59), Rev. Regs. No.
4-99 expressly provides that if a mortgagor exercises his right of redemption within
one year from the issuance of the certificate of sale, no capital gains tax shall be
imposed because no sale or transfer of real property was realized. It is only in case XXIV.
of non-redemption by Hopeful Corporation that the obligation to pay capital gains A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that
tax arises, which shall be based on the bid price of the highest bidder. they can practice their profession as lawyers. For the year 2012, ABC
The tax will be imposed only upon the expiration of the one-year period of Law Firm received earnings and paid expenses, among which are as
redemption. Furthermore, the obligation to pay the capital gains tax would primarily follows:
fall on the mortgagor, Hopeful Corporation, and not on Generous Bank. Earnings:
(1) Professional/legal fees from various clients
(2) Cash prize received from a religious society in recognition of
XVI. the exemplary service of ABC Law Firm
(3) Gains derived from sale of excess computers and laptops
Mr. Tiaga has been a law-abiding citizen diligently paying Payments:
his income taxes. On May 5, 2014, he was surprised to (1) Salaries of office staff
receive an assessment notice from the Bureau of Internal (2) Rentals for office space
Revenue (BIR) informing him of a deficiency tax assessment (3) Representation expenses incurred in meetings with clients
as a result of a mathematical error in the computation of his (A) What are the items in the above mentioned
earnings which should be included in the
income tax, as appearing on the face of his income tax return computation of ABC Law Firm’s gross income? Explain.
for the year 2011, which he filed on April 15, 2012. Mr. Tiaga (B) What are the items in the above-mentioned
believes that there was no such error in the computationof his payments which may be considered as deductions
income tax for the year 2011. Based on the assessment from the gross income of ABC Law Firm? Explain.
(C) (C) If ABC Law Firm earns net income in 2012, what, if
received by Mr. Tiaga, may he already file a protest thereon?
any, is the tax consequence on the part of ABC Law
Firm insofar as the payment of income tax is
SUGGESTED ANSWER : concerned? What, if any, is the tax consequence on
Yes, Mr. Tiaga may already file a protest. Rev. Regs. No. 18-2013, the part of A, B, and C as individual partners,
implementing Sec. 228 of the Tax Code, states that no PAN is insofar as the payment of income tax is concerned?
required if the deficiency tax is a result of a mathematical error in SUGGESTED ANSWER :
the computation of tax as appearing on the face of the tax return. In (A) The three (3) items of earnings should be included in the computation of ABC
such case, an FLD/FAN shall be issued outright. Thus, the Law Firm’s gross income. The professional/legal fees from various clients is
assessment notice sent by the BIR is deemed an FLD/FAN which included as part of gross income being in the nature of compensation for services
(Section 32(A)(1), NIRC). The cash prize from a religious society in recognition of
may be the subject of a protest. its exemplary services is also included there being no law providing for its
exclusion. This is not a prize in recognition of any of the achievements
enumerated under the law hence, should form part of gross income (Section
XXI. 32(B)(7)(c), NIRC). The gains from sale of excess computers and laptops
On August 31, 2014, Haelton Corporation (HC), thru its authorized should also be included as part of the firm’s gross income because the
representative Ms. Pares, sold a 16-storey commercial building known as term gross income specifically includes gains derived from dealings in property
Haeltown Building to Mr. Belly for P100 million. Mr. Belly, in turn, sold (Section 32(A)(3), NIRC).
the same property on the same day to Bell Gates, Inc. (BGI) for P200 million. (B) The law firm being formed as general professional partnership is entitled
These two (2) transactions were evidenced by two (2) separate Deeds of to the same deductions allowed to corporation (Section 26, NIRC). Hence, the
Absolute Sale notarized on the same day by the same notary three (3) items of deductions mentioned in the problem are all deductible, they
public.Investigations by the Bureau of Internal Revenue (BIR) showed that: being in the nature of ordinary and necessary expenses incurred in the practice of
(1) the Deed of Absolute Sale between Mr. Belly and BGI was notarized profession (Section 34(A), NIRC). However, the amount deductible for
ahead of the sale between HC and Mr. Belly; (2) as early as May 17, 2014, HC representation
received P40 million from BGI, and not from Mr. Belly; (3) the said payment expenses incurred by a taxpayer engaged in sale of services, including a law firm,
of P40 million was recorded by BGI in its books as of June 30, 2014 as is subject to a ceiling of 1% of net revenue. (RR No. 10-2002)
investment in Haeltown Building; and (4) the substantial portion of P40 (C) The net income having been earned by the law firm which is formed
million was withdrawn by Ms. Pares through the declaration of cash and qualifies as a general professional partnership, is not subject to income tax
dividends to all its stockholders. because the earner is devoid of any income tax personality. Each partner
shall report as gross income his distributive shares, actuality or
Based on the foregoing, the BIR sent Haeltown Corporation a Notice of constructively received, in the net income of the partnership. The partnership is
Assessment for deficiency income tax arising from an alleged simulated merely treated for income
tax purposes as a pass-through entity so that its net income is not taxable at the for having been enacted in violation of the public ation requirement of tax
level of the partnership bur saidnet income should be ttributed to the partners, ordinances and revenue measures under the Local Government Code (LGC)
whether or not distributed to them, and they are liable to pay the income tax based and on the ground of double taxation. On appeal, the Court of Tax Appeals
on their respective taxable income as individual taxpayers (Section 26, NIRC). (CTA) affirmed the decision of the RTC. No motion for reconsideration was
filed and
the decision became final and executory. (4%)
XXVI. (A) If you are Atty. ELP, what advice will you give Doña
May Freezy Corporation claim the payment to the officer as deduction Evelina so that she can recover the subject local
from its gross income? business taxes?
Explain. (B) If Doña Evelina eventually recovers the local business
taxes, must the same be considered as income taxable
SUGGESTED ANSWER : by the national government?
No. The payments made in exchange for the revelation of a competitors
trade secrets is considered an expense which is against law, morals, good SUGGESTED ANSWER :
customs, or public policy, which is not deductible (3M Philippines, Inc. v. (A) Move for the execution of the judgment which has already become final.
CIR, G.R. No. 82833, September 26, 1988). Also, the law will not allow the (B) Yes, subject to the tax benefit rule. The local business tax paid is a business-
deduction of bribes, kickback, and other similar payments. Applying the principle of connected tax hence, deductible from gross income. If at the time of its deduction it
ejusdem generis, payment made by Freezy Corporation would fall under “other resulted to a tax benefit to Dona Evelina, then the recovery will form part of gross
similar payments” which are not allowed as deduction from gross income (Section income to the extent of the tax benefit on the previous deduction (Section 34(C)(1),
34(A)(1)(c), NIRC). NIRC).

XXVII. X.
In January 2013, your friend got his first job as an office clerk. Which of the following is an exclusion from gross income?
He is single and lives with his family who depends upon him
for financial support. His parents have long retired from their (A) Salaries and wages
work, and his two (2) siblings are still minors and (B) Cash dividends
studying in grade school. In February 2014, he consulted (C) Liquidating dividends after dissolution of a
you as he wanted to comply with all the rules pertaining to the corporation
preparation and filing of his income tax return. He now asks (D) De minimis benefits
you the following: (E) Embezzled money
(A) Is he entitled to personal exemptions? If so, how much?
(1%) SUGGESTED ANSWER :
(B) Is he entitled to additional exemptions? If so, how much? D. De minimis benefits
(1%)
(C) What is the effect of the taxes withheld from his salaries XII.
on his taxable income? Which of the following should not be claimed as deductions
from gross income?
SUGGESTED ANSWER :
(A) Yes. The law allows a basic personal exemption of Php (A) discounts given to senior citizens on certain goods and
50,000.00 for each individual taxpayer (Section 35(A), NIRC). services.
(B) No. While his parents and minor sibling are living with and (B) advertising expense to maintain some form of goodwill for
dependent upon him for financial support, they are not qualified the taxpayer’s business.
dependents for purposes of additional exemptions. The term (C) salaries and bonuses paid to employees.
“dependent” for purposes of the additional personal exemption (D) interest payment on loans for the purchase of
would include only legitimate, illegitimate, or legally adopted machinery and equipment used in business.
children (Section 35(B), NIRC).
(C) The taxes withheld from his salaries will not affect his taxable SUGGESTED ANSWER :
income because they are not allowed as tax deductions but as B. Advertising expense to maintain some form of goodwill for the
tax credits. Tax deductions reduce taxable income while tax taxpayer’s business.
credits reduce the tax liability (Central Drug Corporation v. CIR)
Freezy Corporation, a domestic corporation engaged in the
manufacture and sale of ice cream, made payments to an
XXIX. officer of Frosty Corporation, a competitor in the ice cream
Doña Evelina, a rich widow engaged in the business of currency
exchange, was assessed a considerable amount of local business taxes
business, in exchange for said officer’s revelation of Frosty
by the City Government of Bagnet by virtue of Tax Ordinance No. 24. Corporation’s trade secrets.
Despite her objections thereto, Doña Evelina paid the taxes.
Nevertheless, unsatisfied with said Tax Ordinance, Doña Evelina, through
her counsel Atty. ELP, filed a written claim for recovery of said local
business taxes and contested the assessment. Her claim was denied, and so
Atty. ELP elevated her case to the Regional Trial Court (RTC). The RTC
declared Tax Ordinance No. 24 null and void and without legal effect