taxation law bar questions

8/11/2019 Taxation Law Bar Questions

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State the rule on the construct ion or interpretat ion of laws grant ing tax

exempt ion s or al lowin g tax deduct ion s. What is the rat ionale behind it? (1979)

Tax exemption should be construed in strictissimi juris against the taxpayer.

One who claims to be exempted from payment of a particular tax must showexemption under clear and unmistakable terms found in the exempting statute.(Philippine Acetylene Co., v. CIR, 20 SCRA 1056)

The power of taxation is a high prerogative of sovereignty. The relinquishmentis never presumed. Any reduction or diminution thereof must be strictly construed,and the same must be couched in clear and unmistakable terms. Exemption cannotbe allowed to exist upon a mere vague implication or inference. (Floro CementCorporation v. Judge Gorospe and the Municipality of Lugait, 200 SCRA 480)

The reasons for strictissimi juris interpretation of tax exemptions are (1) Underthe lifeblood theory, that is, taxes are what we pay for civilized society (Mactan CebuInternational Airport V. Marcos, et. al., 261 SCRA 667; (2) To minimize differentialtreatment and foster impartiality, fairness and equality of treatment among taxpayers,(Maceda v. Macaraig, Jr., 197 SCRA 771) and (3) Taxation is a high prerogative ofthe state whose relinquishment is never presumed. (Luzon Stevedoring Corporationv. CA, 163 SCRA 647)

The rule that tax exempt ions are to be str ic t ly construed has certain

excep tion s. What are they? (1966)

The exceptions to strictissimi juris interpretation of tax exemptions are:a. When the statute granting exemption provides for liberal construction thereof.

b. In case of special taxes relating to special cases and affecting only specialclasses of persons.c. If exemptions refer to public property.d. In case of exemptions granted to charitable and educational institutions or

their property. (Cooley)e. In cases of exemptions in favor of a government, political subdivision or

instrumentality. (Maceda v. Macaraig, Jr., 197 SCRA 771)

What is th e ef fect of the repeal of a revenue law o n a tax previou sly assessed

and demand able? (1979)

None. The previously assessed taxes may still be collected unless therepealing law is expressly made to be retroactive. (Intestate Estate of Jovito Co v.Collector, 100 Phil 464)

National Internal Revenue Taxes

Name f ive (5) kind s of taxes, fees and ch arges wh ich are con sidered to b e

natio nal intern al revenue taxes. (1964)

What are co nsid ered nat ional internal revenue taxes? (1966)

Taxes, fees and charges deemed to be national internal revenue taxes are:


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a. Income taxb. Estate and donors taxc. Value added taxd. Other percentage tax

e. Excise taxf. Documentary stamp taxg. Such other taxes as are or hereafter may be imposed and collected by the

BIR (Sec. 21, NIRC of 1997)

Authority of the CIR

Can the CIR inqu ire into the bank d eposits of a taxpayer? I f so, does this

power con f l ic t with R.A. 1405 (Secrecy of Bank Depo sit Law)?

The power of the CIR does not conflict with R.A. 1405 because the same isan exception to the said law.

Notwithstanding any contrary provision of R.A. 1405 and other general orspecial laws, the CIR is authorized to inquire into bank deposits of:

a. A decedent to determine his gross estate; andb. Any taxpayer who has filed an application for compromise of his tax

liability by reason of his financial incapacity to pay his tax liability. (1st par.,Sec 6 (F) (1), NIRC of 1997)

A Co., a Phi l ipp ine corpo rat ion, is a big manufacturer of con sumer good s. Ithas several raw mater ials. The BIR suspects that some of th e supp l iers are not

pro perly report ing their incom e on their sales to A Co. The CIR therefore:

1. Issu ed an access let ter to A Co. to furnish the BIR inform at ion on

sales and p ayments to its sup pl iers.

2. Issued an access let ter to bank (CX Bank ) to furn ish the B IR on

depos i ts of some sup pl iers of A Co. on the alleged grou nd th at the

supp l iers are commit t ing tax evas ion.

A Co ., X Bank and the sup pl iers have not been issued b y the BIR let ters of

author i ty to examine. A Co. and X Bank believe that the BIR is on a fishingexpedition and come to you for counsel. What is your advice? (1999)

I would advise A Co. to supply the BIR with the information desired. The BIRis authorized under the NIRC of 1997 to secure information even from persons whoare not under tax investigation.

I would advise CX Bank to invoke the Bank Deposit Secrecy Law becausethere is no showing that there was an offer by the taxpayer to compromise his taxliability premised upon financial capacity to pay.

A taxpayer is suspected not to have dec lared h is correct gross income in his

return for 1999. The examin er requ ested the Commiss ion er to authorize him to

inqui re into the bank depos i ts of the taxpayer so that he could p roceed w i th

the net worth m ethod o f invest igat ion to establ ish fraud. May the examiner beallowed to look into the taxpayers bank deposits? In what cases may the


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Yes, the Commissioner may place the luxury items under preventive

embargo.Preventive embargo refers to the power of Commissioner to place under

constructive distraint the property of a delinquent taxpayer, or of any taxpayer who,in his opinion, performs any act tending to obstruct the proceeding for collecting thetax due or which may be due him. (1stpar. Sec. 206, NIRC of 1997)

B. CONCEPTS OF INCOME AND INCOME TAXATION

Nature, Scope, Classification and Essential Characteristics of Income

Def ine income for tax purp oses. (1969)

Income means all wealth which flows into the taxpayer other than as a merereturn of capital. It includes the forms of income specifically described as gains andprofits, including gains derived from the sale or other disposition of capital assets.(Sec. 36 Rev. Reg. No. 2)

It is an amount of money coming to a person or corporation, whether aspayment for services, interest or profit from investment. (Conwi et al v. CTA 213SCRA 83)

Income is aflow of service rendered by capital by the payment of money from

it or any other benefit rendered by a fund of capital in relation to such fund through aperiod of time. (Madrigal v. Rafferty 38 Phil 414)Income is the gain derived from capital, from labor, or from both combined,

provided it be understood to include profit gained through a sale or conversion ofcapital assets. (Fisher v. Trinidad 43 Phil 981).Thus, to tax a stock dividend would beto tax a capital increase rather than the income. (Commissioner v. CA, January 20,1999)

Income means earnings lawfully or unlawfully acquired, without consensualrecognition, express or implied, of an obligation to repay and without restriction as totheir disposition. (James v. US, 366 US 213)

Dist ingu ish income from capital (1965)

How does income differ from capital? (1995)

Capital is wealth or fund while income is profit or gain from the flow of wealth.(Commissioner v. CTA et at January 20, 1999)

Capital is a fund of property existing at an instant of time while income is thatflow of services rendered by that capital by the payment of money from it or anyother benefit rendered by a fund of capital in relation to such fund through a period oftime.

Capital is wealth while income is the service of wealth.

Capital is a tree, while income is the fruit. (Madrigal v. Rafferty, 38 Phil 414)


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Def ine or explain the meaning of net taxable income of an ind iv idual o r a

co rpo rat ion . (1971)

In brief , wh at do yo u mean by net income for pu rpos es of incom e tax? (1977)

What is m eant b y taxable incom e? (2000)

Taxable income means the pertinent items of gross income specified in the NIRCless the deductions and /or personal exemption and additional exemptions, if any,authorized for such types of income by the NIRC and other special laws. (Sec 31,NIRC)

Mr. Cruz bou gh t a resident ial hou se and lo t in 1989 for P120,000. In 2002,

cur ious as to how much his p roper ty then co st , he asked a real estate broker

to reappraise the same. The real estate broker reported that the value of h is

pro perty h as inc reased to P1,800,000. Should Mr Cruz repo rt the P1,680,000

increase in h is income tax return fo r the year 2002? Reason s (1982)

No. The P1,680,000 increase in the value of the residential house and lot isnot considered as income reportable as income of Mr. Cruz because such increasehas not yet been received by Mr. Cruz, either physically or constructively.

Besides, capital gains of individuals on dispositions of real property aresubject to a final tax, the presumed capital gain tax. Consequently, increases invaluation are not reported in the income tax return. Increases in valuation of realproperty are not subject to income tax, hence not reportable in the income tax return.

Romulu s, 48 years of age and a reti red emplo yee had the fol lowing pro pert ies

and trans act ions at the end of the 2002 taxable year:

a) Shares of stock in Sabin ian Corpo ration wh ich he bou ght in 1998 for

P50,000.00 and whic h w ere wo rth P70,000.00 as of th e end o f 2002.

b) Shares of Vis igo th Corpo rat ion wh ich h e boug ht for P40,000.00 in

1990 and wh ich he so ld fo r P100,000.00 in 2002.

Are the above items sub ject to the regular tax rates found in the schedu le

un der Sect ion 24 (A) of th e NIRC wh ich states the tax rates on c it izen and

residents? Explain yo ur an swer. (1986)

a. The shares of stock in Sabinian Corporation are not subject to the regulartax rates found in the schedule under Sec.24 (A) of the NIRC of 1997 because theshares have not been disposed of. Thus, there is no gain to be taxed.

b. Assuming that the shares of Visigoth Corporation are capital assets ofRomulus, not listed and traded through a local stock exchange, then the sale is notsubject to the regular tax rates found in the schedule under Sec. 24(A) of the NIRCof 1997, because the actual gains derived from the sale are subject to the final taxprovided under Sec. 21 (B) (C) of the NIRC of 1997.

Manananggo l, a lawy er, has among his cl ients a recrui tm ent agency which

pays h im a mo nth ly retainer of P10,000. In o rder to redu ce his income taxl iabi l i ty , Manananggo l arranged for the retainer to b e paid direct ly to his


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daughter, Christina. This year, Manananggols gross income from his lawprac tice, exclu sive o f the P10,000 mon thly r etainer fee is P2,000,000. How

mus h g ross incom e mus t Manananggol repor t th is year? Explain you r answer.

(1986)

The total amount of P2,120,000 which consists of the amount of P2,000,000gross income from his law practice plus the total amount of P120,000 paid as aretainer fee to his daughter.

This should be so because there was no visible service rendered by Christinato the recruitment agency. Hence, it is clear that said payment is a mere subterfugeon the part of Manananggol to avoid the taxes.

In 1996, Corporation X had a capital stock of 1,000 shares without par value.At th e t ime of i ts inco rpo rat ion , the value of each n o -par vvalue share was P10.

In 2002, du e to its prof i table operat ions , the corp orat ion earned a s urp lus of

P200,000. The corporations board of directors increased the stated value ofeach sh are by P190 making each sh are wo rth P200. The BIR, for in com e tax

pu rpos es, assessed each stockh older fo r the P190 increase. Is th e BIR correct .

Exp lain . (1989)

No. The stockholders have not physically or constructively received anyincome subject to tax. There was no change in the proportion of their ownership inthe corporation considering that the shares of stock are without par value.Furthermore, there was no realization of the income through the change in the statedvalue. When the stockholders disposes of the shares, then the same would be

subject to capital gains tax.

A was engaged by Premiere Movies to perform A PANTOMIME ACT IN AMOVIE IT WAS MAKING. A was to be paid P20,000 for his performance andthe parties signed the necessary contract. A then gratuitously assigned hisrights under the contract to his son, B. B later on collected the P20,000f rom th e Premiere Mov ies. Is th e P20,000 taxable to A? Reasons. (1989)

Yes. The P20,000 A received for the performance is income from the practiceof his profession as an artist. (Sec. 32 (A), NIRC of 1997).The fact that hegratuitously gave the same to his son does not detract from his (As) having received

the income in exchange for his professional services.Since, there is no showing of other donations made by A, then the P20,000 is

not subject to the donors tax because the first P100,000 net donation is exempt fromdonors taxes. (Sec. 99(A), NIRC of 1997)

The emplo yees of Travel lers, Inc. satged a str ike. X, a non -union memb er

jo ined the s trike an d vo lun tee red to p icket the compan y prem ises from 8am to

5pm, Monday thro ugh Frid ay. Six mon ths into the str ike, X ran ou t of mon ey

and asked f inanc ia l aid f rom the union s ince he has no other source of incom e

and n eeded f inanc ial assistance in o rder to l ive. The union gave him P3,000 a

mo nth to take care of his food requirements p lus P1,000 to take care of his

mo nth ly rent . When X f i led his return , he exclud ed these benef i ts from h isgro ss in com e. The exclusion was d enied by th e BIR. Decide. (1993)


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The denial of the inclusion is not valid. I would consider the amount given as a

gift, which should be excluded from his gross income because there is no legallydemandable obligation on the part of the union to give X money. The money was in

the nature of a donated financial assistance and not compensation for having joinedthe picket.

In 1999, X started con struct ing a comm ercial bui lding w ith spaces for l ease to

the pu bl ic. X required Y, a pros pect ive lessee, to sign a pre- lease agreement,

wh ich p rincipal ly pro vided; (a) that the lessee shal l extend to the lessor a no n -

interest bearing lo an of P100,000 payable with in 12 mo nths; and (b) that in

con siderat ion of the loan, the rentals shal l not be increased wh i le the loan

remains u npaid. Upo n comp let ion o f the bui lding in 2002, Y extended th e loan

of P100,000 to X and he (X) was given a sp ace in i ts g roun d f loor. May the BIR

co ns ider the P100,000 as taxable in come of X? Reasons . (1993)

No. There was no gain realized by X whether as payment for services,interest or profit from investment because he is required to repay the P100,000 loan.

A, an archi tect , owes Z, a bu sinessman, the sum of P10,000. Z engaged th e

services o f A to remodel h is residenc e at Magal lanes Vi l lage, Makat i . The value

of the services rend ered by A is P100,000. Acc ord ingly Z canc el led the d ebt of

A .

a. Is the P100,000 value of the services consid ered income subject to tax?

Explain brief ly .b. Under the same facts, supp ose Z p aid A P100,000 for the services

rendered and at the same time condoned As indebtedness. Is theamoun t cond oned con s idered income sub ject to tax? Expla in br ief ly .

(1978)

a. Yes. Whether A uses the accrual method or cash method of accounting. IfA uses the accrual method of accounting, then he has recognized income up to thetotal extent of P100,000 as there is now constructive receipt of income. On theotherhand, if he uses the cash method, he should be subject to tax only up to theextent of P10,000 the amount condoned. This is so because the condonation was in

exchange of the services rendered. The P90,000 value of the services is not yetdeemed collected.

b. Yes. When Z pays A P100,000, then, the same is considered income fromthe exercise of As profession because of the physical receipt of the money. Theamount of P10,000 condoned is considered as a gift because the cancellation waswithout consideration.

Onesiph orou s, a junior execut ive, owed his employ er P4,000. The mon ey was

advanced to h im to pay for his p ersonal bi l ls . Just recent ly, he submit ted an

excel lent repo rt to his emp loyer who became very pleased because it att racted

a big c l ient to their com pany. The employer, therefore, decided to cancel the

debt of Onesiphorous and, in addit ion, gave him a round tr ip t icket toHongko ng plus p ocket mo ney of P5,000.


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How are the above items to b e t reated on the income return of Onesiphorous?

The P4,000 is considered as part of the compensation income of

Onesiphorous to be reported in his income tax return because the condonation wasin exchange of services performed by him for his employer as a result of employer-employee relationship.

The value of the round trip ticket to Hongkong including the pocket moneymay be treated as income to be reported in the income tax return if Onesiphorous isa rank and file employee, because income includes everything of value notnecessarily in money.

If Onesiphorous is not a rank and file employee, then the value of the roundtrip ticket to Hongkong including the P5,000 pocket money are fringe benefits taxableto the employer and not reportable by the employee in his income tax return. (Sec.33, NIRC OF 1997)

Mr. X asked you to prepare his income tax return. Is he requ ired to includ e as

par t of the gross incom e his prom issory note amount ing to P10,000 which

was con doned by his credi tor? Give your reason.

No. there is no showing in the facts that the condonation was in exchange ofservices rendered by Mr. X. the condonation amounts to a gift.

Mr. Francisco borro wed P10,000 from his fr iend Mr. Gut ierrez payable in o ne

year withou t interest . When the loan b ecame due, Mr. Francisco to ld Mr.

Gut ierrez that he (Mr. Francisco) was unable to pay because of bus inessreverses. Mr. Gut ierrez took pity on Mr. Francisco and co ndo ned the lo an. Mr.

Francisco was so lvent at the t ime he bo rrowed the P10,000 aand at the t ime

the loan was cond oned.

Did Mr. Franc isco der ive any income f rom the cancel la tion o r con donat ion of

his indebtedn ess? Explain.

No. Mr. Francisco did not derive income. It is clear that the creditor, Mr.Gutierrez, merely desired to benefit the creditor, Mr. Francisco, and without anyconsideration thereof cancelled the debt. The amount of the debt cancelled is a gift

and not income.

An insolvent com pany h ad an ou ts tanding obl igat ion of P100,000 f rom a

creditor. Since it cou ld no t pay the debt, the creditor agreed to accept payment

thro ugh dacion en pago a pro perty wh ich had a market value of P30,000. In the

dac ion en p ago document , the balance of the debt was cond oned.

a. What is the ef fect of the discharge of the unpaid balance of the

obl igat ion o n the debtor corporat ion?

b. Inso far as the creditor is co ncern ed, how is he af fected taxwise as aa

con sequenc e of the transact ion? (1997)

a. The creditor corporation is deemed to have received a gift from its creditorto the extent of the difference, between the debt P100,000) and the value of the


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property paid (P10,000), which is P70,000. It is clear that the creditor merely desiresto benefit the debtor corporation and without any consideration thereof cancels thedebt. (Sec. 50, Rev. Reg. 50). Thus, the amount foregone which is P70,000 isconsidered a gift and not to be reported as income in the corporations return.

b. Since the P70,000 is considered a gift, the creditor shall be subject toappropriate rate for donors tax.

Gross Income

What is gross income for purposes of the income tax?

Except when otherwise excluded, gross income means all income derivedfrom whatever source, including (but not limited to) the following items:

(1) Compensation for services in whatever form paid, including, but not limitedto fees, salaries, wages, commissions and other similar items;

(2) Gross income derived from the conduct of trade or business of theexercise of a profession;

(3) Gains derived from dealings in property;(4) Interests;(5) Royalties;(6) Dividends;(7) Annuities;(8) Prizes and winnings;(9) Pensions; and

(10) Partners distributive share from the net income of the general professionalpartnership. [Sec. 32 (A) of NIRC of 1997]

W was n ot i f ied by her depo sitory b ank on Jun e 3, 2000 that P50 mil l ion h ad

been credited to her saving s accou nt because of the remit tance of US$1

mil l ion throu gh a US bank by her sister in the U.S. W lost no t im e in spending

mos t of the mon ey for various pu rposes, such as the purchase of luxur ious

cond omin ium u ni t and a luxu ry car , money market placement gi f ts to relat ive,

etc.

Soon thereafter, the US bank discovered that Ws sister remitted onlyUS$1,000 and no t US$1 mil l ion . On or abou t June 29, 2000, the US ban k fi led a

com plaint for the recovery of the excess amou nt with the approp riate Mani la

cou rt against W, as the remit tance of so hu ge an amou nt arose from a cler ical

error. W was also ch arged with estafa on accoun t of the same mo ney.

On Marc h 15, 2001, W fi led her in come tax retu rn fo r the calend ar year 2000,

wi thout a d ec larat ion of the P50 mi l l ion b ut w i th a footnote to the return which

reads: Taxpayer was the recipient of some money from abroad which shepresumed to b e a gi f t but turned o ut to be an erroneous remi t tance and is now

subject of litigation.


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In March 7, 2003, the Commissioner of Internal Revenue assessed W a

def ic iency inco me tax on the P40 mil l ion, impos ed a 50% surcharge for f i l ing a

false and fraudulent return , and ch arged interest covering three years for late

payment.

W contented that the erroneous remittance is not gross income within themeaning of the Tax Code. She also disputed the imposit ion of the 50%

surcharge.

If you were the Judge, how wo uld you rule on the legal points ra ised by W?

(1984)

Ws contention that the erroneous remittance is not gross income is devoidof merit. It is considered under the NIRC of 1997 as falling within the ambit ofincome from whatever source derived because it is income tax not expresslyexcluded or exempted from the class of taxable income. This is irrespective of thevoluntary or involuntary action of W in producing the income. (Gutierrez v. Collectorof Internal Revenue, CTA Case No. 65, August 31, 1965) As a matter of fact thesource of the income may be legal or illegal.

W was correct in her intention that she should not be subjected to the 50%surcharge. There was no actual and intentional fraud through willful and deliberatemisleading of the Bureau of Internal Revenue. The government was not induced togive up some legal right and place itself at a disadvantage so as to prevent its lawfulagents from proper assessment of tax liabilities because W did not conceal anything.Ws notation on her income tax returnwas an error or mistake of fact or law notconstituting fraud. So also such notation was practically on invitation for investigation

and that W literally laid cards on the table. (Commissioner of Internal Revenue v.Javier, Jr., 199 SCRA 824)

X issued a check d rawn on a bank in which he has no fun ds. He negot iatedthe check and received P10,000. He tr ied his luck in a casino but lost .

Thereafter, he was ch arged and co nvicted for pass ing a wo rthless ch eck. The

BIR wants to tax h im fo r the P10,000 he g ot from nego t iat ing th e check.

Decid e. (1989)

X should be taxed. The P10,000 is considered as his income from whatever

source derived, [Sec. 32 (A), NIRC of 1997]. The phrase is so broad that it includesall income not expressly excluded or exempted from the class of taxable income,irrespective of the voluntary or involuntary action of the taxpayer in producing theincome. (Gutierrez v. Collector of Internal Revenue, CTA Case No. 65, August 31,1965)

Mr. Lajojo is a big -t ime swind ler. In o ne year he was able to earn P1 mil l ion

from h is swin dl ing act iv i t ies. When the Comm issio ner of Internal Revenue

discovered his incom e tax f rom swindl ing, the Commiss ioner assessed him a

def ic iency income tax for such income.

The lawyer of Mr. Lajo jo protested the assessment o n the fo l lowing groun ds:


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a) The income tax app l ies only to legal income, not to i l legal income;

b ) Mr. Lajojos receipts from his swindling, hence, his receipt fromswind l ing was s imi lar to a loan, which is not income, because for

every peso b orrowed he has a corresponding l iabi l i t y to p ay one

peso; and ,c) If he has to pay the def ic iency income tax assessm ent, there wi l l be

hardly anyth ing lef t to return to the v ic t ims o f swind l ing.

How w il l you ru le on each of the three grou nd s for the protest? Exp lain. (1995)

a. The first ground should be denied for the reason that all incomes notexpressly excluded or exempted from the class of taxable income, irrespective ofthe voluntary or involuntary action of the taxpayer in producing the income aresubject to tax (Gutierrez v. Collector of Internal Revenue, CTA Case No. 65, August31, 1965). There is no distinction whether the income may be legal or illegal.

b. and c. The second and third grounds should be sustained. There is noincome subject to tax for the reason that to collect a tax would give the governmentan unjustified preference as to the part of the money which rightfully and completelybelongs to the victim. Furthermore, there is no income yet because under the claimof right doctrine in the determination of income, there is an obligation to return,hence Mr. Lajojo does not have a claim of right over the amounts swindled.

NOTE NOT PART OF THE ANSWER: A contrary answer may be justified onthe basis of the Gutierrez case and under the doctrine of control of income. Since,Mr. Lajojo has the unfettered ability to dispose of the amounts swindled, then it isincome to him subject to tax.

In o rder to faci l i tate the proc essing o f i ts appl icat ion fo r a l icense from a

governm ent of f ice, Corporat ion A fou nd i t necessary to p ay the amou nt of

Php100,000 as a b ribe to the appro ving of f ic ial . Is the Php 100,000 deduct ible

from the gross in com e of Corporat ion A? On the other hand, is the Php100,000

taxable income of the appro ving o f f ic ial? (2001)

The Php100,000 bribe is not allowed to be deductible from gross incomebecause it is an illegal expenditure. [Sec. 34 (A) (1) (c), NIRC of 1997] The bribe isconsidered as income of the recipient subject to tax. All incomes not expresslyexcluded or exempted from the class of taxable income, irrespective of the voluntary

or involuntary action of the taxpayer in producing the income are subject to tax(Gutierrez v. Collector of Internal Revenue, CTA Case. No. 65, August 31, 1965).There is no distinction whether the income may be legal or illegal.

Mr. Dom ingo own s a vacant parcel of land. He leases the land to Mr. Enriqu ez

for t en years at a rental of P12,000.00 per year. The co nd it ion is that MR.

Enr iquez wi l l erect a bui ld ing o n the land wh ich w i l l become the proper ty o f Mr.

Doming o at the end of the lease wi thout compensat ion or re imbu rsement

wh atsoever for the value of the bui ldin g.


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Mr. Enriqu ez erects the bui lding . Upon c omplet ion, the bu i lding h ad a fair

value of P1 mil l ion. At the end of the lease, the bui lding is worth only

P900,000.00 due to dep reciat ion .

Wil l Mr. Dom ing o have income when the lease expires and becom es the owner

of the bu i lding w ith a fair market value of P900,000.00? How much incomemu st he report on th e bui lding ? Explain. (1995)

Whether MR. Domingo, the lessor, will have income when the lease expiresand he becomes the owner of the building depends upon the method of recognitionhe shall use. Mr. Domingo, the lessor may report as income the fair market value ofthe improvements at the time of completion of construction. In such a case, he neednot report any income at the expiration of the lease.

If Mr. Domingo, the lessor spreads over the life of the lease the estimateddepreciated value of the improvement at the termination of the lease and report asincome for each year of the lease an aliquot part thereof (Sec. 49, Rev. Regs. Nc. 2),he also need not report any income at the expiration of the lease.

On the other hand, Mr. Domingo, may recognize as income the P900,000.00fair market value of the building at the expiration of the lease, if he did not recognizeincome in the above described manner.

Concepts of Income Taxation

Discus s the meaning o f the Global and Schedu lar systems o f taxat ion. (1997)

Global system of income taxat ion A system employed where the taxsystem views indifferently the tax base and generally treats in common all categoriesof taxable income of the individual. (Tan v. Del Rosario Jr. 237 SCRA, 324, 331)

A system which taxes all categories if income except certain passive incomesand capital gains. It prescribes a unitary but progressive rate for the taxableaggregate incomes and flat rates for certain passive incomes derived by individuals.

The apparent intent of current amendatory laws to the income tax law is tomaintain, by and large, the global treatment on taxable corporations. (Tan, supra)

NOTE: The global system of income taxation for all corporations is evident inthe provisions of Chapter IV Tax on Corporations, , Title II Tax on Income, theNIRC of 1997 which imposes a tax of whichever is higher of a reduced rate of 32%

on taxable income or a 2% minimum corporate income tax. This is irrespective of thetax base. Thus, whether the taxable income is P1,000.00, P10 million, or evenhigher, the tax rate is the same. In short, the tax on corporate income is notprogressive in character.

Schedular system of income taxat ion. A system employed where theincome tax treatment varies and is made to depend on the kind or category oftaxable income of the taxpayer. (Tan v. Del Rosario, Jr., 237 SCRA 324, 331)

A system which itemizes the different incomes and provides for variedpercentages of taxes, to be applied thereto.

It is apparent intention of current amendatory laws to the income tax to

increasingly shift the income tax system toward the schedular approach in theincome taxation of individual taxpayers. (Tan, supra)


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15/54


16/54

who is a citizen of the Philippines and who receives compensation forservices rendered abroad as a member of the complement of a vesselengaged exclusively in international trade shall be treated as an overseascontract worker;

d) An alien individual, whether a resident or not of the Philippines, istaxable only on incomederived from the sources within the Philippines;

e) A domestic corporation is taxable on all income derived from sourceswithin and without the Philippines; and

f) A foreign corporation, whether engaged or not in trade or business in thePhilippines, is taxable only on income derived from sources within thePhilippines. (Sec. 23, NIRC of 1997, emphasis supplied)

Juan d e la Cruz, a resident o f the Phi l ippines, lef t for Au stral ia on Aug ust 24,

2002 to reside permanent ly thereat . During h is stay in the Phi l ippin es, he

received an in come of P15,000.00 from January 1, 2002 up to the d ate of his

departure. In A ustral ia, he received du ring the remainder o f the year 2002 an

addit ion al income of $10,000.00 from so urces w ithin th at country . Are these

two (2) incom es, P15,000.00 and $10,000.00 taxable in f ull and is Ju an de la

Cruz ent i t led to fu l l personal exempt ions and deduct ions allowed by ou r law?

If Juan d e la Cruz was no t a cit izen but a resident , on wh at amo unt is h e

taxable in ful l , and what deduct io n can h e claim w hi le in the Phi l ippines?

Explain ful ly your answ er. (1979)

Yes. The two incomes, P15,000.00 and $10,000.00 are taxable in full. Juan is

considered as a resident citizen. The reason being that he stayed only in Australiafor about four (4) months, from August to December, during the taxable year. To beconsidered as a non-resident citizen, Juan must have stayed in Australia most of thetime during the taxable year. Since he is a resident citizen, his taxable incomeincludes all income derived from sources within or without the Philippines.

Juan is likewise entitled to full personal exemptions and deductions becausehe is considered as a resident citizen.

If Juan is a resident alien, he shall be taxed only on all his income derivedfrom sources within the Philippines. He shall also be entitled to the same deductionsas a resident citizen.

Mr. AD, a US cit izen h ired for f ive(5) years as p lant manag er of a local m iningcompany, derives income f rom investments and real proper ty he ow es in the

United States. Besides his salary and bo nus es from the local mining comp any,

he is provid ed with a house and al lowances for the salar ies of his driver and

three maids. The mining company reimburses al l his gasol ine and oi l

expenses for the use of the company c ar , plus expenses for his g rocery .

a. What incom e items, if any, should h e declare in the Phi l ipp ine income

tax return? Exp lain.

b. Under the same facts, except that Mr. AD is a Fi l ipino ci t izen wo rking

in Saudi A rabia and h is investments and real property are located in

the Phi l ippines. What income items , i f any, sho uld h e declare in hisPhi l ipp ine income tax return and at what rates is he taxed?


17/54

a. Only his income derived from sources within the Philippines such as hissalary and bonuses from the local mining company and the expenses for his grocery.This is so because being a resident alien he shall be subject to tax only on theincome derived from sources within the Philippines.

The value of the use of the house, allowances for the salaries of his driver andthe three maids, the value of the use of the company car, as well as the gasoline andoil, are considered as fringe benefits which are taxable to his employer.

b. Since Mr. AD is an overseas contract worker taxable only on his incomederived from sources within the Philippines. He is to be taxed only on his incomederived from his investments and properties located in the Philippines. If the passiveincome, then he shall be subject to final taxes. If not, then to the schedular tax.

Great Wall machineries Corpo rat ion (GWMC) is a corpo rat ion inco rporated and

operating under the laws of the Peoples Republic of China. AGWMC and theDavao Ceramic s Corp orat io n (DCC) plan to en ter into a US $1000,000 con tract

on C&F basis, whereby GWMC shal l sel l to DCC a GWMC-manufactured b al l

mi l l . Under the proposed co nt ract which wi l l be s igned in Hongkon g, GWMC

wil l sh ip the bal l mil l f rom Shangh ai to Davao City. GWMC wil l also send its

Chinese technic ians to Davao City to instal l the bal l mil l and to train DCC

perso nnel on h ow to run th e bal l mil l . The instal lat ion and the trainingw i l l take

30 days to comp lete. The air fare, hotel accommo dat ion and salar ies of GWMC

who wil l be sent Davao City wi l l be paid for by GWMC. The contract wi l l be

ful ly performed by GWMC within 65 days from the signing . Under the contract ,

DCC will remit payment in US dollars to GWMCs bank account in Hongkong.This is the f i rs t cont ract that GWMC wi l l s ign wi th a customer in the

Phil ippines. GMWC HAS NO OFFICE OR AGENT IN THE Phil ippines. /andGMWC has no intent ion o f secur ing a l icense to do bus iness in the Phi l ipp ines.

Wil l said GWMC person nel sent to Davao City be subject to Phi l ippin e income

tax on their salar ies whi le they wo rk in Davao City? Explain. (1990)

Yes, the foreign personnel are subject to Philippine income taxation. This isso because the personnel are considered as non-resident aliens not engaged intrade or business within the Philippines. They are not citizens of the Philippines aandthey are not also residents of the Philippiens not having stayed therein for anaggregate period of more than 180 days during the calendar year. ( Sec. 22 (G) and

25(A) (1), both of the NIRC of 1997). Consequently, they should be subject toincome taxes on all income received within the Philippines which includescompensation. The tax imposed is 25% OF THE GROSS COMPENSATIONINCOME RECEIVED. (Sec 25 (B), NIRC OF 1997)

Newtex Internat ional (Phi ls. ) Inc. is an American f irm du ly authorized to

engage in bu siness in th e Phi l ippines as a branch of f ice. In i ts act iv i ty of

act ing as a buy ing agent for fore ign buyers of sh i r ts and dresses abroad and

per forming l iaison w ork b etween i ts home of f ice and the Fi l ip ino garment

manufacturers and exporters, Newtex does not generate any income.

Tof inance its o f f ice expens es here, i ts head off ice abroad regu lar ly remits to i t

the needed amou nt. To o versee its operat ion s for tw o (2) years, the head o ff iceassign ed three (3) foreign person nel.


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Are the three foreign person nel subject to Phi l ipp ine incom e tax? (1991)

Yes, they are considered as resident aliens having stayed in the Philippinesfor more than two years. They shall be taxed on the incomes derived from sources

within the Philippines. They Performed the service within the Philippines, hencetaxable.

Juan , a Fi l ipino ci t izen, has emig rated to the United States where he is no w a

permanent resident . He owns certain income-earning property in the

Phi l ipp ines from wh ich he cont in ues to derive sub stant ial income. He also

receives income f rom his emplo yment in the Uni ted States on which the US

income tax is paid.

On w hich of the abo ve incomes is he taxable, i f at al l , in the Phi l ipp ines, and

how , in general terms, would such income o r incomes be taxed? (1997)

Juan is taxable only on his income derived from sources within the Philippinesbecause he is a nonresident citizen. If the income is passive income, then he shallbe subject to final taxes, if not, then to the schedular tax.

HK Co. is a Hong Kong corpo rat ion not d oing bu s iness in the Phi l ipp ines. It

ho lds 40% of the shares of A c o. , a Phi l ippine com pany whi le the 60% is owned

by P Co., a Fi l ipino -owned Phi l ipp ine corpo rat ion . HK also owns 100% of the

shares of B Co., an Ind onesian com pany which is a duly l icensed Phi l ipp ine

branc h. Due to the wo rldwid e restructu r ing of th e HK Co. group , HK Co.

dec ided to sel l al l i ts sh ares in A and B Cos. The negot iat ions for the buy -outand the sign ing o f the Ag reement of Sale were al l don e in the Phi l ippin es. The

agreement provides that the purchase price will be paid to HK Co.s bankaccount in the US and the t i t le to A and B Cos. Shares w i l l pass f rom HK Co. to

P Co. in HK w here the stock cert i f icates wi l l b e del ivered. P Co. seeks you r

adv ice as to w hether or not i t wi l l su bject the payments of the pu rchase pr ice

to WT. Explain you r advic e. (1999)

The payments for the purchase price are subject to WT because they areconsidered as income derived from sources within the Philippines.

Since the shares of stock were sold in the Philippines, the income shall betreated as derived entirely from sources within the Philippines and correspondinglytaxed therein. {2ndpar., Sec 42 (E), NIRC OF 1997]

A Co ., a Phi l ipp ine corpo rat ion, has an execut ive (P) wh o is a Fi l ipino ci t izen. A

Co. has a sub sidiary in Hong Ko ng (HK Co.) and wil l assign P for an ind ef ini te

per iod to w ork fu l l t ime for HK Co. P wi l l br ing his fami ly to res ide in HK and

wil l lease out his residence in the Phi l ippines. The salary of p wil l be

shou ldered 50% by A Co. whi le the other 50% plus h ous ing, cost o f leav ing

and educational allowance of Ps dependents will be shouldered by the HK

company. A Co. will credit the 50% of Ps salary to Ps Philippine bank


19/54

accou nt . P wil l sign the con tract of employm ent in the Phi l ippin es. P wil l also

be receiv ing rental incom e for the lease of his Ph i l ippine residence.

Are these salar ies, al lowanc es and rentals su bject to Phi l ippin e incom e tax?

(1999)

The salaries and allowance of P are not subject to Philippine income taxbecause these are incomes from without the Philippines earned by P, who is anoverseas contract worker.

The rental income derived from his Philippine residence is considered asincome derived from sources within the Philippines, hence subject to Philippine tax.

Mr. Cortex is a non -resident al ien b ased in Hon g Ko ng. During th e calendar

year 2000, he came to th e Phi l ippines several t imes and stayed in the cou ntry

for an agg regate period of more th an 180 days. How w il l Mr, Cortez be taxed on

his income der ived f rom sources wi th in the Phi l ipp ines and f rom abroad?

(2000)

Mr. Cortez being a non-resident alien engaged in trade in business in thePhilippines is going to be taxes only on his income derived from sources within thePhilippines [Sec. 25 (A) (1) in relation to Sec. 24, both of the NIRC of 1997] in thesame manner as individual citizen and resident alien individuals and shall be subjectto same exclusions, deductions and tax rates, except that taxes are allowed as a

deduction only if and to the extent that they are connected from the sources withinthe Philippines. [Sec, 34 (C) (2), Ibid]. Furthermore, he is allowed to use only theitemized deductions but not the standard optional deduction. [Sec 34 (L), Ibid].Finally Mr. Cortez is allowed to deduct personal exemptions only subject toreciprocity [ Sec 35 (D), Ibid]

Mr. Sebast ian is a Fi l ipino seaman emplo yed by a Norwegian com pany which

is engaged exclusively in internat ional shipping. He and his wife, who

manages their bus iness, f i led a join t incom e tax return for 1998 on March 15,

1999. After an aud it of the return , the BIR issu ed on Ap ri l 20, 2002 a deficienc y

income tax assessment for the sum o f p250,000, inclus ive of interest and

penalty. For fai lure of Mr. And Mrs . Sebast ian to pay the tax within the periodstated in the no t ice of assessm ent, the BIR issued on augus t 19, 20002

warrants of d ist raint and levy to enforce col lect ion of taxes.

What is the rule of incom e taxat ion wi th respect to Mr. Sebastians income in1998 as a seaman on board th e Norwegian vessel engaged in in ternat ional

ship ping . Explain yo ur answer. (2002)

Mr. Sebastian is a seaman who is employed by a vessel exclusively engagedin international trade. Thus, his income as a seaman is considered as incomederived from sources without the Philippines not subject to Philippine income

taxation.


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C. CLASSIFICATION OF TAXPAYERS AND TAXATION OF THEIR INCOME

Trusts

Mr. David created an irrevocable trust in favor of his two m in or grand chi ldren.

The trust st ipu lates that 50% of the net income shou ld be distr ibu ted yearly to

the grandchi ldren, share and share al ike, the balance to accumulate for

eventual dist r ibu t ion to the grandc hi ldren at the age 25. The incom e for 2002

was P1 mil l io n.

a) How w il l the income of the trust be taxable?

b) Wil l you r answer remain the same if the trust establ ished by Mr.

David is revocable?

c) When is a trust con sidered revocable? (1980)

a) The net income of the irrevocable trust amounting to P1 million should bereduced by the following:

1) The income given to the beneficiaries (Sec. 61 (A), NIRC of 1997);2) P20,000.00 exemption (Sec. 62, Ibid)After the allowable deductions mentioned above, the taxable incomeshall be subjected to the same tax rates as individuals. (Sec. 61, Ibid.)

b) No, because the income of such part of an irrevocable trust shall beincluded in computing the net income of Mr. David, the grantor. (Sec. 63,Ibid.)

c) A trust is considered as revocable where at any time the power to revest in

the grantor title to any part of the corpus of the trust is vested1) In the grantor either alone or in conjunction with any person nothaving a substantial adverse interest in the disposition of such partof the corpus or the income therefrom, or

2) In any person not having a substantial adverse interest in thedisposition of such part of the corpus or the income therefrom. (Sec.63, Ibid.)

Oro, a mil l ion aire with a wife and f ive (5) min or ch i ldren has the fol lowin g

assets:

Asset Amount

a) Cash in mo ney mark et P500,000 P75,000or 15% return

b) Stoc k inv estment in ABC Corp . P500,000 P100,000

or 20% return

c) Stock inv estm ent in XYZ Corp . P500,000 P50,000

or 10% return

d) Real Estate pro pert ies P1,500,000 P180,000

or 12% return

TOTAL P3,000,000 P405,000

====================

Oro th us earns an annu al gross in com e of P405,000. He comes to you and

says: I want you to lessen the taxes my estate will have to pay, as well aslessen my current income tax. However, un t i l my ch i ldren reach 21 years of


21/54

age. I dont want them to control any of my properties. At my age, I need agross income of only P75,000 annually. What would you do to reduce Orosestate taxes and h is current in come tax, and at the same t ime prevent his

chi ldren f rom o btain ing cont ro l of a sub stant ia l por t ion of his p roper t ies unt i l

they reach th e age of 21? (1974)

I would suggest the creation of an irrevocable trust over all the assets of Mr.Oro, except the cash in money market which earns P75,000.00, administered in thePhilippines, registered with and approved by the Bureau of Internal Revenue subjectto the following conditions: (a) The share of the children in the properties shall betransferred to each of them when they reach the age of 21; (b) All the income fromthe properties constituted into the trust, amounting to P330,000.00 should be dividedamong his five children, and no part of the income should go to Mr. Oro.

The tax to be collected on the return from cash in money market, and thestack investments would be the same whether Mr. Oro constitutes a trust or not. Allof these incomes would be subject to final taxes. However, there would be taxsavings with respect to the P180,000.00 return from the real properties.

If Mr. Oro does not constitute a trust, the P180,000.00 shall be taxed on theportion above P140,000.00 in the amount of P22,500.00 and the excess overP140,000.00 shall be taxed at the rate of 25% or P40,000 x .25 = P10,000.00. Thetotal tax due from Mr. Oro is P32,500.00.

On the other hand, if an irrevocable trust is so constituted as above mentioned, the income of P180,000.00 shall be divided among the five (5) childrenwho shall each have income subject to tax in the amount P36,000.00. Each childshall pay an income tax on his share computed on the basis of P2,500.00 on the

amount that does not exceed P30,000.00 and 15% on the excess over P30,000.00or P6,000.00 x .15 = P900.00. Thus, the tax due from each child is P2,500.00 +P900.00 = P3,400.00. The total tax due from all the five (5) children is P3,400.00 x 5= P17,000.00. The savings is computed as: tax paid by Mr. Oro on the P180,000.00income from real properties is P32,500 LESS taxes to be paid by his five (5) childrenamounting to P17,000.00 = P15,500.00

Corporations

Def ine or explain the meaning of co rpo rat ion fo r incom e tax purp oses? (1971)

Corporation for income tax purposes includes partnership, no matter howcreated or organized, joint stock companies, joint accounts (cuentas enparticipacion) associations or insurance companies. It does not include generalprofessional partnerships, joint venture or consortium formed for the purposes ofundertaking construction projects engaging in petroleum, coal, geothermal, and otherenergy operations, pursuant to an operation of consortium agreement under aservice contract with the Government. [1stsentence, Sec. 22 (B), NIRC of 1997]

Partnerships Taxed as Corporations


22/54

E died in December 2000 leaving to his three (3) son s A , B, and C an apartment

bu i lding. They decided no t to part i t ion th e pro perty and just div ided the rentals

amon g thems elves for the year 2001. Was a partnership formed whic h id

sub ject to the corpo rate income tax for the year 2001?

In 2002, A, B and C did not d iv ided the incom e f rom the apartment bu i ld ing;

instead they invested the same in the pu rchase of a ho use to be rented out .

What is the status of their enterpr ise for income tax purpo ses for the year

2002? Explain y ou r answer. (1972)

There was no partnership formed subject to the corporate income tax for theyear 2001, when the three (3) sons did not partition the apartment they inherited.However, with respect to the house they purchased in 2002 from the common fund,there was formed a partnership.

Co-heirs who own properties which produce income should not automaticallybe considered partners of an unregistered partnership, or a corporation, within thepurview of the income tax law. To hold otherwise, would subject the income of all co-ownership of inherited properties to the tax on corporations resulting in oppressivetaxation and confirm the dictum that the power to tax involves the power to destroy.This eventuality should be obviated.

Article 1769(3) of the Civil Code provides that the sharing of grossreturnsdoes not of itself establish a partnership, whether or not the persons sharing themhave a joint or common fight or interest in any property from which the returns arederived. There must be an unmistakable intention to form a partnership or join tventure. (Obillos, Jr. v. CIR, 139SCRA 440).Such is not present in the case at bar.

For tax purposes, the purchase of a house t be rented out is in fact acontribution of the incomes of A, B and C to a common fund for the purposes ofdividing the rentals earned among themselves. With respect to the purchase of ahouse, a partnership was thus formed in 2002, subjecting them to corporate incometax rates. (Evangelista v. Collector, 102 Phil 140)

Mrs. Carmen Reyes died in 1996 leaving as h eirs her hu sband , Pedro Reyes,

and s ix (6) chil dren . She left real pro pert ies in Manila, Pasay City and Quezon

City, with a total value of P50,000.00. The husband was appointed

admin ist rator of the estate. In 2001 the project o f part i t ion was appro ved by th e

cou rt and upo n sat isfact ion that the estate and in heri tance taxes had alreadybeen paid, the special proc eeding s on the estate of the deceased was clos ed

and termin ated. However, Mr. Reyes cont in ued to adm inister the prop ert ies

with th e consent o f his ch i ldren. He leased some of the pro pert ies, the rental

incom e of which he accumulated and later used in the purch ase of other

pro pert ies. By 2002, he and h is chi ldren had acqu ired real property w ith a total

valu e o f P2,000,000.00.

Invest ig at ion revealed th at during the perio d 2001 to 2002, the annu al rental

income o f the pro pert ies adm inistered b y M r. Reyes was P120,000.00. He

repor ted h al f of said annual income in his incom e tax return, whi le each of h is

chi ld ren added to h is income the amount o f P10,000.00, as his s hare in the

rental income of the propert ies.


23/54

If you w ere the Comm issio ner of Internal Revenu e, how wou ld you tax the

yearly rental income of P120,000.00? What in you r opin ion sh ou ld be the tax

status of Mr. Reyes and his c hi ldren? Exp lain, ci t ing the legal basis fo r you r

con clusio n. (1973)

As the Commissioner of Internal Revenue, I would determine which portion ofthe yearly income of P120,000.00 is attributable to the inherited properties and theportion coming from the properties from the accumulated rentals of the inheritedproperties.

The income from the inherited properties should be taxed as income from theseparate properties of Mr. Reyes and his children. They should be taxed separatelyas they are merely co-owners of the properties.

The income from the properties purchased from the rental income of theproperties is partnership income taxable like corporations. With respect to thepurchased properties, the tax status of Mr. Reyes and his children is a taxablepartnership.

Co-heirs who own properties which produce income should not automaticallybe considered partners of an unregistered partnership, or a corporation, within thepurview of the income tax law. To hold otherwise would subject the income of all co-ownership of inherited properties to the tax on corporations resulting in oppressivetaxation and confirm the dictum that the power to tax involves the power to destroy.This eventually should be oviated.

Article 1769(3) of the Civil Code provides that the sharing of gross returnsdoes not of itself establish a partnership, whether or not the persons sharing themhave a joint or common fight or interest in any property from which the returns are

derived. There must be an unmistakable intention to form a partnership or jointventure. (Obillos, Jr. v. Commissioner of the Internal Revenue, 139 SCRA 440) suchis not present in the instant case.

For tax purposes the purchase income generating real property is in fact, acontribution of the incomes of Mr. Reyes and his children to a common fund for thepurpose of dividing the rentals earned among themselves. Thus, a partnership wasthus formed in 2002, subjecting them to corporate income tax rates. (Evangelista c.Collector, 102 Phil.)

Rosa Arro yo d ied in 2000. His heirs executed a project part i t ion o f her estate

which was approved by the Court. However, Rosas estate was not actuallydistr ibuted among the heirs but remained under the management of their

father (widower-spou se) wh o u sed the prop er ties in bu s iness and so their

value increased yearly. The prof i ts w ere credited on th e books of accou nt of

the comm on fund to the hei rs in p ropor t ion to thei r respect ive heredi tary

shares. The heirs al lowed their father to co nt inue us ing th eir sh ares for his

ventures, althou gh th ey paid income taxes on their resp ect ive shares of the

prof i ts of their common business. Is there a partnership here subject to

corp orate income tax under the Tax Code? Why ? (1975)

There was no partnership formed subject to the corporate income tax, when

her widower-spouse and heirs did not partition the estate they inherited from Rosa.However, when the heirs allowed their father (the widower spouse) to continue using


24/54

their shares for his ventures, resulting in a common business, there was formedpartnership.

Co-heirs who own properties which produce income should not automaticallybe considered partners of an unregistered partnership, or a corporation, within the

purview of the income tax law. To hold otherwise, would subject the income of all co-ownership of inherited properties to the

Article 1769(3) of the Civil Code provides that the sharing of gross returnsdoes not of itself establish a partnership, whether or not the persons sharing themhave a joint or common fight or interest in any property from which the returns arederived. There must be an unmistakable intention to form a partnership or jointventure. (Obillos, Jr. v. Commissioner of the Internal Revenue, 139 SCRA 440) suchis not present in the instant case.

For tax purposes the purchase income generating real property is in fact, acontribution of the incomes of Mr. Reyes and his children to a common fund for thepurpose of dividing the rentals earned among themselves. Thus, a partnership wasthus formed in 2002, subjecting them to corporate income tax rates. (Evangelista c.Collector, 102 Phil.)

EL, GL, and XL al l of legal age, inheri ted from their parents, who b oth d ied in a

car accident o n J anuary 1, 1997, a ten (10) doo r apartment bu i lding si tuated on

a 2,500 square meter lot (apartment bui lding) in Pasay City. The estate

pro ceedings with the Regional Trial Court (RTC) of Pasay City w ere termin ated

on 31 Decemb er 1998 with the three (3) sisters remaining equal and p ro -

indiv iso c o-owners of the apar tment bu i ld ing. The rent w as div ided equal lyamon g th e three sisters af ter deduct ing the expenses (l ike real estate taxes

and m ajor repairs) on th e apartmen t bui ldin g. The three sisters then reported

their shares of the net incom e in their indiv idual income tax returns from 1999

to 2002. Now , a buyer h as of fered to pu rch ase the apartment b ui lding for P10

mil l ion.

a. Were the three sisters correct in report ing their shares of said net

income in their respect ive tax returns from 1999 to 2002? Explain.

b. If the three sisters decide to sel l the apartment bu i lding, how wil l they

be taxed o n th e sale? Explain (1990)

a. Yes. Co-heirs who inherited properties which produce income should not

automatically be considered as partners of an unregistered partnership orcorporation subject to tax. The reason is that sharing of gross returns does not byitself establish a partnership. There must be an unmistakable intention to form apartnership or joint venture. There is no contribution or investment of additionalcapital to increase or expand the inherited properties, merely continuing thededication of the property to the use to which it had been put by their forebears.(Obillos, Jr. v.CIR, 139 SCRA 436)

b. They shall be taxed on their ordinary income from the sale. The propertiesare not capital assets because they are used in trade or business.

Mr. Santos d ied intestate in 2000 leaving his spou se and f ive chi ld ren as theon ly heirs. The estate con sisted of a family home and a four -door apartment


25/54

wh ich w as being ren ted to tenants. Within the year, an extrajudic ial set t lement

of the estate was excu ted among the heirs, each of them receiv ing his/her due

share. The surv iv ing spou se assumed adminis t rat ion of the prop er ty . Each

year, the net incom e from th e rental of the pro perty was d istr ibuted to al l ,

pro po rt ionaely, on which they paid respect ively, the correspon ding tax.

In 2003, the income tax returns o f the heirs were examin ed and d ef ic iency

income tax assessment were issued against each of them for the years 2000 to

2002, inclu sive, as havin g entered into an un registered partnership. Were th e

assessment jus t i f ied? (1997)

No. Co-heirs who inherited properties which produce income should notautomatically be considered as partners of an unregistered partnership orcorporation subject to tax. The reason is that sharing of gross returns does not byitself establish a partnership. There must be an unmistakable intention to form apartnership or joint venture. There is no contribution or investment of additionalcapital to increase or expand the inherited properties, merely continuing thededication of the property to the use to which it had been put by their forebears.(Obillos, Jr. v.CIR, 139 SCRA 436)

Roberto Ruiz and Conrado Cruz bou ght three(3) parcels of land from Rodrigo

Sabado o n 4 May 1994. Then o n 8 Ju ly 1995, they b oug ht tw o(2) parcels of land

from Migu el Sanch ez. In 2000, they so ld the f irst th ree parcels of land to

Central Realty Inc . In 2002, they so ld the tw o parcels to Jo se Guerrero . Ruiz

and Cruz realized a net pro f it of P100,000 for t he sale in 2000 and P150,000 for

the sale in 2002. The correspo nd ing c apital gains taxes were indiv idual ly paidby Ruiz and Cruz.

On 20 Septemb er 2002 however, Ruiz and Cru z received a let ter from CIR

assessing them def ic iency corp orate income taxes for the years 2000 and 2002

because, acco rding to th e CIR, du ring s aid years they as co-owners in th e real

estate transact ions fo rmed an un registered p artnership or jo int venture taxable

as a corporat ion and that the unregistered partnership was subject to

corporate income tax, as dis t inguished f rom prof i ts der ived f rom the

par tnership b y them, which is subject to ind iv idual income tax.

Are Roberto Ruiz and Conrado Cruz l iable for def ic ienc y corp orate incometax?

No. Roberto Ruiz and Conrado Cruz have not formed a partnership subject tocorporate tax rates. Mere sharing of gross returns does not of itself establish apartnership (Art. 1769-3, Civil Code).

There must be an unmistakable intention to form a partnership or jointventure. (Obillos, Jr. v.CIR, 139 SCRA 436). There is no showing that the jointpurchase was for the purpose of earning profits to be divided among them.

Noel Langi t and his brother , Jovy, bought a parcel of land which they

registered in their names as pro ind iv iso ow ners (Parcel A). Subsequ ent ly,they formed a par tnership duly regis tered w i th the SEC, which bo ught another


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parcel of land (Parcel B). Both parcels of land were sold , real izing a net prof i t

of P1,000,000 for Parc el A and P500,000 for Parcel B .

a. The BIR claims that the sale of Parcel A shou ld be taxed as a sale of

an unregistered partnership. Is the BIR correct?

b. The BIR also claims th at the sale of Parcel B sh ou ld be taxed as asale by a c orp orat ion. Is the A BIR correct? (1994)

a. No. The brothers have not formed a partnership subject to corporate taxrates. Mere sharing of gross returns does not of itself establish a partnership (Art.1769-3, Civil Code).

There must be an unmistakable intention to form a partnership or jointventure. (Obillos, Jr. v.CIR, 139 SCRA 436). There is no showing that the jointpurchase was for the purpose of earning profits to be divided among them.

b. Yes, because the Parcel B was brought after the brothers have formed ataxable partnership. Registration of the partnership with the SEC is a manifestshowing of the brothers intention to engage in business together and divide theprofits.

General Professional Partnerships

Dist ingu ish the income tax l iabi l i ty of X, a general profession al partnership

engaged in the pract ice of law, and Y, a general partnership engaged in the

op erat ion o f logging con cession . (1981)

A general professional partnersip is formed by persons for the sole purpose ofexercising their common profession, no part of the income of which is derived fromengaging in any trade or business while a general partnership is formed by personsfor the sole purpose of engaging in any trade or business.

A general professional partnership is not a taxable entity hence its income isnot taxable as such while a general partnership is considered as a corporation hencea taxable entity and its income is taxable as such.

A general professional partnership not being a taxable entity does not need tofile an income tax return but an information return while a general partnership being

a taxable entity should file an income tax return.The partners in a general professional partnership are not subject to double

taxation being taxed only once while a general partnership is taxed once on itsincome and the share in the profits of the partners are again taxed as dividends.

X, Y, Z & Asso ciates is a p artnership of new lawyers belon ging to the same law

class and fraterni ty. The B IR Distr ic t Off icer is requir ing them to register their

f i rm n ame with the Bu reau of Dom est ic Trade before the Revenue Distrc i t

Of f ice wi l l al low the regist rat ion of bo oks, receip ts and other records o f the law

f irm.

Is the law f irm su bject to pay income tax as wel l as the requirement to f i le anincome tax return ? Exp lain (1988)


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The firm is not subject to pay income tax as it is a general professionalpartnership for the sole purpose of exercising their common profession, no part ofthe net income of which is derived from engaging in any trade or business. Theparties shall be liable for income tax only in their individual capacity.

The firm is required to file in duplicate a return of its income, except incomeexempt under Sec 32 (B) of the NIRC of 1997 (exclusion from gross income), settingforth the items of the gross income and deductions allowed and the names, TINs,addresses and shares of each of the partners. (Sec. 55, NIRC of 1997)

A partner in a general law p artnership incu rs expenses that are not passed on

to the par tnership s uch as: he buys h is own law books; h e enter tains c l ients

wi thout pass ing the bi l ls to the par tnership; he pays his own dues to

pro fessional organ izat ion; and he bu ys a car for use in law pract ice. The

partnership does n ot advanc e the purchase price o r take t it le to the car. May

he deduct the above-ment ion ed expens es from h is dist r ibu t ive share in the net

pro f i ts of said partnership? Why ? (1999

No, because these are incurred in the exercise of the profession which are properlydeductible by the general professional partnership in order to arrive at the netdistributive shares of the individual partners.

Atty. MA and A tty. PL were classmates in law sch ool. After passin g the bar in

1999, they joined separate law f irm s in Makat i . In 2000, they resigned from

their respect ive law f irms and form ed a law partn ership und er the f irm name of

A & L, with of f ice add ress at Ay ala Avenu e, Makat i City. In January, 2002,

being part icular ly a goo d year, the partnersh ip ant ic ipates a net income o f P2.0

mil l ion.

a. Is the said law partnership a taxable ent i ty for income tax purpo ses?

Explain.

b. If the two partners decide to reinvest P1.5 mil l ion into the partnership to

buy an of f ice condom inium and dis t r ibute as div idends o nly P0.50

million, how much of the partnerships 2002 net income will be subjectto income tax? Explain. (1990)

a. No, because it is a general professional partnership organized for the conductof a profession. (Sec. 22 (B) and 26, NIRC OF 1997)

b. None, because the net income of a general professional partnership is notsubject to income taxation.

D. EXCLUSION FROM GROSS INCOME

Exclusion from Gross Income, in General


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Discus s brief ly w hether or n ot al l income is taxable. (1988)

Not all income are taxable. Some incomes are excluded from gross incomesin the determination of taxable income, and others are subject to tax exemptions.

Exclus ions f rom gross income dis t inguished f rom deduct ions f rom gross

income.

a) Exclusions from gross income refer to a flow of wealth to the taxpayerwhich are not treated as part of gross income for purposes of computing thetaxpayers taxable income, due to the following reasons:

1) it is exempted by the fundamental law;2) it is exempted by statute; and3) it does not come within the definition of income (Sec. 61, Rev, Regs.

No. 2), WHILE deductions are the amounts which the law allows to besubtracted from gross income in order to arrive at net income.

b) Exclusions pertain to the computation of gross income, WHILE deductionsto the computation of net income.

c) Exclusions are something received or earned by the taxpayer which do notform part of gross income, WHILE deductions are something spent or paidin earning gross income.

An example of exclusion from gross income are life insurance proceeds, andan example of a deduction are ordinary and necessary expenses.

Distinguish Exclusion from Gross Income from Deductions from GrossIncome. Give an example of each.

a) Exclusions from gross income refer to a flow of wealth to the taxpayerwhich are not treated as part of gross income for purposes of computing thetaxpayers taxable income, due to the following reasons:

4) it is exempted by the fundamental law;5) it is exempted by statute; and6) it does not come within the definition of income (Sec. 61, Rev, Regs.

No. 2), WHILE deductions are the amounts which the law allows to be

subtracted from gross income in order to arrive at net income.b) Exclusions pertain to the computation of gross income, WHILE deductions

to the computation of net income.c) Exclusions are something received or earned by the taxpayer which do not

form part of gross income, WHILE deductions are something spent or paidin earning gross income.

An example of an exclusion is life insurance proceeds while an example ofdeduction is depreciation.

Life Insurance Proceeds


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X Corporation took a keymen insurance of the life of its President, Mr. RodelCruz. The policy designated Mr. Cruzs wife as its revocable benef ic iary in theevent of d eath o f Mr. Cruz. Will the insu rance pro ceeds be treated as inc om e

sub ject to tax by the wife?(1980)

No. Proceeds of life insurance policies paid to the beneficiary, in this case thewife, upon the death of the insured are excluded from gross income. [Sec. 32 (B) (1),NIRC of 1997]. The reason is that life insurance proceeds represents indemnity notincome.

Mr. X received the fol lowing income and you w ere asked to prepare his income

tax return. Is h e requi red to inc lude as par t of gross income the p roceeds f rom

a l i fe insu rance pol icy received from the estate of his deceased p arents? Give

yo ur reaso ns . (1988)

No. Life insurance proceeds are excluded from gross income. [Sec. 32 (B) {1},NIRC of 1997], being compensation or indemnity for loss and not income.

Returned Premiums

A took out a l i fe insurance pol icy for P1,000,000.00 naming his wife as

benef ic iary. Under the terms of the po l icy, the insurer wi l l pay A th e amo un t of

P1,000,000.00 after th e 20thyear of the pol icy, and h is benef ic iar ies, should h e

died befo re that date. A ou tl ived th e po licy and received P1,000,000.00. The

prem ium s p aid on the po licy w as P250,000.00. Is th e P1,000,000.00 received b y

A s ub ject to tax? Explain y our an swer. (1978)

No, not all of the P1,000,000.00 is subject to tax. The amount of P250,000.00is not subject to tax because it is the amount received by A, as a return of thepremiums paid by him under a life insurance contract at the maturity of the termmentioned in the contract. [Sec. 32 (B) (2), NIRC of 1997]. The premiums returnedare not income but return of capital. They represent earnings which were previouslytaxed.

On the other hand, the amount of P750,000.00 is subject to tax because itrepresents income being interest or earnings of the premium and not return ofcapital. (Ibid)

Lin us purc hased a l i fe annuity for P500,000 which wil l p ay him P120,000 a

year. The l i fe expectancy of Linu s is 12 years. Under Sect ion 32 of NIRC of

1997, which of the fo l lowing wi l l L inus be able to exc lude f rom his gro ss

income:

a. P940,000

b. P500,000

c. P1,440,000

Choo se one of the abo ve answers and explain you r cho ice. (1986)


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P500,000. the said amount represents a return of premiums paid by Linuswhich is not income but return of capital. They represent earnings which werepreviously taxed. [Sec (B) (2), NIRC of 1997]

Born of a po or fami ly on 14 February 1952, Mar io worked his way throu ghcol lege. After wo rking fo r mo re than 12 years in X Manufactur in g Corp orat ion,

Mario decided to ret i re and avai l of the benef i ts und er the very reason able

ret i rement p lan maintained by h is employ er. On the day o f his ret i rement on 30

Apr i l 2002, his endowment insurance pol icy , for which he was pay ing an

annu al premium of P1,520 since 1982 also matured. He was th en paid the face

value of his in suranc e pol icy in the amount of P50,000.

Is h is P50,000 ins urance pro ceeds exempt from in com e taxation? (1991)

Not all of the P50,000 would be exempt. Only the amount of P30,400considered as a return of premiums would be exempt while the balance of P19,600representing the interest or earnings of the premium would be subject to tax.

The amount of P30,4000 represents a return of premiums paid by Marcelowhich is not income but return of capital. They represent earnings which werepreviously taxed. [Sec.32 (B) (2), NIRC of 1997]

Gifts, Bequests and Devises

Expla in w hether or not the fo l lowing taxpayer is subject to incom e tax on her

descr ib ed item received:

Mrs. Y, wife of a d eceased emp loyee, received f inancial b enef its vo lu ntar i ly

voted upon by the Board of Directors of the emp loyer-comp any in recogni t ion

of her husbands long and loyal service and primarily to help her meetf in ancial n eeds. (1988)

Mrs. Y is not subject to income tax on the financial benefits she receivedbecause there were no services rendered by Mrs. Y. It could not also be consideredas income of the deceased employee because the giving was not in payment forservices rendered. Since there was no consideration given, it is a gift and notincome.

Mr. Osorio, a bank execut ive, whi le paying go lf with Mr. Perez, a manu factur ing

firm executive, mentioned to the latter that his (Osorios) bank had just openeda business relationship with a big foreign importer of goods which Perezcom pany manufactures. Perez requested Osorio to introdu ce him to this

fore ign impo rter and pu t in a good word for him (Perez) , which Osor io did. As a

result , Perez was able to make a prof i table bu siness d eal with the foreign

importer.

In grat i tude, Perez, in behalf of his manufactur ing f i rm, sent Osorio an

expensive car as a gif t . Osorio cal led Perez and told him that there was real ly

no obl igat ion o n the par t of Perez or his company to give such expens ive gi f t .


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Bu t Perez insis ted that Osorio keep the car. The company o f Perez ded ucted

the cos t of the car as a busin ess expenses.

The Comm ission er of Internal Revenue includ ed the fair market value of the

car as income of Osorio who p rotested that the car was a gif t and thereforeexc luded f rom incom e. Who is co rrect , the Comm iss ion er or Osor io?

Mr. Osorio is correct. Where the taxpayer receives a car from a corporationfor furnishing the names of potential customers, the same is a gift excluded fromincome taxation.(Duberstein v. Commissioner of Internal Revenue F2d 28, CCA 6th0

Mr. Rod rigo, an 80-year old ret i red bu sinessman, fel l in love w ith a 20-year old

Tetchie Sono ra, a nightc lub hosp ital ity gir l . Alth oug h she refused to marry

him, she agreed to bbe his live in partner.

In grat i tud e, Mr. Rodrig o transferred to her a con dominium un it , wh ere they

bo th l ive, und er a deed of salee for P10 mil l ion . Mr. Rod rigo p aid the capital

gains tax o f 6% of P10 mil l ion .

The Comm iss ioner found that the proper ty w as t ransferred to Tetchie Sonora

by Mr. Rodr igo because of the companionship she was prov id ing him.

Accordingly , the Commiss ioner made a determinat ion that Sonora had

compensat ion income of P10 mi l l ion in the year the condominium was

transferred to her and issued a tax def ic iency income tax assessment.

Tetchie Sono ra protests the assessment and claims that the transfer of thecond omin ium u ni t was a gi f t and therefore exc luded f rom incom e. How w i l l

you rule on the protest of Tetchie Sonora? Explain. (1995)

Protest granted. There was no legally demandable obligation on the part ofSonora to get the condominium unit. This is because there was no consideration shegave to Mr. Rodrigo in exchange for the condominium unit. The giving stemmed froma pure act of liberality on the part of Mr. Rodrigo which is a gift excluded from grossincome.

X, a mu l t inational corporat ion do ing bu s iness in the Phi l ipp ines, donated to

Mr. Y, i ts resid ent manager in the Ph i l ippines.

Assuming the shares of stock were given to Mr. Y in con s iderat ion of h is

services to the corp orat ion, what is the tax imp l icat ion? Explain. (1996)

The value of the shares shall be taxable as a compensation income becauseit was paid as a result of employer-employee relationship.

Compensation for Injuries or Sickness

Are moral damages awarded a l i tigant for mental anguish on account of a

l ibelous art ic le wri t ten about him taxable as incom e or not? Why? (1964)


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Moral damages are taxable as income. Mental anguish is not physical injuries,therefore moral damages awarded due to moral anguish are not excluded fromincome.

Amount received as a compensation for personal injuries plus amounts of any

damages received on account of such injuries are excluded from taxable income ifthe personal injuries are physical in character.

Exclusions from taxable income are considered as exemptions from taxation,hence to be interpreted in strictissimi jurisagainst the taxpayer. The words personalinjuries should be given a restrictive meaning to refer only to physical injuries. Thisinterpretation finds basis in Sec. 32 (B) (4), NIRC of 1997 which refers to Accidentor Health Insurance or under Workmens Compensation Acts, both of which refers tophysical injuries or sickness. This could only mean physical injuries.

In a certain civ i l case, plaint i f f was awarded damages b y the court in the sum

of P20,000 representing profit he failed to realize on account of defendantsfai lure to comp ly with his obl igat ion to said plaint i f f . Are tho se damages

taxable against h im? (1967)

Yes, because damages which are excluded from gross income are only thosethat paid as a result of injuries or sickness. Furthermore, since this is unearnedincome than he would have paid income taxes on the income if he was notpreviously deprived of such income. It is only just that upon recovery he should payincome taxes on the same.

An acc ident solely at t r ibutable to the crimin al negl igence of the driver of B B us

Company resulted in the death of Xs wife, physical injuries to X that preventedhim from working for a month, and the total wreck of Xs brand new car whichhe h ad bo ugh t for P400,000.

In the act ion for damages f i led by X against B Bus Company, the court

awarded the following; p30,000 for Xs injuries consisting mainly in the loss ofhis right hand; P25,000 for Xs loss of one month salary; P25,000 for the deathof his wife and P100,000 moral damages on account of such loss; and

P800,000 for the loss of Xs car, the value of which had in the meantimedoub les on accou nt of inf la t ion.

How would you t reat each of the above i tems o f damages for income t axpu rpos es? Exp lain (1984)

The amount of P30,000 for Xs injuries consisting in the loss of his right hand,P25,000 for the death of his wife, and the P100,000 moral damages arising from thedeath of Xs wife are all excluded from gross income. They rep resent amounts ofdamages received by suit as compensation for injuries. Consequently, such amountsare not considered income. [Sec. 32 (B) (4), NIRC of 1997]

The P800,000 is partly taxable. The first P400,000 representing the value ofthe damaged car is not taxable because it is merely compensation or replacement ofwhat X lost. Consequently, there is no income. The increase in value of the car in the

amount of P400,000 is taxable income because it was a damage payment arising


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from the destruction of the car and not from the physical injuries arising fromsickness or accident.

The P25,000 award representing salary not earned as a result of the accidentis taxable because it is merely a replacement of income that is taxable if earned.

Exclusions are to be strictly construed as they constitute tax exemptions.

The widow and chi ldren of a passenger who died in an ai rp lane crash were

paid P1,200,000 by th e air l ine. This f igure w as reached after n egoat iat ion

between the heirs o f the deceased and the ins urer of the air l ine, the lat ter

having received ind ubitable evidence that the deceased had a net income of

P120,000 at the t im e of his d eath, and that 10 prod uct ive years wou ld have

insu red f inancial stabi l i ty to his family. Should the heirs declare this amou nt in

their incom e tax returns. State your answer. (1970)

No, the amount of P1,200,000 should not be declared in the heirs income taxreturns. The amount represents damages received on account of personal injuries(which includes death) by agreement hence to be excluded from gross income. [Sec.32 (B) (4) NIRC of 1997]. The reason for the exclusion is that the payment is merecompensation for injuries suffered and not income. Furthermore, the amounts werenot existing at the time of the death of the decedent.

Patroclus w as injured in a vehicular accident in 1999. He incurred and p aid

med ical exp enses o f P10,000 and legal fees of P5,000 durin g th e year. In 2002,

he recovered P35,000 as set t lement from the insurance company which

insu red the car owned by the other party involved in the accident . From th e

above paym ents and transact ions , the amou nt taxable to Patroclus in 20002 is:a. P20,000

b. P25,000

c. P30,000

d. P35,000

e. None of the above.

Choo se one of the above answers and g ive reasons for you r choice. (1986)

None of the above. All of the recovered amounts are not income because theyare merely compensation for actual losses suffered. They do not constitute taxablegain as they were not received as payment for services, interest or profit from

investment.

Mr. Infante was hit by a wayward bu s whi le on his w ay to work. He surviv ed but

had to pay P400,000 for h is ho spital izat ion. He was unable to w ork fo r six (6)

mo nth s wh ich meant that he did not receive his usu al salary of P10,000 a

mo nth o r a total of P60,000. He sued the bus c ompany and was able to obtain a

f inal judgment awarding him P400,000 as reimbursement for his

ho spital izat ion, p60,000 for the s alaries h e fai led to receive whi le h osp ital ized,

P200,000 as m oral damages for his p ain and suf fer ing, and P100,000 as

exemplary d amages. He was able to col lect in ful l f rom the judgment.

How muc h income did h e real ize when h e col lected on th e judgment? Explain.(1995)


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P60,000 because this amount is merely a replacement of income whichshould have been subjected to tax if earned.

All of the other receipts are excluded from gross income. They representamounts of damages received by suit as compensation for injuries. Consequently,

such amount are considered as income. [Sec. 32 (B) (4), NIRC of 1997]

Retirement Benefits, Gratuities, Pension, Etc

RSV was ret i red by h is emp loyer co rpo rat ion in 1997 and p aid P100,000 as a

reti rement g ratu i ty w i thout any deduct ion o f w i thhold ing tax. The corp orat ion

subsequent ly became bankrupt .

Can the BIR sub ject the P100,000 ret i rement g ratui ty to inco me tax? Discu ss.

No. It is clear that RSV was retired by his employer xxx. The only conclusionthat could be drawn is that he was separated beyond his control. Thus, theretirement gratuity he received is excluded from gross income and not subject toincome tax.

Romulu s, 48 years of age and a ret i red emp loyee had among h is prop ert ies

and trans act ions at the end of the 1998 taxable year:

Retiremen t benefits in th e amo un t of P200,000.00 received by him in 2002

un der a qu al i f ied ret i rement plan maintained by his form er emp loyer com pany.

Romulu s vo luntar i ly ret i red af ter 20 years of s ervice.

Is the abov e item su bject to the regular tax rates found in the sch edule under

Sect ion 24 (A) of the NIRC, wh ich states that the tax rates o n cit izens andresidents? Explain your answer.

Yes, because it is not among excluded incomes. There is no showing thatRomulus retirement was compulsory, hence it could not be said that his separationwas beyond his control. The amount of P200,000.00 could not also be considered astax-exempt retirement becauseRomulus is only 48 years which is below 50 years.Neither is there a statement in the facts that he has worked for the same employerfor at least ten (10) years or that he has not previously enjoyed tax-free retirementbenefits.

Expla in w hether or not the fo l lowing taxpayer is subject to the income tax onthe described item received:

Ret iree from AG&P receiv ing ret i rement benef i ts from th e compan y ret i rement

plan , qu alif ied by the BIR. (1988)

The retirement benefits would be subject to tax because there is no showingthat the retiree is a qualified tax-free retiree. The problem does not show that theretiree is above 50 years, that he has served his employer for more than 10 yearsand that he has not previously availed of tax-free retirement.

Furthermore, there is no showing that the separation through retirement wassbeyond the retirees control.


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expenses. Under the program, an emp loyee who o f fered to res ign would be

given separation pay equivalent to his three months basic salary for everyyear of s ervic e. Mr. Jacobo acc epted th e

taxation law bar questions

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