Bar Exam 2014 Suggested Answers in Taxation by the UP Law Complex

On March 27, 2012, the Bureau of Internal Revenue (BIR) issued a notice of assessment against Blue Water Industries Inc. (BWI), a domestic corporation, informing the latter of its alleged deficiency corporate income tax for the year 2009. On April 20, 2012, BWI filed a letter protest before the BIR contesting said assessment and demanding that the same be cancelled or set aside

However, on May 19, 2013, that is, after more than a year from the filing of the letter protest, the BIR informed BWI that the latter’s letter protest was denied on the ground that the assessment had already become final, executory and demandable. The BIR reasoned that its failure to decide the case within 180 days from filing of the letter protest should have prompted BWI to seek recourse before the Court of Tax Appeals (CTA) by filing a petition for review within thirty (30) days after the expiration of the 180-day period as mandated by the provisions of the last paragraph of Section 228 of the National Internal Revenue Code (NIRC). Accordingly, BWI’s failure to file a petition for review before the CTA rendered the assessment final, executory and demandable.

Is the contention of the BIR correct? Explain. (5%)

SUGGESTED ANSWER:

No, the contention of BIR is not correct. The right of BWI to consider the inaction of the Commissioner on the protest within 180 days as an appealable decision is only optional and will not make the assessment final, executory and demandable (Section 228, NIRC; Lascona Land Co., Inc. V, CIR, G.R. No. 171251, March 5, 2012, 667 SCRA 455).

II.

Mr. De Sarapen is a candidate in the upcoming Senatorial elections. Mr. De Almacen, believing in the sincerity and ability of Mr. De Sarapen to introduce much needed reforms in the country, contributed P500,000.00 in cash to the campaign chest of Mr. De Sarapen. In addition, Mr. De Almacen purchased tarpaulins, t-shirts, umbrellas; caps and other campaign materials that he also donated to Mr. De Sarapen for use in his campaign,”

Is the contribution of cash and campaign materials subject to donor’s tax? (4%)

SUGGESTED ANSWER:

The Tax Code provides that any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code (Section 99(C), NIRC). On the other hand, the Omnibus Election provides, that any provision of the law to the contrary notwithstanding, any contribution in cash or in kind to any candidate or political party or coalition of parties for campaign purposes, duly reported to the Commission shall not i be subject to axy payment of gift tax (Section 13, R.A. 7166). Hence, the contributions will be exempt from donor’s tax if they are duly reported to the Commission. Otherwise, the contributions will be subject to donor’s tax.

III.

Dr. Taimtim is an alumnus’ of the College of Medicine of Universal University (UU), a privately-owned center for learning which grants yearly dividends to its stockholders, UU has a famous chapel located within the campus where the old folks used to say that anyone who wanted to pass. the medical board examinations should offer a dozen roses on all the Sundays of October. This was what Dr.Taimtim did when he was still reviewing for the board examinations. In his case, the folk saying proved to be true because he is now a successful cardiologist. Wanting to give back to the chapel and help defray the costs of its maintenance, Dr.Taimtim donated P50,000.00 to the caretakers of the chapel which was evidenced by an acknowledgment receipt.

In computing his net taxable income, can Dr. Taimtim use his donation to the chapel:as an allowable deduction from his gross income under the National Internal Revenue :

Code (NIRC)? (4%)

SUGGESTED ANSWER:

No, the donation is not deductible. The chapel is owned by privately-owned university hence the donation for the 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 donee must not inure to the benefit of any private stockholder or individual. In the instant case, the university is granting yearly dividends to its stockholders which is a clear violation of the law appertaining to the so-called “private inurement doctrine” thereby making the donation non-deductible (Section 34(H)(1), NIRC).

Gangwain Corporation. (GC) filed its quarterly tax returns for the calendar year 2012 as follows:

First quarter – April 25, 2012

Second quarter – July 23, 2012

Third quarter – October 25, 2012

Fourth quarter – January 27, 2013

On December 22, 2013, GC filed with the Bureau of Internal Revenue (BIR) an administrative claim for refund of its unutilized input Value-Added Tax (VAT) for the calendar year 2012. After several months of inaction by the BIR on. its claim for refund, GC decided to elevate its claim directly to the Court of Tax Appeals (CTA) on April 22, 2014. In due time, the CTA denied the tax refund relative to the input VAT of GC for the first quarter of 2012, reasoning that the claim was filed beyond the two-year period prescribed under Section 112(A) of the National Internal Revenue Code (NIRC).

(A) Is the CTA correct? (3%)

(B] Assuming that GC filed its claim before the CTA on

February 22, 2014, would your answer be the same? (3%)

SUGGESTED ANSWER:

(A) No. CTA is not correct. The two-year period to file à claim for refund refers to the administrative claim : and does not refer to period within which to elevate the claim to the CTA. The filing of the administrative claim for refund was timely done because it is: made within two years from the end of the quarter, when the zero-rated transaction took place (Section 112(A); NIRC). When GC decided to elevate its claim to the CTA on April 22, 2014, it was after the lapse of 120 days from the filing of the claim for refund with the BIR, hence, the appeal is seasonably filed. The rule on VAT refunds is two years to file the claim with the BIR, plus 120 days for the Commissioner to act and inaction after 120 days is a deemed adverse decision on the claim, appealable to the CTA within 30 days from the lapse of the 120-day period (CIR 3:0. Aichi Forging Company of Asia, Inc., G.R. No: 1. 184823, October 6, 2010; CIR v. San Roque, G.R. No. 187485, February 12, 2013)

(B) Yes. The two-year prescriptive period to file a claim for refund refers to the administrative claim with: the BIR and not to the period to elevate the claim to the CTA. Hence, the CTA cannot deny the refund for reasons that the first quarter claim was filed beyond the two-year period prescribed by law. However, when the claim is made before the CTA on February 24, there is definitely no appealable decision as yet because the 120-day period for the Commissioner to act on the claim for refund has not yet lapsed. Hence, the act of the taxpayer in elevating the claim to the CTA is premature and the CTA has no jurisdiction to rule thereon (CIR V.. Aichi Forging Company of Asia, Inc., G.R. No. 184823, October 6, 2010; CIR ..v. San Roque, G.R. No. 187485, February 12, 2013).

The City of Liwliwa assessed local business taxes. against Talin Company, Claiming that there is double taxation, Talin Company filed a complaint for Refund or Recovery of Illegally and/or Erroneously-collected Local “Business Tax Prohibition with Prayer to Issue Temporary Restraining Order and Writ of Preliminary Injunction with the Regional Trial Court (RTCİ: The RTC denied the application for a Writ of Preliminary Injunction. Since its motion for reconsideration was denied, Talin Company filed a special civil action for certiorári with the Court of Appeals (CA): The government lawyer representing the City of Liwliwa prayed for the dismissal of the petition on the ground that the same should have been filed with the Court of Tax Appeals (CTA) Talin Company, through its lawyer, Atty. Frank, countered that the CTA cannot entertain a petition for certiorari since it is not one of its powers and :. authorities under existing laws and rules.

Decide. (5%)

SUGGESTED ANSWER:

The government lawyer is correct that it is the Court of Tax Appeals that is vested with proper jurisdiction.

The law is clear when it said that The Court of Tax Appeals shall have exclusive appellate jurisdiction to review by appeal decisions, orders or resolutions of : the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction (Section 7(3), RA 9282). In a recent case decided by the Supreme Court, it was beld that the CTA has certiorari powers over the issue of grave abuse of discretion on the part of the RTC in issuing an interlocutory order in cases falling within the exclusive appellate jurisdiction of the tax court, as this is inherent to its exercise of appellate jurisdiction (City of Manila v. Hon. Caridad H. Grecia-Cuerdo, G.R. No. 175723, February 4, 2014).

VI.

Choose the correct answer. Smuggling (1%)

(A) does not extend to the entry of imported or exported articles by means of any false or fraudulent invoice; statement or practices; the entry of goods at less than the true weight or measure; or the filing of any false ..or fraudulent entry for the payment of drawback or refund of duties.

(B) is limited to the import of contraband or highly dutiable cargo beyond the reach of customs authorities

(C) is committed by any person who shall fraudulently import or bring into the Philippines, or assist in so doing, any article, contrary to law, or shall receive, conceal, buy; sell or any manner facilitate the transportation, concealment or sale of such article after .,importation, knowing the same to have been imported contrary to law

(D) is punishable by administrative penalty only

SUGGESTED ANSWER:

(C) is committed by any person who shall fraudulently import or bring into the Philippines, or assist in so doing, any article, contrary to law, or shall receive, conceal, buy, sell or any manner facilitate the transportation, concealment or sale of such article’. after importation, knowing the same to have been imported contrary to law (Section 3601, Tariff and Customs Code).

VII

In accordance with the Local Government Code (LGC), the Sangguniang Panglungsod (SP) of Baguio City enacted : Tax Ordinance No.19, Series of 2014, imposing a P50.00 tax on all the tourists and travellers going to Baguio City. In imposing the local tax, the SP reasoned that the tax collected will be used to maintain the cleanliness of Baguio City and for the beautification of its tourist attractions. Claiming the tax to be unjust, Baguio Travellers Association (BTA); an association of travel agencies in Baguio City; filed a petition for declaratory relief before the Regional Trial Court (RTC because. BTA was apprehensive that tourists: might cancel their bookings with BTA’s member agencies. BTA also prayed for the issuance of a Temporary Restraining Order (TRO) to enjoin Baguio City from enforcing the local tax on their customers and on all tourists: going to Baguio City. The RTC issued a TRO enjoining Baguio City from imposing the local tax Aggrieved, Baguio City filed a petition for certiorari before the Supreme Court (SC) seeking to set aside the TRO issued by the RTC on the ground that collection of taxes cannot be enjoined.

Will the petition prosper? (5%)

SUGGESTED ANSWER:

Yes. The petition for certiorari will prosper. The RTC has no jurisdiction to entertain any action concerning the validity of a Tax Ordinance and to enjoin the imposition of taxes levied by it. Any question. on the legality of the tax ordinance can only be raised on appeal with the Secretary of Justice and the appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and the payment of the tax levied therein (Section 187, LGC).

VIII

Masarap Kumain, Inc. (MKI) is a Value Added Tax (VAT)-registered company which has been engaged in the catering business for the past 10 years. It has invested a substantial portion of its capital on flat wares, table linens, plates, chairs, catering equipment, and delivery vans. MKI sold its first delivery van, already 10 years old and idle,to Magpapala Gravel and Sand Corp. (MGSC), a corporation engaged in the business of buying and selling gravel and sand. The selling price of the delivery van was way below: its acquisition cost.

Is the sale of the delivery van by MKI to MGSC subject: to VAT? (4%)

SUGGESTED ANSWER 1:

The lawyer of the condominium corporations is correct. The association dues, membership fees, and other assessments/charges do not constitute incoine payments because they were collected for the benefit ‘ “of the unit owners and the condominium corporation is not created as a business entity. The collection is the money of the unit owners pooled together and will be .. spent exclusively for the purpose of maintaining and preserving the building and its premises which they themselves own and possess (First e-Bank Tower Condominium Corp., V. BIR, Special Civil Action No. 12-1236, RTC Br. 146, Makati City).

SUGGESTED ANSWER 2:

In the case of office Metro Philippines, Inc. (formerly Regus Centres, Inc.) v. Commissioner of Internal Revenue, CTA Case No. 8382, the Court only dealt with the EWT issue as the VAT Section 105 shows that transactions in the course of a trade or business (sells, barters, exchanges, leases goods or properties, renders services, imports goods) are those subject to VAT, In the case of a condominium corporation, the function of the entity is merely for administrative purposes and not a trade or business. Thus, payments in the form of association dues should not be subjected to VAT.

During his lifetime, Mr. Sakitin obtained a loan amounting to ten million pesos from Bangko Uno for the purchase of a parcel of land located in Makati City, using such pro perty as collateral for the loan. The loan was evidenced by a duly notarized promissory note, Subsequently, Mr. Sakitin died. At the time of his death, the unpaid balance of the loan amounted to P2 million, The heirs of Mr. Sakitin deducted the amount of P2 million from the gross estate, as part of the “Claims against the Estate.” Such deduction was disallowed by the Bureau of Internal Revenue (BIR) Examiner, claiming that the mortgaged property was not included in the computation of the gross estate. Do you agree with the BIR? Explain. (4%).

SUGGESTED ANSWER:

Yes. Unpaid mortgages upon, or any indebtedness with respect to property are deductible from the gross estate only if the value of the decedent’s interest in said property, undiminished by such mortgage or indebtedness, is included in the gross.estate (Section 86(AX1)(e)) In the instant case, the interest of the decedent in the

property purchased from the loan where the said pro perty was used as the collateral, was not included in the gross estate. Accordingly, the unpaid balance of the loan : at the time of Mr. Sakitin’s death is not deductible as “Claims against the Estate”.

XXI

On August 31, 2014, Haelton Corporation (HC), thru its authorized representative Mş Pares, sold a 16-storey. commercial building known as Haeltown Building to Mr. Belly for P100 million: Mr. Belly, in turn, sold the same property on the same day to Bell Gates, Inc (BGI) for P200 million. These two (2) transactions were evidenced by two. separate Deeds of Absolute Sale notarized on the same day by the same notary public: Investigations by the Bureau of Internal Revenue (BIR) showed that:

(1) the Deed of Absolute Sale between Mr. Belly and BGI was notarized ahead of the sale between HC and Mr. Belly;

(2) as early as May 17, 2014, HC received P40 million from BGI, and not from Mr. Belly;

(3) the said payment of P40 million was recorded … by BGI in its books as of June 30, 2014 as investment in Haeltown Building; and (4) the substantial portion of P40 million was withdrawn by Ms. Pares through the declaration of cash: dividends to all its stockholders.

Based on the foregoing, the BIR sent Haeltown Corpo tation, a Notice of Assessment for deficiency income tax arising from an alleged simulated sale of the aforesaid commercial building to escape the higher corporate income tax rate of thirty percent (30%).

What is the liability of Haeltown Corporation, if any?

SUGGESTED ANSWER:

Haelton Corporation is liable for the deficiency income tax as a result of tax evasion. The purpose of selling first the property to Mr. Belly is to create a tax shelter. He never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a shan, and without business purpose and economic substance. The intermediary transaction, which was prompted more on the mitigation of tax liabilities than for legitimate busi ness purpose constitutes one of tax evasion. However, being a corporation, Haelton can only be liable for civil fraud which is a civil liability rather than a criminal fraud which can only be committed by natural persons (CIR 1.-Benigno Toda, Jr.G.R. No. 147188, September 14, 2004, 438 SCRA 290).

XXII

Choose the correct answer Double Taxation (1%)

(A) is one of direct duplicate taxations wherein two (2) taxes must be imposed on the same subject matter, by the same taxing authority, within the same jurisdiction, I during the same period, with the same kind or character of tax, even if the purposes of imposing the same are different

(B) is forbidden by. law; and therefore, it is a valid defense against the validity of a tax measure

(C) means taxing the same property twice when it should be taxed only once; it is tantamount to taxing the same person twice by the same jurisdiction for the same thing

(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.

SUGGESTED ANSWER:

(C) means taxing the same property twice when it should

be taxed only once; it is tantamount to taxing the same person twice by the same jurisdiction for the same thing (Victorias Milling Co. Vi Municipality of Victorias, Negros Occidental, G.R. No. L-21183, September 27, 1968).

XXIII

Choose the correct answer. Tax Avoidance (1%).

(A) is a scheme used outside of those lawful means and, when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

(B) is a tax saving device within the means sanctioned by law

(C) is employed by a corporation, the organization of which is prompted more on the mitigation of tax liabilities. than for legitimate business purpose.

(D) is any form of tax deduction scheme, regardless if the same is legal or not.

SUGGESTED ANSWER:

(B) is a tax saving device within the means sanctioned by law (Philip Manufacturing Corp. v. CIR, G.R. No. L-19737, August 26, 1968).

XXIV.

A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that they can practice their profession as awyers. For the year 2012, ABC Law Firm received earnings and paid expenses, among which are as follows: (6%)

Earnings

(1) professional/legal fees from various clients

(2) cash prize received from a religious society in recognition of the exemplary service of ABC Law Firm

(3) gains derived from sale of excess computers and

Payments:

(1) salaries of office staff

(2) rentals for office space

(3) representation expenses incurred in meetings with clients

(A) What are the items in the abovementioned earnings which should be included in the computation of ABC Law Firm’s gross income? Explain.

(B) What are the items in the abovementioned payments which may be considered as deductions from the gross income of ABC Law Firm? Explain.

(C). If ABC Law Firm earns net income in 2012, what, if any, : is the tax consequence on the part of ABC Law Firm insofar as the payment of income tax is concerned?

What, if any, is the tax consequence on the part of A, B, and C as individual partners, insofar as the payment of income tax is concerned?

SUGGESTED ANSWER:

(A) The three (3) items of earnings should be included in

the computation of ABC Law Firm’s gross income. The professional/legal fees from: various clients is included as part of gross income being in the nature of compensation for services (Section 32(A) (I), NIRC). The cash prize from a religious society … in recognition of 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 32(B)(7):

(c), NIRC). The gains from sale of excess computers . and laptops should also be included as part of the : firm’s gross income because the term gross income specifically includes gains derived from dealings in property (Section 32(A)(3), NIRC).

(B) The law firm being formed as a general professional partnership is entitled to the same deductions as allowed to corporations (Section 26, NIRC). Hence, the three (3) items of deductions mentioned in the problem are all deductible, they being in the nature i of ordinary and necessary expenses incurred in the practice of profession (Section 34(A), NIRC).

ALTERNATIVE ANSWER:

The law firm being formed as a general professional partnership is entitled to the same deductions as allowed to corporations (Section 26, NIRC). Hence, the three (3) items of deductions mentioned in the problem are all deductible, they being in the nature of ordinary and necessary expenses incurred in the practice of profession (Section 34(A), NIRC). However, the amount deductible for representation expenses incurred by a taxpayer engaged in sale of services, including a law firm, is subject to a ceiling of 1% of net revenue (RR No. 10-2002)

(C) The net income having been earned by the law firm, which is formed and qualifies as a general Professional partnership, is not subject to income tax because the earner is devoid of any income tax personality. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. The partnership is merely treated for income tax purposes as a pass-through entity so that its net income is not taxable at the level of the partnership but said net income should be attributed to the partners, whether or not distributed to them, and they are liable to pay the income tax based on their respective taxable income as individual taxpayers (Section 26, NIRC).

XXV

Which of the following transactions is subject to Value Added Tax (VAT)? (1%)

(A) sale of shares of stock-listed and traded through the local stock (B) importation of personal and household effects belonging to residents of the Philippines returning from abroad subject to custom: duties under the Tariff and Customs Code.

(D). gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority.

SUGGESTED ANSWER:

(B) importation of personal and household effects belonging to residents of the Philippines returning from abroad subject to custom duties under the Tarifi and Customs Code (exempt from VAT only if exempt from customs duties, Section 109(1)(C), NIRC).

XXVI.

Freezy Corporation, a domestic corporation engaged in the manufacture and sale of ice cream, made payments: to an officer of Frosty Corporation, a competitor in the ice cream business, in exchange for said officer’s revelation of Frosty Corporation’s trade secrets.

May Freezy Corporation claim the påyment to the Officer as deduction from its gross income? Explain. (4%)

SUGGESTED ANSWERS

No, The payments made in exchange for the revelation of a competitor’s trade secrets is considered as an expense which is against law, morals, good customs or public policy, which is not deductible (3M Philippines, · Inc. V. CIR, GR No. 82833, September 26, 1988). Also, the law will not allow the deduction of bribes, kickbacks and other similar payments. Applying the principle of ejusdem generis, payment made by Freezy Corporation would fall under “other similar payments which are not allowed as deduction from gross income (Section 34(A)(1)(C), NIRC).

XVII

In January 2013; your friend got his first job as an office clerk. He is upon him for financial support. His parents have long retired from their work, and his two (2) siblings are still minors and studying in grade school. In February 2014, he consulted you as he wanted to comply”: with all the rules pertaining to the preparation and filing of his income tax return. He now asks you the following:

{A} Is he entitled to personal exemptions? If so, how much? (1%). (B) Is he entitled to additional exemptions? If so, how much? (1%) (C) What is the effect of the taxes withheld from his salaries on his taxable income? (2%)

SUGGESTED ANSWER:

(A) Yes. The law allows a basic personal exemption of P50,000 for each individual taxpayer (Section 35(A), NIRC).

(B) No. While his parents and minor siblings are living with and dependent upon him for financial support, they are not qualified dependents for purposes of. additional exemptions. The term “dependent” for purposes of the additional personal exemption would include only legitimate, illegitimate or legally adopted child (Section 35(B), NIRC).

(C) The taxes withheld from his salaries will not affect his taxable income because they are not allowed as tax deductions but as tax credits. Tax deductions: reduce the taxable income while tax credits reduce the tax liability (CIR v. Central Luzon Drug Corpo ration, G.R. No. 159647, April 15, 2005).

XXVIII.

Choose the correct answer. Tax laws – (1%)

(A) may be enacted for the promotion of private enterprise or business for as long as it gives incidental advantage to the public or the State

(B) are inherently legislative; therefore, may not be delegated

(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:

(D) adhere to uniformity and equality when all taxable articles or kinds of property of the same class are taxable at the same rate (City of Baguio v. de Leon, G.R. No. L-24756, October 31, 1968, 25 SCRA 938).

XIX.

Doña Evelina, a rich widow engaged in the business of currency exchange; was assessed a considerable amount of local business taxes by the City Government of Bagnet by virtue of Tax Ordinance No. 24. 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 for having been enacted in violation of the publication requirement of tax ordinances: and revenue measures under the Local Government Code (LGC) and on the ground of double taxation. On appeal, the Court of Tax Appeals (CTA) affirmed the decision of the RTC. No:motion for reconsideration was filed and the decision became final and executory: (4%)

(A) If you are Atty. ELP, what advice will you give Doña Evelina so that she can recover the subject local business taxes? ;

(B) If Doña Evelina eventually recovers the local business taxes, must the same be considered as income taxable. by the national government?

PINAY JURIST

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Bar Exam 2014 Suggested Answers in Taxation by the UP Law Complex

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