2008 Bar Questions in Taxation

I

In January 1970, Juan Gonzales bought one hectare of agricultural
land in Laguna for P100,000. This property has a current fair market
value of P10 million in view of the construction of a concrete road
traversing the property. Juan Gonzales agreed to exchange his
agricultural lot in Laguna for a one-half hectare residential property
located in Batangas, with a fair market value of P10 million, owned by
Alpha Corporation, a domestic corporation engaged in the purchase and
sale of real property. Alpha Corporation acquired the property in 2007 for
P9 million.

a) What is the nature of the real properties exchanged for tax
purposes – capital asset or ordinary asset? Explain. (3%)
b) Is Juan Gonzales subject to income tax on the exchange of
property? If so, what is the tax base and rate? Explain. (3%)
c) Is Alpha Corporation subject to income tax on the exchange of
property? If so, what is the tax base and rate? Explain. (3%)


II

Jose Cernan, Filipino citizen, married to Maria Cernan, died in a
vehicular accident in NLEX on July 10, 2007. The spouses owned,
among others, a 100-hectare agricultural land in Sta. Rosa, Laguna with
current fair market value of P20 million, which was the subject matter of
a Joint Venture Agreement about to be implemented with Star Land
Corporation (SLC), a well-known real estate development company. He
bought the said real property for P2 million fifty years ago. On January 5,
2008, the administrator of the estate and SLC jointly announced their big
plans to start conversion and development of the agricultural lands in
Sta. Rosa, Laguna, into first-class residential and commercial centers.
As a result, the prices of real properties in the locality have doubled.
The Administrator of the Estate of Jose Cernan filed the estate tax
return on January 9, 2008, by including in the gross estate the real
property at P2 million. After 9 months, the BIR issued deficiency estate
tax assessment, by valuing the real property at P40 million.

a) Is the BIR correct in valuing the real property at P40 million?
Explain. (3%)

b) If you disagree, what is the correct value to use for estate tax
purposes? Explain. (3%)


III

DEF Corporation is a wholly owned subsidiary of DEF, Inc.,
California, USA. Starting December 15, 2004, DEF Corporation paid
annual royalties to DEF, Inc., for the use of the latter’s software, for
which the former, as withholding agent of the government, withheld and
remitted to the BIR the 15% final tax based on the gross royalty
payments. The withholding tax return was filed and the tax remitted to
the BIR on January 10 of the following year. On April 10, 2007, DEF
Corporation filed a written claim for tax credit with the BIR, arising from
erroneously paid income taxes covering the years 2004 and 2005. The
following day, DEF Corporation filed a petition for review with the Court
of Tax Appeals involving the tax credit claim for 2004 and 2005.

a) As a BIR lawyer handling the case, would you raise the defense
of prescription in your answer to the claim for tax credit? Explain. (4%)

b) Can the BIR lawyer raise the defense that DEF Corporation is
not the proper party to file such claim for tax credit? Explain. (3%)


IV

JKL Corporation is a domestic corporation engaged in the
importation and sale of motor vehicles in the Philippines and is duly
registered with the Subic Bay Metropolitan Authority (SBMA). In
December 2007, it imported several second-hand motor vehicles from
Japan and Korea, which it stores in a warehouse in Subic Bay. It sold
these motor vehicles in April 2008, to persons residing in the customs
territory.

a) Are the importations of motor vehicles from abroad subject to
customs duties and value added taxes? Explain. (4%)

b) If they are taxable, when must the duties and taxes be paid?
What are the bases for and purposes of computing customs duties and
VAT? To whom must the duties and VAT be paid? Explain. (3%)


V

Maria Suerte, a Filipino citizen, purchased a lot in Makati City in
1980 at a price of P1 million. Said property has been leased to MAS
Corporation, a domestic corporation engaged in manufacturing paper
products, owned 99% by Maria Suerte. In October 2007, EIP
Corporation, a real estate developer, expressed its desire to buy the
Makati property at its fair market value of P300 million, payable as
follows: (a) P60 million downpayment; and (b) balance, payable equally
in twenty four (24) monthly consecutive installments. Upon the advice of
a tax lawyer, Maria Suerte exchanged her Makati property for shares of
stock of MAS Corporation. A BIR ruling, confirming the tax-free
exchange of property for shares of stock, was secured from the BIR
National Office and a Certificate Authorizing Registration was issued by
the Revenue District Officer (RDO) where the property was located.
Subsequently, she sold her entire stockholdings in MAS Corporation to
EIP Corporation for P300 million. In view of the tax advice, Maria Suerte
paid only the capital gains tax of P29,895,000 (P100,000 x 5% plus
P298,900,000 x 10%), instead of the corporate income tax of
P104,650,000 (35% on P299 million gain from sale of real property).
After evaluating the capital gains tax payment, the RDO wrote a letter to
Maria Suerte, stating that she committed tax evasion.
Is the contention of the RDO tenable? Or was it tax avoidance that
Maria Suerte had resorted to? Explain. (6%)


VI

While driving his car to Baguio last month, Pedro Asuncion,
together with his wife Assunta, and only son, Jaime, met an accident that
caused the instantaneous death of Jaime. The following day, Assunta
also died in the hospital. The spouses and their son had the following
assets and liabilities at the time of death:
................................Assunta........................................................ Jaime
................................Exclusive..................... Conjugal.................. Exclusive
................................______________________________________________
Cash......................................................... P10,000,000............ P1,200,000.
Cars .......................P2,000,000..................... 500,000.
Land........................ 5,000,000.................. 2,000,000.
Residential house .........................................4,000,000.
Mortgage payable........................................ 2,500,000.
Funeral expenses............................................ 300,000.


a) Is the Estate of Jaime Asuncion liable for estate tax? Explain.
(4%)
b) Is vanishing deduction applicable to the Estate of Assunta
Asuncion? Explain. (4%)


VII

After examining the books and records of EDS Corporation, the
2004 final assessment notice, showing basic tax of P1,000,000,
deficiency interest of P400,000, and due date for payment of April 30,
2007, but without the demand letter, was mailed and released by the BIR
on April 15, 2007. The registered letter, containing the tax assessment,
was received by the EDS Corporation on April 25, 2007.

a) What is an assessment notice? What are the requisites of a
valid assessment? Explain. (3%)

b) As tax lawyer of EDS Corporation, what legal defense(s) would
you raise against the assessment? Explain. (3%)


VIII

The City of Manila enacted an ordinance, imposing a 5% tax on
gross receipts on rentals of space in privately-owned public markets.
BAT Corporation questioned the validity of the ordinance, stating that the
tax is an income tax, which cannot be imposed by the city government.
Do you agree with the position of BAT Corporation? Explain. (5%)


IX

William Antonio imported into the Philippines a luxury car worth
US$100,000. This car was, however, declared only for US$20,000 and
corresponding customs duties and taxes were paid thereon.
Subsequently, the Collector of Customs discovered the underdeclaration
and he initiated forfeiture proceedings of the imported car.

a) May the Collector of Customs declare the imported car forfeited
in favor of the government? Explain. (3%)

b) Are forfeiture proceedings of goods illegally imported criminal in
nature? Explain. (3%)


X

John McDonald, a U.S. citizen residing in Makati City, bought
shares of stock of a domestic corporation whose shares are listed and
traded in the Philippine Stock Exchange at the price of P2 million.
Yesterday, he sold the shares of stock through his favorite Makati
stockbroker at a gain of P200,000.

a) Is John McDonald subject to Philippine income tax on the sale
of his shares through his stockbroker? Is he liable for any other tax?
Explain. (3%)

b) If John McDonald directly sold the shares to his best friend, who
is another U.S. citizen residing in Makati, at a gain of P200,000, is he
liable for Philippine income tax? If so, what is the tax base and rate?
(3%)


XI

Pedro Manalo, a Filipino citizen residing in Makati City, owns a
vacation house and lot in San Francisco, California, U.S.A, which he
acquired in 2000 for P15 million. On January 10, 2006, he sold said real
property to Juan Mayaman, another Filipino citizen residing in Quezon
City, for P20 million. On February 9, 2006, Manalo filed the capital gains
tax return and paid P1.2 million representing 6% capital gains tax. Since
Manalo did not derive any ordinary income, no income tax return was
filed by him for 2006. After the tax audit conducted in 2007, the BIR
officer assessed Manalo for deficiency income tax computed as follows:
P5 million (P20 million less P15 million) x 35% = P1.75 million, without
the capital gains tax paid being allowed as tax credit. Manalo consulted a
real estate broker who said that the P1.2 million capital gains tax should
be credited from the P1.75 million deficiency income tax.

a) Is the BIR officer’s tax assessment correct? Explain. (3%)

b) If you were hired by Manalo as his tax consultant, what advice
would you give him to protect his interest? Explain. (3%)


XII

Greenhills Condominium Corporation incorporated in 2001 is a
non-stock, non-profit association of unit owners in Greenhills Tower, San
Juan City. To be able to reduce the association dues being collected
from the unit owners, the Board of Directors of the corporation agreed to
lease part of the ground floor of the condominium building to DEF
Savings Bank for P120,000 a month or P1.44 million for the year,
starting January 2007.

a) Is the non-stock, non-profit association liable for value added
tax in 2007? If your answer is in the negative, is it liable for another kind
of business tax? (4%)

b) Will the association be liable for value added tax in 2008 if it
increases the rental to P150,000 a month beginning January 2008?
Explain. (3%)


XIII

MNO Corporation was organized on July 1, 2006, to engage in
trading of school supplies, with principal place of business in Cubao,
Quezon City. Its books of accounts and income statement showing gross
sales as follows:

July 1, 2006 to December 31, 2006.........................P 5,000,000.
January 1, 2007 to June 30, 2007........................ P 10,000,000.
July 1, 2007 to December 31, 2007....................... P 15,000,000.

Since MNO Corporation adopted fiscal year ending June 30 as its
taxable year for income tax purposes, it paid its 2% business tax for
fiscal year ending June 30, 2007 based on gross sales of P15 million.
However, the Quezon City Treasurer assessed the corporation for
deficiency business tax for 2007 based on gross sales of P25 million
alleging that local business taxes shall be computed based on calendar
year.

a) Is the position of the city treasurer tenable? Explain. (3%)

b) May the deficiency business tax be paid in installments without
surcharge and interest? Explain. (3%)


XIV

Spouses Jose San Pedro and Clara San Pedro, both Filipino
citizens, are the owners of a residential house and lot in Quezon City.
After the recent wedding of their son, Mario, to Maria, the spouses
donated said real property to them. At the time of donation, the real
property has a fair market value of P2 million.

a) Are Mario and Maria subject to income tax for the value of the
real property donated to them? Explain. (4%)

b) Are Jose and Clara subject to donor’s tax? If so, how much is
the taxable gift of each spouse and what rate shall be applied to the gift?
Explain. (4%)

XV

In 2007, spouses Renato and Judy Garcia opened peso and dollar
deposits at the Philippine branch of the Hong Kong Bank in Manila.
Renato is an overseas worker in Hong Kong while Judy lives and works
in Manila. During the year, the bank paid interest income of P10,000 on
the peso deposit and US$1,000 on the dollar deposit. The bank withheld
final income tax equivalent to 20% of the entire interest income and
remitted the same to the BIR.

a) Are the interest incomes on the bank deposits of spouses
Renato and Judy Garcia subject to income tax? Explain. (4%)

b) Is the bank correct in withholding the 20% final tax on the entire
interest income? Explain. (3%)