Taxation Review

1st Mock Bar Examination (Academic Year 2020-21)

February 27, 2021 (8:00am to 11:30am)

I. Last 20 February 2021, the Commissioner of Internal Revenue issued

a BIR ruling against ABC Corporation to the effect that the
transaction entered into by corporation is liable to income tax (IT)
and value added tax (VAT); and upon receipt of the ruling, the
corporation was not amenable thereto. Being the legal counsel of
the corporation, you were asked for the proper remedy the
corporation should undertake. What legal advice will you give?
Explain.

II. LATEX Corporation was subjected to audit for its taxable year 2016
by the BIR. Several notices & requests were sent to the Corporation
for the submission of the required documents, but the Corporation
failed to comply. The examiner of the BIR disallowed all the
expenses claimed and considered all the third party information
obtained by the Bureau relative to the sales and purchases of the
Corporation for the taxable year 2016. Because of the prescriptive
period, assessments were issued even without the benefit of
comprehensive or full audit. The Corporation failed to refute the
assessments issued and in the collection process, it offered a
compromise settlement of its tax liabilities, alleging therein
jeopardy assessment/s. Why is it that a jeopardy assessment is a
valid ground to compromise a tax liability? Explain.

III. XYZ Corporation is engage in retail business. Last 31 January 2021,

the corporation received a deficiency tax assessment from the BIR
containing only the computation of the deficiency tax and the
penalties. You were asked by the corporation, being the best CPA-
Lawyer of the region, is the assessment valid? Explain.

IV. ABC Corporation secured an income tax holiday for 5 years as a

pioneer industry. On the fourth year of the tax holiday, the
Corporation declared and paid cash dividends to its stockholders,
all of whom are individuals. Are the dividends taxable? Explain.
 Taxation Review
1st Mock Bar Examination (Academic Year 2020-21)
February 27, 2021 (8:00am to 11:30am)

V. In a civil case for Annulment of Contract of Sale, plaintiff presented

in evidence the Contract of Sale which she sought to be annulled.
No documentary stamp tax on the Contract of Sale was paid
because according to the plaintiff, there was no need to pay the
same since the sale was not registered with the Register of Deeds.
Plaintiff is now offering the Contract of Sale as her evidence. Is the
Contract of Sale admissible? Explain.

VI. A widower died in 15 May 2019. In his will, he left his estate of
Php100 million to his four children; and named his compadre,
Don Kuripot, to be the administrator of the estate. When the BIR
sent a demand letter to Don Kuripot for the payment of the estate
tax, he refused to pay claiming that he did not benefit from the
estate, he not being an heir. Forthwith, he resigned as
administrator. As a result of the resignation, who may be held liable
for the payment of the estate tax? Explain.

VII. A complaint for tax evasion was filed before the City Prosecutor's
Office of Tacloban against Atty. Limbungan. In the complaint, it was
alleged that he understated his income by 95% and overstated his
expenses by 65%. Worried that the case will affect his practice of
profession, Atty. Limbungan offered to compromise his tax liability.
While the City Prosecutor consented and indicated his conformity,
the Commissioner thru the Regional Director, opposed or rejected
the offer of compromise, insisting that the case is not one (1) of those
cases that can be compromised. Rule on the contentions of the
parties. Decide with reason/s.

VIII. In the settlement of the estate of Don Barbero who died

intestate, his wife renounced her inheritance. In addition thereto,
she also renounced her share of the conjugal property. The BIR
determined that there was a taxable gift and thus assessed Doña
Barbero as a donor. Was the BIR correct? Explain.
Taxation Review
1st Mock Bar Examination (Academic Year 2020-21)
February 27, 2021 (8:00am to 11:30am)

IX. Under the Corporation Law, every corporation has a separate and
distinct personality than that of its stockholders. Sometime in the year
2019, a corporation voluntarily dissolved. After dissolution, it was
determined that the corporation still has unpaid income taxes. The
Commissioner of Internal Revenue (CIR), relying on the so-called
“Lifeblood Theory”, filed a case against the stockholders for the
unpaid taxes. Will the case filed by the CIR prosper? Explain your
answer.

X. A group of businessmen from the City of Manila is opposing the

proposed tax law being introduced by Congress, contending that as
stated in the new tax measure, which will be in addition to the existing
business taxes, the amount of taxes to be collected will be used to
rehabilitate the Provinces of Leyte and Samar, two (2) provinces that
were devastated by super typhoon Yolanda in the year 2013. The
businessmen contended that it will be unfair for them, including those
similarly situated, to pay additional business tax in order to finance
the rehabilitation or in short, they are opposing the tax measure for
they will not be deriving any benefit from such. Rule on the
contention of the businessmen. Discuss with reasons.

XI. In relation to substantiating expenses with receipts or proofs for

expenses to be deductible, discuss the so-called “Cohan Rule”.

XII. Mandy is working as a warehouseman of AAA Company in one of its

warehouses in the port area of Manila. Inside the warehouse is a
quarter, divided into several rooms, for rent for those working in the
port area, whether employee or not of the Company, for a monthly
rental of Php2,000. Mandy is required to stay in the quarter, but the
Company is letting him occupy the room for free. The accountant of
Company is asking for your legal advice on the tax implication of the
benefit, the free rental of the room Mandy is occupying, on whether
it will form part of his (Mandy’s) taxable income or not. What advice
will you give? Explain your answer.
 Taxation Review
1st Mock Bar Examination (Academic Year 2020-21)
February 27, 2021 (8:00am to 11:30am)

XIII. Atty. Me-aw was admitted to the Bar last May 2020 and immediately
after taking his oath and signing in the Roll of Attorneys, he engaged
in the practice of law. Since the deadline for filing Income Tax Return
is fast approaching, Atty. Me-aw is seeking your advice as a tax
practitioner because he (Atty. Me-aw) is incline in claiming the
following legal expenses as deductions from his gross income:

a. Travelling expenses in taking his oath and in signing in the Roll of

Attorneys
b. Expenses in taking the Bar Examination (review fees, board &
lodging expenses, examination fees, travelling expenses, etc.
c. Expenses in seeking advice from lawyers & other professionals
prior to his practice of profession
d. Expenses incurred in celebration of his successful passing of the
Bar
e. Amount spent for celebrating with a Judge for winning his first
case.

To be answered: From the foregoing, (a) to (e), determine

which is/are allowable expense/s that can be deducted from
the “gross income” of Atty. Me-aw. Explain your answer/s.

XIV. In the year 2010, R. Tan acquired a parcel of land located in Brgy.
Marasbaras, Tacloban City, for Php5M. Because of Robinson
Tacloban, there is a need to expand the highway/road leading to
mall, hence, the government expropriated the land of R. Tan by
paying Php10M, the market value appearing in the tax declaration
in the year 2017, the time of expropriation. Per verification, it was
discovered that R. Tan did not report his income / gain from the
transaction and because of this, the Revenue District Officer of BIR
Tacloban City assessed R. Tan, who objected/protested the same
alleging that his property was acquired by the government through
condemnation proceedings and so the forced sale cannot be made
subject to income tax. Rule on the contention of R. Tan. Explain.
 Taxation Review
1st Mock Bar Examination (Academic Year 2020-21)
February 27, 2021 (8:00am to 11:30am)

XV. After examining the books and records of XYZ Corporation, the 2016
final assessment notice showing basic deficiency tax of Php5M,
deficiency interest of Php1M and due date for payment on April 30,
2018 was sent but without the demand letter. It was mailed and
released by the BIR on April 15, 2018. The registered letter, containing
the tax assessment, was received by the XYZ Corporation on April 25,
2018. What is an assessment notice? What are the requisites of a valid
assessment? Explain.

XVI. In relation to the facts above-stated (No. XV), as tax lawyer of the
Corporation, what legal defense(s) would you raise against the
assessment? Explain.

XVII. Is a deficiency tax assessment a bar to a claim for tax refund or tax
credit? Explain.

XVIII. Describe the power of taxation. May a legislative body enact laws to
raise revenues in the absence of a constitutional provision granting
said body the power of tax? Explain.

XIX. State with reasons the tax treatment of the following in the
presentation of annual income tax returns:

a. Proceeds of life insurance received by a child as irrevocable

beneficiary
b. 13th month pay and de minimis benefits
c. Dividends received by a domestic corporation from (i) another
domestic corporation; and (ii) a foreign corporation
d. Interest on deposits with (i) BPI Family Bank; and (ii) a local
offshore banking unit of a foreign bank
e. Income realized from sale of (i) capital assets; and (ii) ordinary
assets.
 Taxation Review
1st Mock Bar Examination (Academic Year 2020-21)
February 27, 2021 (8:00am to 11:30am)

XX. B was hired by X to watch over X’s fishpond with a monthly salary of
Php50k. In order for him (B) to be able to perform his duties well, he
was also provided with a small hut, which he could use as his
residence in the middle of the fishpond. Is the fair market value of the
use of the small hut by X a “fringe benefit” that is subject to the Fringe
Benefit Tax imposed by Section 33 of the National Internal Revenue
Code? Explain your answer.

XXI. May taxes be the subject of set-off or compensation? Explain.

XXII. Is the approval of the court, sitting as probate or estate settlement

court, required in the enforcement and collection of estate tax?
Explain.

XXIII. In the year 2020, X worked part time as a waitress in a restaurant in

Mega Mall from 8:00 a.m. to 4:00 p.m. and then as a cashier in a 24-
hour convenience store in her neighborhood. Is she required to file
an income tax return this coming 15 April 2021 or can avail of the so-
called “substituted filing”? Explain your answer.

XXIV. What is the test to be applied in determining whether or not real

property that is actually, directly and exclusively used for religious,
charitable or educational purposes shall be granted exemption from
real property taxes under the Constitution? Explain.

XXV. Discuss the doctrine of equitable recoupment? Is this doctrine

applicable in Philippine setting? Explain.

XXVI. The Congress of the Philippines, in its desire to broaden the scope of
taxation, enacted a law subjecting the Philippine National Police to
income taxation. The PNP’s legal division opposed the imposition,
asserting that it directly exercises the sovereign powers of the State
and is, therefore, exempt as a government entity. Is the law passed
by Congress valid and constitutional? Explain briefly.
 Taxation Review
1st Mock Bar Examination (Academic Year 2020-21)
February 27, 2021 (8:00am to 11:30am)

XXVII. What’s the difference between income subject to creditable

withholding tax from income subject to final withholding tax? Explain.

XXVIII. Appliance Center, Inc. is an exclusive distributor/dealer of a certain

brand of appliances and equipment. It sells its products on credit by
requiring a 30% down payment and the balance payable in 1 to 3
years in installment. May X Appliance Center, Inc. report its income
in installments? Explain briefly.

XXIX. X is a partner in XYZ Partnership, Ltd. He also operates a hollow-block

factory. For the current taxable year, the partnership obtained losses
while X’s hollow-block business generated profits. Discuss briefly the
income tax treatment of X’s share in the partnership losses, assuming
the partnership is:

a. Business Partnership.
b. Joint Venture for construction projects.

XXX. Briefly discuss the so-called “improperly accumulated earnings tax”.

XXXI. X (debtor) borrowed money from Y (creditor) in the amount of

Php250K as evidenced by a non-interest bearing promissory note
payable one (1) year from the execution thereof, Y happened to win
Php20M in a lotto draw and so he decided to condone the debt of
X on the sole condition that X would just give Y his artistic painting
worth Php50K. X gladly agreed to the bargain. What is the tax
implication of the condonation of X’s debt by Y? Explain briefly.

XXXII. Will an appeal to the Court of Tax Appeals (CTA) suspend the
payment, levy, distraint and/or sale of any property of the taxpayer
for the satisfaction of his liability? Explain.

XXXIII. The BIR sent X a letter demanding that his books of accounts for the
taxable year 200A be submitted for examination to the bureau within
thirty (30) days from receipt thereof. X ignored the letter. Two (2) years
late, the BIR sent X a delinquency tax assessment without the benefit
 Taxation Review
1st Mock Bar Examination (Academic Year 2020-21)
February 27, 2021 (8:00am to 11:30am)

of a complete or partial audit by the BIR. Is the assessment justifiable

under the circumstances? Explain briefly.

XXXIV. What is the remedy of a party adversely affected by a decision or

ruling of the Court of Tax Appeals (CTA) in Division? Explain.

XXXV. X Corporation was assessed by the BIR on the improperly

accumulated earnings tax beyond the prescriptive period of
assessment of internal revenue taxes. Is the assessment barred by
prescription? Explain briefly.

XXXVI. Last 31 December 2019, a corporate taxpayer was able to secure a

favorable BIR Ruling (a ruling of first impression) from the BIR National
Office, Quezon City relative to its importation of raw materials. One
year after, the BIR National Office issued another Ruling, which will
now subject the importation of raw materials of the same corporate
taxpayer to tax. The Corporation is now in the dilemma on whether
or not the said ruling (subsequent / second ruling) will be given
retroactive effect.

a. What are BIR Rulings?

b. What is required to make a BIR Ruling of first impression a valid
one?
c. Does a BIR Ruling has a retroactive effect, considering the
principle that tax exemptions should be interpreted strictly
against the taxpayers?
XXXVII. A corporate taxpayer gave its employees 14th and 15th months
EXTRA BONUS for the year 2016, the total of which amounted to
Php40M. When the Corporation filed its Income Tax Return last April
15, 2017, a net operating loss was declared and reported. After
review, the BIR disallowed the deductions pertaining to the 14th and
15th bonus by considering it as unreasonable or based on
unreasonableness. The Corporation on the other hand argued that it
was an ordinary and necessary expense that should be allowed. If
you were the BIR Commissioner, how will you resolve the issue?
Explain.
 Taxation Review
1st Mock Bar Examination (Academic Year 2020-21)
February 27, 2021 (8:00am to 11:30am)

XXXVIII. After an accident, the victim was able collect from the Hauling
Operator the following:

a. Php500T for actual damages (hospitalization, medical

expenses)
b. Php200T moral damages
c. Php200T Attorney's Fee and other legal expenses connected
with the recovery of damages.

To be answered: Determine from the above-mentioned (a - c),

the taxable and non-taxable receipts of the victim. Explain your
answer.

XXXIX. The City Council of Tacloban recently passed a very timing and
urgent ordinance granting 50% discount for payment of unpaid real
property taxes and the waiver of all penalties and fines resulting from
late payment because of adverse economic conditions brought by
calamities. The primary purpose of the said ordinance is to enhance
revenue collection of the City. One resident of the City who pays his
real property taxes regularly and promptly, demanded a 50% refund
on the taxes he paid, arguing that the ordinance is actually
rewarding delinquent taxpayers and discriminates against prompt
ones like him. The City Legal Counsel rendered his opinion in favor of
the City Government. Contending that the said ordinance was class
legislation, a suit was filed by the aggrieved citizen to declare the
ordinance void. Will the suit prosper? Explain your answer.

XL. US Chief Justice Marshall once said that, “The power to tax is the
power to destroy”, while in relation to that statement, US Justice
Holmes quoted that, “The power to tax in not a power to destroy
while this Court sits.” Reconcile the two statements stated by the
Justices in connection with the taxing power of the government.