Reviewer in Taxation (Book 1) Asser S.

Tamayo (2012 Edition)

CHAPTER 6

EXCLUSIONS FROM GROSS INCOME

1. It refers to income received or earned but is not taxable as income because it is exempted by
law or by treaty.

a. Exclusion c. Deduction
b. Inclusion d. Taxation

ANS: A

2. First statement: Tax free income is not to be included in the income tax return unless
information regarding it is specifically called for.

Second statement: While exclusions are simply not taken into account in determining gross
income, deductions are subtracted from gross income to arrive at net income.

a. Both statements are correct

b. Both statements are incorrect
c. Only the first statement is correct
d. Only the second statement is correct

ANS: A

3. First statement: Proceeds of life insurance policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or otherwise are excluded from gross income.
Second statement: If such amounts of the proceeds of life insurance are held by the insurer under
an agreement to pay interest thereon, the interest payments shall be included in gross income.
a. Both statements are correct
b. Both statements are incorrect
c. Only the first statement is correct
d. Only the second statement is correct

ANS: A

4. The widow of your best friend has just been paid P 1,000,000 on account of the life insurance
policy of the deceased husband. She asks you whether she shall declare the amount for income
tax purposes or for estate tax purposes.

First advice: The proceeds of the life insurance paid to the beneficiary upon the death of the
insured are exempt from income tax and need not be declared for income tax purposes.
Second statement: The proceeds of the life insurance will have to be declared for estate tax
purposes if the designation of the beneficiary is revocable, otherwise, they need not be declared.
a. Both advices are right
b. First advice right; second advice wrong
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

c. Both advices are wrong

d. First advice wrong; second advice right

ANS: A

5. First statement: The amount received by the insured, as a return of premium paid by him
under life insurance, endowment, or annuity contracts, either during the term or at the maturity of
the term mentioned in the contract or upon surrender of the contract shall be excluded from gross
income.
Second statement: If the amounts, when added to amounts received before the taxable year under
such contract, exceed the aggregate premium paid, whether or not paid during the taxable year,
then the excess shall be included in the gross income.
a. Both statements are correct
b. Only the first statement is correct
c. Both statements are incorrect
d. Only the second statement is correct

ANS: A

6. Mr. Santiago purchased a life annuity for P 100,000 which would pay him P 10,000 a year.
The life expectancy of Mr. Santiago was 12 years. Which of the following would Mr. Santiago
be able to exclude from his gross income?
a. P120, 000 c. P20,000
b. P100,000 d. P10,000

ANS: B

7. In 1999, Mr. S. Santos purchased a life insurance by paying P500,000 premiums. The
insurance contract stipulated that Mr. Santos would receive P700,000 as annuity to be paid in
three(3) years as follows: P200,000 in 2009, P200,000 in 2010 and P300,000 in 2011.

How much would Mr. Santos exclude from his gross income in 2011?
a. P200,000 c. P50,000
b. P100,000 d. None

ANS: B

8. Jaypi Cruz insured his life with his estate as beneficiary. In 2011, after Mr. Cruz had paid
P65,000 in premiums, he assigned the policy to Mr. S. Santos for P60,000 and Mr. Santos
collected the total proceeds of P200,000. Mr. Santos, after the assignment, and before Mr. Cruz
death, paid total premiums of P80,000.

How much is the taxable amount?

a. P200,000 c. P60,000
b. P140,000 d. Zero
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

ANS: C

9. First statement: The value of property acquired by gift, bequest, devise or descent shall be
excluded from the gross income.
Second statement: Income from property received as gift, bequest, devise or descent as well as
gift, bequest, devise or descent of income from any property, in case of transfer of divided
property, shall be included in gross income.
a. Both statements are correct
b. Both statements are incorrect
c. Only the first statement is correct
d. Only the second statement is correct

ANS: A

10. One of the following is subject to income tax.

a. Income from a donated property derived from its investment or sale
b. Alimony or amount of principal paid under a marriage settlement
c. Value of property received as gift, or under a will or testament, or through legal succession
d. Participating dividends in insurance

ANS: A

11. Which of the following shall be excluded from gross income?

a. Amounts received through accidents or health insurance
b. Amounts received under Workmens Compensation Acts
c. Amounts of any damages received, whether by suit or agreement, on account of injuries or
sickness
d. All of the choices

ANS: D

12. Which of the following shall not be subject to tax?

a. Moral damages
b. Exemplary damages
c. Compensatory damages
d. All of the choices

ANS: D

13. Recoveries of damages, representing compensation for personal injuries which are non-
physical in nature shall not be included in gross income if due to which of the following?
a. Libel, defamation and slander
b. Breach of promise to marry
c. Compensatory damage
d. All of the choices
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

ANS: D

14. Mr. Monte was injured in a vehicular accident in 2009. He incurred and paid medical
expenses of P20,000 and legal fees of P10,000 during the year. In 2011, he received P70,000 as
settlement from the insurance company which insured the car owned by the other party involved
in the accident. From the above payments and transactions, the amount of taxable income of Mr.
Monte in 2011 was:
a. P70,000 c. P40,000
b. P50,000 d. zero

ANS: D

15. In a certain civil case, Wilfredo, plaintiff, was awarded by the court P20,000 damages
representing profit he failed to realize on account of defendants failure to comply with his
obligation to Wilfredo. Are those damages taxable income of Wilfredo?
a. No, because damages are generally not subject to income tax
b. Yes, because damages which are excluded from gross income are only those that are paid
arising from injuries or sickness
c. No, because no criminal case was filed by Wilfredo
d. Yes, because damages arising out of a civil case is always taxable under the current provisions
of the Tax Code

ANS: B

16. An accident solely attributable to the criminal negligence of the driver of Reckless Bus
Company resulted in the death of Ricardos wife, physical injury to Ricardo that prevented him
from working for a month and the total wreck of his brand new car which he bought for
P400,000.

In the action for damages filed by Ricardo against the bus company, the Court awarded the
following:

For Ricardos injury consisting mainly in the loss

of his right arm P 30,000
For the loss of one-month salary 25,000
For the death of his wife 25,000
For moral damages on account of such loss 100,000
For the loss of his car the value of which doubled
because of inflation 800,000

How much was the taxable income of Ricardo?

a. P980,000
b. P425,000
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

c. P25,000
d. Zero

ANS: B

17. One of the following is taxable in the Philippines

a. Salaries of the officials of the United Nations assigned in the Philippines paid by the United
nations and certified by the Secretary General of the United Nations
b. Income of citizens of the United States working in consular offices in the Philippines
c. Salaries of diplomatic officials and agents assigned in the Philippines
d. Salaries of nonresident employed by a foreign petroleum service contractor in the Philippines

ANS: D

18. Which of the following retirement benefits received from private firms is not taxable?
a. Received from an employer under its reasonable pension plan, employee is 49 years old
and has served the company for 12 years
b. Received from an employer under its reasonable pension plan, employee is 51 years old
and has served the company for 9 years
c. Received from an employer which has no reasonable pension plan, employee is 53 years
old and has served the company for 12 years
d. Received from an employer under its reasonable pension plan, employee is 52 years old
and has served the company for 11 years

ANS: D

19. Retirement benefits received under R.A. No. 7641 and those received by officials and
employees of private firms, whether individual or corporate, shall be excluded from gross
income, provided that the following are satisfied, except that:
a. the retirement benefit is in accordance with a reasonable private plan maintained by the
employer approved by the BIR
b. the retiring official or employee has been in the service of the same employer for at
least ten (10) years and is not less than fifty (50) years of age at the time of retirement
c. the retiring official or employee should not have previously availed of the privilege
under the retirement benefit plan of the same or another employer
d. none of the choices

ANS: D

20. First statement: The law does not require that the 10-year requirement for tax exempt
retirement benefits should be uninterrupted.
Second statement: The tax exempt retirement benefits shall be availed of by the official or
employee only once.
a. Both statements are correct
b. Both statements are incorrect
c. Only the first statement is correct
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

d. Only the second statement is correct

ANS: A

21. An employee of X company retired at the age of 50 years old after serving the company for 10 years.
He received retirement benefits from X company amounting to P2,500,000. The following year after his
retirement, he was invited by Y corporation to join it as its Executive Vice-President. After serving Y
corporation for 10 years, he retired at the age of 61. Y corporation gave him P3,000,000 retirement
benefits.

Which retirement benefits should be subject to tax?

a. Retirement benefits from X Company
b. Retirement benefits from Y Corporation
c. Both retirement benefits
d. Neither retirement benefits

ANS: B

22. Any amount received by an official or employee or by his heirs from the employer as
consequence of separation of such official or employee from the service of the employer shall be
excluded from gross income except if caused by:
a. death
b. sickness or other physical disability
c. any cause beyond the control of the official or employee
d. none of the choices

ANS: D

23. RDE was retired by his employer corporation in 2010 and paid P1,000,000 as a retirement
gratuity without any deduction for withholding tax. The corporation became bankrupt in 2011.
Can the BIR subject the P1,000,000 retirement gratuity to income tax?

First answer: Yes, if the retirement gratuity was paid based on a reasonable pension plan where
RDE was 50 years old and has served the corporation for 8 years.
Second answer: No, if RDE was forced by the corporation to retire
a. Both answers are wrong
b. Both answers are correct
c. First answer is correct; second answer is wrong
d. First answer is wrong; second answer is correct

ANS: B

24. Nellioso, 48 years of age and a retired employee, had among his properties and transactions
at the end of the taxable year 2011: Retirement benefits in the amount of P 200,000 received by
him in 2011 under a qualified retirement plan maintained by his former employer company.
Nellioso voluntarily retired after 20 years of service.
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

Is the above item subject to the regular tax rates for individual taxpayers?
a. No, because retirement benefits are generally not subject to the regular rates for
individual taxpayers
b. Yes, because Nellioso is only 48 years old when he retired which is below the 50-year
old requirement for exempt retirement benefits
c. No, because the retirement benefits received by Nellioso are subject to final
withholding tax
d. Yes, because the retirement benefits are given when Nellioso voluntarily retired from
the company

ANS: B

25. Born of a poor family on February 14, 1963, Mario worked his way through college. After working
for more than 12 years in X Manufacturing Company, Mario decided to retire and avail of the benefits
under the very reasonable retirement plan maintained by his employer. On the day of his retirement on
April 30, 2011 he received P400,000 as retirement benefit. Is Marios P400,000 retirement benefit
subject to income tax?
a. Yes, because Mario was only 48 years at the time of his retirement which is below the 50
year old requirement for exempt retirement benefits.
b. No, because Mario worked for the company for 12 years and the retirement benefits are
given under a very reasonable retirement plan maintained by his employer.
c. Yes, because it was Mario who decide to retire and avail of the benefits under the very
reasonable retirement plan maintained by his employer.
d. No, because retirement benefits are not subject to income regardless of the age o the retiree

ANS: A

26. Which of the following separation pay is taxable?

a. Separation pay received by an employee who resigned to join another company
b. Separation pay received by an employee whose services were terminated due to business
reverses, the employee was 48 years at the time of termination
c. Separation pay received by an employee who was asked by his employer to resign because his
position was declared a redundancy
d. Separation pay received by an employee who was retrenched by his employee because the
latter is leaving the Philippines.

ANS: A

27. First statement: In order for the separation pay to be exempt from income tax, the
separation from the service of the official or employee must not be asked for or initiated by
him or not of his own making.
Second statement: Any payment made by an employer to an employee on account of
dismissal, constitute of compensation regardless of whether the employer is legally bound by
contract, statute, or otherwise to make such payment.
a. Only the first statement is correct
b. Only the second statement is correct
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

c. Both statements are correct

d. Both statements are not correct

ANS: C

28. Which of the following is not a condition for granting tax exemptions to employee benefits?
a. The employee is terminated from services of the employer due to death, sickness or other
physical disability or for cause beyond the control of the employee
b. The employer pays benefits the official or employee or his heirs as a consequence of
such separation
c. The employee has served the employer for at least ten(10) years
d. None of the choices

ANS: C

29. Which of the following shall not be subject to income tax?

I- Pedro Reyes, an official of Corporation X, asked for early retirement because he was
emigrating from Australia. He was paid P2,000,000 as a separation pay in recognition of
his valuable services to the corporation.
II- Juan Cruz, another official of the same company was separated for occupying a
redundant position. He was given P500,000 as a separation pay.
III- Jose Bautista was separated due to his failing eyesight. He was given P500,000 as
separation pay.

All of the three(3) were not qualified to retire under the BIR approved pension plan of the
corporation
a. I, II and III c. I only
b. I and II d. II and III only

ANS: D

30. Mr. Jacobo worked for a manufacturing firm. Due to business reverses, the firm offered a
voluntary redundancy program in order to reduce overhead expenses. Under the program, an
employee who offered to resign would be given separation pay equivalent to his three months
basic salary for every year of service. Mr. Jacobo accepted the offer an received P400,000 as
separation pay under the program. After all the employee who accepted the offer were paid, the
firm found its overhead still excessive. Hence, it adopted another redundancy program. Various
unprofitable departments were closed. As a result Mr. Kintanar was separated from his service.
He also received P400,000 as separation pay.

Which of the above separation pay must be exempt from tax?

a. Both separation pays are exempt from tax
b. Neither separation pay is exempt from tax
c. Only the separation pay of Mr. Jacobo is exempt
d. Only the separation pay of Mr. Kintanar is exempt
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

ANS: D

31. Which of the following shall be excluded from gross income?

a. Social security benefits, retirement gratuities, pensions and other similar benefits received
from foreign government agencies and other institutions, private and public by resident or
nonresident citizens of the Philippines or aliens who come to reside permanently in the
Philippines
b. United States Veterans Administration benefits
c. GSIS and SSS benefits
d. All of the choices

ANS: D

32. Which of the following incomes derived by foreign governments, financing institutions
owned, controlled or enjoying refinancing from foreign governments and international or
regional financial institutions established by foreign governments shall be excluded from gross
income?
I- Income derived from investments in the Philippines in loans, stocks, bonds or other
domestic securities
II- Income from interest on deposits in banks in the Philippines
a. Both I and II c. I only
b. Neither I nor II d. II only

ANS: A

33. First Statement: Generally, the income of government entities performing proprietary
function is subject to tax.
Second Statement: Income derived from any public utility or from the exercise of any essential
governmental accruing to the Government of the Philippines or to any political subdivision is not
taxable
a. True, True c. True, False
b. False, False d. False, True

ANS: A

34. Prizes and awards made primarily in religious, charitable, scientific, educational, artistic,
literary, or civic achievement, shall be excluded from gross income, but only if the recipient:
I- is selected without any action on his part to enter the contest or proceeding
II- is not required to render substantial future services as a condition to receiving such
prize or award
a. Both I and II are correct c. Only I is correct
b. Neither I nor II is correct d. Only II is correct

ANS: A

35. Ms. Elisya Montenegro entered her short story in a literary contest. She won in the Short
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

Story category, and received P500,000 for her prize. What was the tax consequence of the
literary prize?
a. Exempt from income tax
b. Subject to final withholding tax
c. Subject to Section 24 (A)
d. Not subject to any internal revenue tax

ANS: B

36. Ms. Ma. Estella Santos was selected as the outstanding scientist in her province in 2011. Her
name was submitted by her supervisor without her knowledge. She received a plaque, trophy and
cash reward of P500,000. What was the tax consequence of the reward?
a. Exempt from income tax
b. Subject to final withholding tax
c. Subject to Section 24 (A)
d. Not subject to any internal revenue tax

ANS: A

37. All prizes and awards granted to athletes in local and international sports competitions and
tournaments whether held in the Philippines or abroad and sanctioned by their national sports
associations shall be:
a. Exempt from income tax
b. Subject to final withholding tax
c. Subject to Section 24 (A)
d. None of the choices

ANS: A

38. Conrad Smooth Ube is an amateur boxer. He is sent to compete in South Korea by the
Amateur Boxing Association of the Philippines (ABAP) and wins the gold medal after beating
his opponent Oh Ke Ba. He is awarded P500,000 by Good Faith Corp., a domestic Philippine
corporation. What is the tax consequence of the award received by Conrad Smooth Ube?
a. Subject to Section 24 (A)
b. Subject to final tax
c. Not subject to income tax
d. Subject to amusement tax

ANS: C

39. Bon Boom Boom Bonafe, resident citizen is a professional boxer. He fights Antonio
Speedy Dayag in the world championship in the USA. He receives P15,000,000 prize for the
fight. What is the tax consequence of the prize received by Bon Boom Boom Bonafe?
a. Subject to Section 24 (A)
b. Subject to final tax
c. Not subject to income tax
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

d. Subject to amusement tax

ANS: A

40. Gross benefits received by officials and employees of public and private entities are excluded
from gross income provided that the total exclusion shall not exceed:
a. P100,000
b.P50,000
c. P30,000
d. P20,000

ANS: C

41. Which of the following shall not be included in the gross income?
a. GSIS and SSS contributions
b. Medicare and Pag-IBIG contributions
c. Union dues
d. All of the choices

ANS: D

42. Which of the following gains should be excluded from gross income?
I- Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate
of indebtedness with a maturity of more than five(5) years.
II- Gains realized by the investor upon redemption of shares of stock of a mutual fund company
a. Both I and II c. I only
b. Neither I nor II d. II only

ANS: A

43. The amount of the informers reward shall be equivalent to:

a. ten percent (10%) of the amount recovered or one million pesos (P1,000,000) per case
whichever is higher
b. ten percent (10%) of the amount recovered or one million pesos (P1,000,000) per case
whichever is lower
c. fifteen percent (15%) of the amount recovered
d. none of the choices

ANS: B

44. Informers reward to persons instrumental in the discovery of violations of the National
Internal Revenue Code and the discovery and seizure of smuggled goods is subject to a final
withholding tax of:
a. ten percent (10%)
b. fifteen percent (15%)
Reviewer in Taxation (Book 1) Asser S. Tamayo (2012 Edition)

c. twenty percent (20%)

d. twenty five percent (25%)

ANS: A

45. Which of the following is subject to tax?

a. Interest on government securities
b. Interest on long term deposits or investments in banks with a maturity of five (5) years
or more
c. Interest on the price of the land covered by the Presidential Decrees on Land Reform,
received by the landowner from the purchaser-tenant, and the capital gain derived by him
d. Interest received by nonresidents from deposits with depository banks under the
Expanded Foreign Currency Deposit System (EFCDS)

ANS: A

46. Which of the following statements regarding campaign contributions is correct?

a. As a general rule, campaign contributions are not included in the taxable income in the
candidate to whom they were given, the reason being that such contributions were given
not for the personal expenditure/ enrichment of the concerned candidate, but for the
purpose of utilizing such contributions for his/her campaign
b. To be considered as exempt from income tax, these campaign contributions must have
been utilized to cover a candidates expenditures for his/her electoral campaign
c. Unutilized/ excess campaign funds, that is, campaign contributions net of the
candidates campaign expenditures, shall be considered as subject to income tax, and as
such, must be included in the candidates taxable income as stated in his/her Income Tax
Return filed for the subject taxable year
d. All of the choices