2005 BAR EXAMINATIONS

IN TAXATION LAW

BAR EXAMINATIONS 2005

TAXATION
11 September 2005 2 P.M. — 5 P.M.
INSTRUCTIONS

This questionnaire consists of fourteen (14)

numbers contained in eight (8) pages. Read each
question very carefully. Answer legibly, clearly
and concisely. Start each number on a separate
page; an answer to a sub-question under the
same number may be written continuously on
the same and immediately succeeding pages
until completed. Do not repeat the question.
HAND IN YOUR NOTEBOOK WITH THIS
QUESTIONNAIRE GOOD LUCK!!!

(Sgd.) Romeo J. Callejo, Sr.

Chairman
2005 Bar Examination Committee
PLEASE CHECK THE NUMBER OF PAGES IN
THIS SET WARNING: NOT FOR SALE OR
UNAUTHORIZED USE
 TAXATION
-I-

a) 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 to tax? Explain.

b) May taxes be the subject of set-off or

compensation? Explain.

c) Can an assessment for a local tax be the

subject of set-off or compensation against a final
judgment for a sum of money obtained by the
taxpayer against the local government that made
the assessment? Explain.

d) Is a deficiency tax assessment a bar to a claim

for tax refund or tax credit? Explain.

e) Is the approval of the court, sitting as probate

or estate settlement court, required in the
enforcement and collection of estate tax?
Explain. (10%)
- II -

(1.) Explain briefly whether the following items

are taxable or non-taxable:
a) Income from jueteng;
b) Gain arising from expropriation of property;
c) Taxes paid and subsequently refunded;
d) Recovery of bad debts previously charged off;
e) Gain on the sale of a car used for personal
purposes. (5%)

(2.) State and discuss briefly whether the

following cases may be compromised or may not
be compromised:
a) Delinquent accounts;
b) Cases under administrative protest, after
issuance of the final assessment notice to the
taxpayer, which are still pending;
c) Criminal tax fraud cases;
d) Criminal violations already filed in court;
e) Cases where final reports of reinvestigation or
reconsideration have been issued resulting in
the reduction of the original assessment agreed
to by the taxpayer when he signed the required
agreement form. (5%)
- III -

(1.) A city outside of Metro Manila plans to enact

an ordinance that will impose a special levy on
idle lands located in residential subdivisions
within its territorial jurisdiction in addition to
the basic real property tax. If the lot owners of a
subdivision located in the said city seek your
legal advice on the matter, what would your
advice be? Discuss. (5%)

(2.) a) State and explain the basis of dutiable

value of an imported article subject to an ad
valorem tax under the Tariff and Customs Code.
b) Distinguish countervailing duty from dumping
duty. (5%)

(3.) Jacob, after serving a 5-year tour of duty as

military attaché in Jakarta, returned to the
Philippines bringing with him his personal
effects including a personal computer and a car.
Would Jacob be liable for taxes on these items?
Discuss fully. (5%)
- IV -

(1.) State with reasons the tax treatment of the

following in the preparation 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. (5%)

(2.) a) State the conditions required by the Tax

Code before the Commissioner of Internal
Revenue could authorize the refund or credit of
taxes erroneously or illegally received.

b) Does a withholding agent have the right to file

an application for tax refund? Explain. (5%)
-V-

A taxpayer received a tax deficiency assessment

of P1.2 Million from the BIR demanding payment
within 10 days, otherwise, it would collect
through summary remedies. The taxpayer
requested for a reconsideration stating the
grounds therefor. Instead of resolving the
request for reconsideration, the BIR sent a Final
Notice Before Seizure to the taxpayer. May this
action of the Commissioner of Internal Revenue
be deemed a denial of the request for
reconsideration of the taxpayer to entitle him to
appeal to the Court of Tax Appeals?

Decide with reasons. (5%)

- VI -

Danilo, who is engaged in the trading business,

entrusted to his accountant the preparation of
his income tax return and the payment of the
tax due. The accountant filed a falsified tax
return by underdeclaring the sales and
overstating the expense deductions by Danilo.

Is Danilo liable for the deficiency tax and the

penalties thereon?

What is the liability, if any, of the accountant?

Discuss. (5%)
- VII -

An international airline with no landing rights in

the Philippines sold tickets in the Philippines for
air transportation. Is income derived from such
sales of tickets considered taxable income of the
said international air carrier from Philippine
sources under the Tax Code? Explain. (5%)
- VIII -

JR was a passenger of an airline that crashed.

He survived the accident but sustained serious
physical injuries which required hospitalization
for 3 months. Following negotiations with the
airline and its insurer, an agreement was
reached under the terms of which JR was paid
the following amounts: P500,000.00 for his
hospitalization; P250,000.00 as moral damages;
and P300,000.00 for loss of income during the
period of his treatment and recuperation. In
addition, JR received from his employer the
amount of P200,000.00 representing the cash
equivalent of his earned vacation and sick
leaves.

Which, if any, of the amounts he received are

subject to income tax? Explain. (5%)
- IX -

Company A decides to close its operations due to

continuing losses and to terminate the services
of its employees. Under the Labor Code,
employees who are separated from service for
such cause are entitled to a minimum of one-
half month pay for every year of service.
Company A paid the equivalent of one month
pay for every year of service and the cash
equivalent of unused vacation and sick leaves as
separation benefits.

Are such benefits taxable and subject to

withholding tax under the Tax Code?

Decide with reasons. (5%)

-X-

The Roman Catholic Church owns a 2-hectare

lot in a town in Tarlac province. The southern
side and middle part are occupied by the Church
and a convent, the eastern side by a school run
by the Church itself, the southeastern side by
some commercial establishments, while the rest
of the property, in particular the northwestern
side, is idle or unoccupied.

May the Church claim tax exemption on the

entire land? Decide with reasons. (5%)
- XI -

An alien employee of the Asian Development

Bank (ADB) who is retiring soon has offered to
sell his car to you which he imported tax-free for
his personal use. The privilege of exemption
from tax is granted to qualified personal use
under the ADB Charter which is recognized by
the tax authorities.

If you decide to purchase the car, is the sale

subject to tax? Explain. (5%)
- XII -

Ralph Donald, an American citizen, was a top

executive of a U.S. company in the Philippines
until he retired in 1999. He came to like the
Philippines so much that following his
retirement, he decided to spend the rest of his
life in the country. He applied for and was
granted a permanent resident status the
following year. In the spring of 2004, while
vacationing in Orlando, Florida, USA, he
suffered a heart attack and died. At the time of
his death, he left the following properties:
(a) bank deposits with Citibank Makati and
Citibank Orlando, Florida;
(b) a resthouse in Orlando, Florida;
(c) a condominium unit in Makati;
(d) shares of stock in the Philippine subsidiary of
the U.S. Company where he worked;
(e) shares of stock in San Miguel Corp. and
PLDT;
(f) shares of stock in Disney World in Florida;
(g) U.S. treasury bonds; and
(h) proceeds from a life insurance policy issued
by a U.S. corporation.

Which of the foregoing assets shall be included

in the taxable gross estate in the Philippines?
Explain. (5%)
- XIII -

Josel agreed to sell his condominium unit to

Jess for P2.5 Million. At the time of the sale, the
property had a zonal value of P2.0 Million. Upon
the advice of a tax consultant, the parties agreed
to execute two deeds of sale, one indicating the
zonal value of P2.0 Million as the selling price
and the other showing the true selling price of
P2.5 Million. The tax consultant filed the capital
gains tax return using the deed of sale showing
the zonal value of P2.0 Million as the selling
price.

Discuss the tax implications and consequences

of the action taken by the parties. (5%)
- XIV -
(1.) Mr. Fermin, a resident of Quezon City, is a
Certified Public Accountant-Lawyer engaged in
the practice of his two professions. He has his
main office in Makati City and maintains a
branch office in Pasig City. Mr. Fermin pays his
professional tax as a CPA in Makati City and his
professional tax as a lawyer in Pasig City.
a) May Makati City, where he has his main
office, require him to pay his professional tax as
a lawyer? Explain.
b) May Quezon City, where he has his residence
and where he also practices his two professions,
go after him for the payment of his professional
tax as a CPA and a lawyer? Explain. (5%)

(2.) In 1995, the BIR filed before the Department

of Justice (DOJ) a criminal complaint against a
corporation and its officers for alleged evasion of
taxes. The complaint was supported by a sworn
statement of the BIR examiners showing the
computation of the tax liabilities of the erring
taxpayer. The corporation filed a motion to
dismiss the criminal complaint on the ground
that there has been, as yet, no assessment of its
tax liability; hence, the criminal complaint was
premature. The DOJ denied the motion on the
ground that an assessment of the tax deficiency
of the corporation is not a precondition to the
filing of a criminal complaint and that in any
event, the joint affidavit of the BIR examiners
may be considered as an assessment of the tax
liability of the corporation.

Is the ruling of the DOJ correct? Explain. (5%)

NOTHING FOLLOWS.