CRC-ACE Taxation Topics Guide

CRC-ACE
The Professional CPA Review School
TAXATION
Topics:
 TAX- 1017 GROSS INCOME

 TAX- 1018 ITEMIZED DEDUCTIONS
 TAX- 1019 INSTALLMENT METHOD
 TAX- 1020 CORPORATE READJUSTMENT
 TAX- 1021 DECLARATION AND QUARTERLY PAYMENTS OF
INCOME TAX FOR SELF-EMPLOYED INDIVIDUALS
 TAX- 1022 COMMUNITY TAX CERTIFICATES
 TAX- 1023 TAXATION PROCESSES AND REMEDIES INTRO
 TAX- 1024 TAX REMEDIES
Dean Ruben D. Morante

Prof. Roel E. Hermosilla
TAX- 1017.28
GROSS INCOME
A. Define income in general- It is the gain derived from labor, or capital, or both labor and
capital, and includes the gain derived from the sale or exchange of capital assets.
B. Define gross income in general- Gross income means the total income of a taxpayer subject
to basic tax. It includes the gains, profits, and income derived from any source whatever,
whether legal or illegal.
C. What is included in gross income- It includes gains, profits, and income derived from: (C CPA
BLOP)
1. Compensation for services, including fees, salaries, wages, commissions and similar
items;
2. Annuities and pensions;
3. Gains derived from dealings in property, whether real or personal;
4. Winnings, cinematographic films and similar works, prizes, royalties, interests,

dividends and partner’s distributive share in net income of general professional partnership;
5. Gross income derived from the conduct of trade, business or exercise of profession;
6. Rents;
7. Transaction of any business carried on for gain or profit; and
8. Income of whatever kind and in whatever form derived from any source.
D. Exclusions from gross income
1. Proceeds of life insurance policies paid to beneficiaries upon the death of the insured.
2. Amount received by the insured as a return of premiums paid by him under life
insurance, endowment or annuity contracts.
3. Gift, bequest, devise or descent.
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4. Compensation for personal injuries or sickness received thru Accident or Health
insurance or Workmen’s Compensation Act, plus DAMAGES received on account of such
injuries or sickness.
5. Income exempt under any treaty binding upon the government of the Phil.
6. Retirement benefits, pension, gratuities, etc.
a. Retirement benefits received by officials and employees of private firms, whether

individual or corporate.
Requisites for exemption:
1. There must be a reasonable private benefit plan maintained by the employer.
2. The retiring official or employee has been in the service of the same employer for
at least 10 years.
3. Not less than 50 years of age at the time of retirement.
4. The benefit of exemption may be availed of only once.
b. Separation pay received by an official or employee or his heirs from the employer
due to
1. Death
2. Sickness
3. Physical disability
4. Any cause beyond the control of the official or employee.
c. Retirement benefits, pensions and similar benefits received from foreign

government agencies and other institutions, public or private.
d. Benefits received from U.S Veterans Administration.
e. Benefits received from S.S.S.
f. Benefits received from G.S.I.S.
g. Benefits received by government officials and employees.
7. Income of the Philippine government or political subdivisions derived from:
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a. Any public utility, and
b. The exercise of any essential governmental function.
8. Income of
a. Foreign governments,
b. Financing institutions owned by them, and
c. International or regional financing institutions established by them from their

investments in the Philippines in loans, stocks and bonds, or from interest on bank deposits in
the Philippines.
9. Prizes and awards in recognition of religious, charitable, scientific, educational,

artistic, literary, or civic achievement.
Requisites for exemption:
a. Recipient was selected without entering any contest or proceedings.
b. Recipient is not required to render substantial future services.
10. Prizes and awards in sports competition.
11. 13th month pay and other benefits not exceeding P30,000.
12. “De minimis” benefits.
a. Monetized unused vacation leave credits not exceeding ten (10) days during the
year;
b. Medical cash allowance to dependents of employees not exceeding seven hundred

fifty pesos (P750) per employee per semester, or one hundred twenty five (P125) per month;
c. Rice subsidy of one thousand five hundred pesos (P1,500) or one (1) sack of 50-kg.
rice per month amounting to not more than one thousand five hundred pesos (P1,500);
d. Uniforms and clothing allowance not exceeding four thousand pesos (P4,000) per
annum;
e. Actual medical benefits not exceeding ten thousand pesos (P10,000) per annum;
f. Laundry allowance not exceeding three hundred pesos (P300) per month;
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g. Employee achievement awards e.g., for length of service, or safety achievement,
which must be in the form of a tangible personal property other than cash or gift certificate,
with an annual monetary value not exceeding ten thousand pesos (P10,000) received by the
employee under an established written plan which does not discriminate in favor of highly paid
employees;
h. Gifts given during Christmas and major anniversary celebrations not exceeding five
thousand pesos (P5,000) per employee per annum;
i. Flowers, fruits and books or similar items given to employees under certain
circumstances, e.g., on account of illness, marriage, birth of baby, etc.; and
j. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of
the basic minimum wage.
13. GSIS, SSS, Philhealth and Pag-ibig contributions and union dues of individuals.
14. Gains from sale of bonds, debentures or other certificates of indebtedness with
maturity of more than 5 years.
15. Gains from redemption of shares in mutual fund.
Problems
1. Which of the following is not income:
a. Gain from labor c. Return of capital
b. Gain from capital d. Gain derived from a sale of asset
2. Hershe bought a residential house and lot in 2008 for P120,000. In 2011, curious as to
how much her property then cost, she asked a real estate broker to reappraise the same. The
real estate broker reported that the value of her property has increased to P500,000. Hershe
should report gross income in her income tax return for the year of 2011 of:
a. P500,000 b. P120,000 c. P380,000 d. None
3. A tax exclusion is defined as
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a. An item or amount which the law allows to be deducted from gross income in order
to arrive at net income.
b. The grant of immunity to particular persons or corporations from a tax which

others within the same taxing district are obliged to pay.
c. Income received but which is not taxable as it is exempted by law or by treaty
d. A deduction from income tax due of any amount paid to a foreign country subject
to limitation.
4. Proceeds of insurance taken by corporation on the life of an executive to indemnify it

against loss in case of his death is:
a. Exempt from income tax c. Subject to final tax
b. Part of taxable income d. Party exempt, party taxable
5. Amount receivable by the estate of the deceased, his executor or administrator as a

beneficiary under policy taken by the decedent upon his own life is:
a. Excluded from gross income.
b. Part of gross income whether the beneficiary is revocable or irrevocable.
c. Part of gross income if the beneficiary is revocable.
d. Part of gross income if the beneficiary is irrevocable.
Items 6 through 8 are based on the following information:
Kapuso insured his life with an insurance company. Under the contract, he will pay a
monthly premium of P2,000 for 10 years. In case of death before the 10 th year, his
beneficiary ill receive an indemnification in the amount of P150,000. If he is still living
on the 10th year, he will receive P500,000.
6. If Kapuso dies on the 5th year, his beneficiary will report an income of:
a. P500,000 b. P150.000 c.P260,000 d. Exempt
7. Suppose Kapuso dies on the 5th year and his beneficiary was offered to receive the
P150,000 in cash or to receive it in installment of P20,000 for ten (10) monthly
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installment payments and the beneficiary chose the 2nd option, he will report an income
of:
a. P500,000 b. P150,000 c. P50,000 d. Exempt
8. If Kapuso survives the policy and is able to receive the P500,000, he will report an
income of:
a. P500,000 b. P260,000 c. P150,000 d. None
9. Malaya was insured under an endowment policy with a value of P500,000. Total
premiums paid by him during the term of premium payments on the policy was
P490,000, from which there was a return of premiums of P40,000. At the maturity of
the policy, Malaya received P500,000. The income of Malaya under the policy is:
a. Zero b. P500,000 c. P10,000 d. P50,000
10. Bektas insured his life with his estate as beneficiary. In 2011, after Bektas had paid
P65,000 in premiums, he assigned the policy to Alamid for P60,000 and Alamid
continues paying the premiums. Bektas died and Alamid collected the total proceeds of
P200,000. Alamid, after the assignment and before Bektas’ death, paid total premiums
of P80,000. As a result of the above transaction, Alamid:
a. May consider the proceeds of P200,000 as exempt from income tax.
b. Derived a taxable income of P55,000.
c. Derived a taxable income of P60,000.
d. Answer not given.
11. Which of the following is taxable?

a. Agricultural land inherited
b. Cash received as gift
c. Philippine Charity Sweepstakes winnings
d. Interest on government bonds

a. Separation pay received by a 50-year old employee due to the retrenchment
program of the employer.
b. Retirement pay received from a benefit plan registered with the Bureau of Internal
Revenue where at the time the employee retired he was 55 years of age, retirement
from employment for the first time in his life, and was employed with the employer
from whom retiring for 6 years prior to retirement.
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c. Social security benefit received by a balikbayan from employer abroad at the age of
35.
d. SSS and GSIS benefit.
13. 1st statement: Amounts received by reason of involuntary separation remain exempt
from income tax even if the official or employee at the time of separation has rendered
less than ten (10) years of service and/or below fifty (50) years of age.
2nd Statement: Any amount received by an official or employee or by his heirs from the
employer due to death, sickness or other physical disability or for any cause beyond the
control of the said official or employee, such as retrenchment, redundancy, or cessation
of business is exempt from income tax.
a. Both statements are correct
b. Both statements are not correct
c. Only the first statement is correct
d. Only the second statement is correct
E. Compensation paid in promissory notes - Promissory notes received in payment for service
constitute income to the extent of fair market value at the time of receipt. Fair market
value is the fair discounted value.
Problems
1. When services are paid for in non-interest-bearing note, taxpayer:

a. Shall not report any income from the promissory note.
b. Shall defer reporting of the income until the note is paid upon maturity.
c. Shall report as income the face value of the note plus interest at legal rate.
d. Shall repot as income the fair market value of the promissory note at the time of
receipt.
2. For services rendered, Otoman received as compensation on December 31, 2011, a non-
interest-bearing promissory note for P250,000 which is due on December 31, 2012. The
note may be sold to the bank at the time of receipt at a discount rate of 20%. The note
was paid to Otoman on December 31, 2012. How much should Otoman report in his
2011 and 20112 ITRs?
2011 2012 2011 2012
a. P437,500 P87,000 c. P420,000 P105,000

b. P525,000 P0 d. P525,000 P105,000
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3. If a corporation transfers to its employees its own stock as remuneration for services
rendered by the employees, the amount of such remuneration is the:
a. Fair market value of the stock at the time they were given to the employee.
b. Fair market value of the stock at the time they were sold by the employee.
c. Par value of the stock.
d. Fair market value of the stock at the time the services were rendered.
4. On March 31, 2012, Plinky received 100 shares of stock with a fair market value of P120
per share as of March 31, 2012. The shares of stock were intended to pay the services
rendered by Plinky on November 20, 2011, at which time the fair market value was P100
per share. The par value per share is P50. The income of Plinky is:
a. P12,000 b. P10,000 c. P5,000 d. P2,500
5. Which of the following items that reduce salaries of employees is not an exclusion from
gross income?
a. GSIS or SSS contributions c. Labor union dues
b. Philhealth and Pag-ibig contribuions d. IOU’s
6. Thirteenth month pay P25,000
Christmas bonus P5,000
Productivity incentives pay P8,000
The gross compensation income subject to tax is:
a. P38,000 b. P13,000 c. P8,000 d. P1,000
7. Merced, a resident citizen of the Philippines, married and an employee of SMC Corp.,
had the following data for 2011:
Salary, net of P15,000 exclusions for

SSS,Philhealth, Pag-ibig, etc. P260,000
Thirteenth month pay P25,000
Loyalty award P20,000
Productivity incentives pay P30,000
De minimis benefit (within maximum) P10,000
How much income tax was withheld on the compensation income?

a. P65,500 b. P56,900 c. P51,500 d. P68,900
8. Marfil, has the following income in 2011:

Salary as audit supervisor P180,000
Income from accounting practice P100,000
Per diem as a director P120,000
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Accumulated vacation pay (9 days) P20,000
13th month pay P46,000
Winning from PSCO P20,000
How much compensation income is subject to basic tax?

a. P486,000 b. P386,000 c.P316,000 d. P336,000
F. Fringe benefits – under the new Tax Code, fringe benefits are classified as follows:
1. Fringe benefits to rank and file employees; and

2. Fringe benefits to employees holding managerial or supervisory positions.
Taxable fringe benefits to rank and file employees
1. Meals furnished or subsidized by employer.

2. Rental value of living quarters furnished an employee.
3. Premiums on life insurance of an employee where the insured employee is directly
or indirectly the beneficiary.
4. Fixed or variable transportation, representation and other allowances given an
employee. Except the advance or reimbursement-type allowances.
5. Performance bonus, relay station allowance, and danger exposure allowance.
6. Personal economic relief allowance (PERA) granted to government employees.
7. Salaries and allowances during leaves of absence (vacation and sick leaves).
8. Fees received by an employee (including director’s fees) for the performance of a
service for the employer.
9. Dismissal (involuntary separation) payment.
Exempt fringe benefits to rank and file employees
1. Meals, living quarters, de minimis entertainment, medical services, courtesy

discounts on purchases, sack of rice, etc. given for the “convenience of the
employer” or for promoting the contentment, health, efficiency or goodwill of the
employee.
2. Reimbursement-type traveling, representation and other allowances. Except excess
advance retained by the employee.
3. Retirement and separation benefits exempt under the law.
Problems
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1. All of the following fringe benefits are not taxable except:
a. De minimis benefits.
b. Benefits given to a clerk of the company.
c. Those authorized and exempted under contractual agreements.
d. Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plan.
2. Which of the following statements is not correct?

a. The monetized value of unutilized vacation leave credits of ten (10) days or less
which were paid to the employee during the year are not subject to income tax and
to the withholding tax.
b. The salary of an employee on vacation or on sick leave, which are paid
notwithstanding his absence from work, constitutes compensation income.
c. Any amount which is required by the law to be deducted by the employer from the
compensation of an employee including the withheld tax is considered as part the
employee’s compensation and is deemed to be paid to the employee as
compensation at the time the deduction is made.
d. If living quarters or meals are furnished to an employee for the convenience of the
employee, the value there of need not be included as part of compensation income.
3. A and B are employed as driver of X and Y, respectively, with a monthly salary of P5,000
each. In addition, A and B are provided free meals and living quarters with a monthly
value of P3,000. A eats and lives in X’s residence because he is a bachelor and could help
in other household chores like gardening and running errands for the family. On the
other hand, B stays with Y because the latter is a doctor available24 hours a day. What is
the gross compensation income of A and B?
A B A B
a. P8,000 P5,000 c. P8,000 P8,000

b. P5,000 P5,000 d. P5,000 P8,000
Fringe benefits to managerial or supervisory employees subject to final tax
1. Taxable fringe benefit defined. It means any good, services or other benefit furnished or
granted in case or in kind by an employer to an employee (except rank and file
employees) such as, but not limited, to the following: HIME THE HIVE)
a. Housing;
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b. Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;
c. Membership fees, dues and other expenses home by the employer for the employee
in social and athletic clubs or other similar organizations;
d. Expenses for foreign travel;
e. Household personnel, such as maid, driver and others;
f. Expense account;
g. Holiday and vacation expenses;
h. Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the laws allow;
i. Vehicle of any kind; and
j. Educational assistance to the employee or his dependents.
2. Fringe benefits not subject to final tax

a. Benefits given to rank and file employees, whether granted under a CBA or not;
b. Benefits given is required by the nature of, or necessary to the trade, business or
profession of the employer;
c. Benefits given is for the convenience or advantage of the employer;
d. Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plan;
e. Fringe benefits which are authorized and exempted from tax under special laws; and
f. De minimis benefits promulgated by the BIR.
3. Rate of final tax and tax base. The final tax rate based on the grossed-up monetary value of the
taxable fringe benefits, follows:
34% - Effective January 1, 1998
Grossed-up monetary value of the fringe benefit shall be determined by dividing the actual
monetary value of the fringe benefit received by the employee, by:
Grossed-up monetary value of fringe benefit furnished to nonresident alien individual and special
kind of nonresident alien, both not engaged in trade or business in the Phil., shall be determined
by dividing the actual monetary value of the fringe benefit received by the difference between
100% and the applicable final income tax rates of 25% and 15%, respectively.
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4. Valuation of taxable fringe benefits
a. If the fringe benefit is granted in money, or is directly paid for by the employer, then the value
is the amount granted or paid for;
b. If the fringe benefit is granted or furnished by the employer in property and ownership is
transferred to the employee, then the value of the fringe benefit shall be equal to the fair market
value of the property. Note: the FMV of the property is the FMV determined by the BIR
Commissioner or the FMV determined by the Provincial or City Assessor, whichever is higher.
c. If fringe benefit is granted or furnished by the employer in property but the ownership is not
transferred to the employee, the value of the fringe benefit is equal to the depreciation value of
the property.
5. Valuation Guidelines. The guidelines for valuation of specific types of fringe benefits and
determination of the monetary value of the fringe benefits are as follows:
a. Housing privilege
Case 1 – The employer leases (as lessee) residential property for the use
of a Supervisor.
Value of the benefit – rental paid by the employer under the lease contract.
Monetary value of the benefit – 50% of the value of the benefit
Tax base (taxable value) – grossed-up monetary value.
Problem & Solution

A Co. leased a residential house for the use of its branch manager. The rent agreed upon the
lease contract was P170,000 per month. Compute the benefit and tax.
Value of fringe benefit per month P170,000
Monetary value of the benefit (50% of P170,000) P85,000
Tax base- grossed-up monetary value (85,000 divided by 68%)
P125,000
Fringe benefit tax in 2011 (32% of P125,000) P40,000
Case 2 – The employer owns residential property which was assigned to an officer for his use as
residence.
Annual value of the benefit – 5% of FMV of the land and improvements as determined by the
BIR Commissioner or the Assessor, whichever is higher.
Monetary value of the benefit – 50% of the value of the benefit
Tax base – grossed-up monetary value
Problem & Solution

B Co. owns a condominium unit which an officer was allowed to use as residence.
Cost of the unit was P5,000,000. The FMV per Commissioner’s valuation is P4,896,000 and
the Assessor’s is P3,500,000. Compute the fringe benefit tax due per month.
Monthly value of the fringe benefit (5% of P4,896,000 divided by 12 mo.) P20,400
Monetary value (50% of P20,400) P10,200
Grossed-up monetary value (P10,200 divided by 68%) P15,000
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Case 3 – The employer purchases residential property on the instalment basis and allows an
officer to use the same as his residence.
Annual value of the benefit – 5% of the acquisition cost, exclusive of interest.
Monetary value of the benefit – 50% of the value of the benefit.
Tax base – grossed-up monetary value.
Problem & Solution

C Co. purchased real property in installments and allowed an officer to use the same as his
residence. Installment contract price was P2,611,200. Compute the fringe benefit tax per
month.
Annual value of fringe benefit (5% of P2,611,200) P130,560

Monetary value (50% of P130,560) P 65,280
Grossed-up value (P65,280 divided by 68%) P 96,000
Monthly grossed-up value (P96,000 divided by 12) P 8,000
Fringe benefit tax in 2011 (32% of P8,000) P 2,560
Case 4 – The employer purchases a residential property and transfers ownership thereof in the
name of an officer.
Value of the benefit – employer’s acquisition cost or FMV, whichever is higher. (The FMV is the
higher between the BIR Commissioner’s value and the Assessor’s value)
Monetary value – the entire value of the benefit.

Tax base- grossed-up monetary value.
Problem & Solution

D Co. purchased a house and lot and transferred title thereto to its president. The cost of
acquisition was P1,500,000. The BIR Commissioner’s FMV was P2,720,000. Compute the fringe
benefit tax.
Value of the benefit (Commissioner’s value) P2,720,000
Monetary value (entire benefit) P2,720,000
Grossed-up value (P2,720,000 divided by 68%) P4,000,000
Fringe benefit tax in 2011 (32% of P4,000,000) P1,280,000
Case 5 – The employer purchases a residential property and transfers ownership thereof to an
officer for the latter’s residential use at a price less than the employer’s acquisition cost.
Value of the benefit – The difference between the FMV of the BIR Commissioner or the FMV of
the Assessor, whichever is higher, and the cost to the employee.
Monetary value of the benefit – entire value of the benefit.
Problem & Solution

E Co. purchased a residential house at a cost of P2,300,000. The property was transferred by E
Co. to its president to be used for residential purposes for P1,980,000. The BIR Commissioner’s
value is P2,500,000, while the Assessor’s value is P2,626,000. Determine the fringe benefit tax.
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FMV of assessor (higher than Commissioner’s value) P2,626,000
Less: Cost to the employee 1,980,000
Value of the fringe benefit P 646,000
Monetary value (entire value) P 646,000
Grossed-up value (P646,000 divided by 68%) P 950,000
Case 6 – Housing benefits which are not taxable – The following housing benefits provided by
the employer to its employees are not considered as taxable fringe benefits.
a. Housing privilege of military officials of the Armed Forces of the Philippines consisting of
officials of the Philippine Army, Philippine Navy and Philippine Air Force.
b. A housing unit which is situated inside or adjacent to the premises of a business or
factory. A housing unit is considered adjacent to the premises of the business if it is located
within the maximum of fifty (50) meters from the perimeter of the business premises.
c. Temporary housing for an employee who stays in a housing unit for three (3) months or
less.
b. Interest on loan at less than market rate
1. If the employer lends money to his employee free of interest or at a rate lower than 12%,
such interest foregone by the employer (the difference of the interest assumed by the
employee and the rate of 12%) shall be treated as a taxable fringe benefit.
2. The benchmark rate of 12% shall remain in effect until revised by a subsequent regulation.
3. The regulation shall apply to installment payments or loans with interest rate lower than
12% starting January 1, 1998.
Problem & Solution

A local bank approved a loan of P680,000 in favour of an officer with interest thereon at special
rate of 8% per annum. Term of the loan is 6 months. Compute the fringe benefit tax.
Interest at benchmark rate (P680,000 x 12% x 6/12) P40,800

Less: Interest at special rate (P680,000 x 8% x 6/12) 27,200
Interest foregone by the bank P13,600
Value of benefit P13,600
Grossed-up value (P13,600 divided by 68%) P20,000
Fringe benefit tax in 2011 (P20,000 x 32%) P 6,400
c.Social and athletic club fees

Membership fees, dues, and other expenses borne by the employer for his employee, in social
and athletic clubs or other similar organizations shall be treated as taxable fringe benefits of the
employee in full.
d. Expenses for foreign travel
1. Fringe benefits of foreign travel which are taxable:
a. 30% of the cost of first class airplane ticket;
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b. Lodging cost in a hotel or similar establishment in excess of 300 US Dollars per
day; and
c. Travelling expenses paid by the employer for the travel of the family members of
the employee.
When there is no documentary evidence showing that the employee’s travel

abroad was in connection with business meetings or conventions, the entire cost
of the ticket, including cost of hotel accommodations and other expenses
incident thereto shouldered by the employer, shall be treated as taxable fringe
benefits.
“Business meetings” shall be evidenced by official communications from

business associates abroad indicating the purpose of the meeetings.
“Business conventions” shall be evidenced by official

invitations/communications from the host organization or entity abroad.
2. Fringe benefits of foreign travel which are not taxable
Reasonable foreign travel expenses of the employee paid by the employer for the
purpose of attending business meetings or foreign conventions. Such expenses
includes:
a. Inland travel expenses such as expenses for food, beverages and local
transportation;
b. The cost of lodging in a hotel or similar establishment amounting to an
average of US $300 or less per day;
c. Cost of economy and business class airplane ticket; and
d. 70% of the cost of first class airplane ticket.
e.Household expenses
The following personal expenses of the employee which are borne by the employer
shall be treated as taxable fringe benefit:
1. Salaries of household help, personal driver of the employee, or other.

2. Similar expenses like payment for homeowners association dues, garbage dues, etc.
f.Expense account
1. Expenses incurred by the employee which are paid by his employer shall be treated
as taxable fringe benefits. (In this case, the employee receives an entertainment or
representation allowance which is subject to liquidation).
2. Expenses paid for by the employee but reimbursed by his employer shall be treated
as taxable fringe benefits. (In this case, the employee pays for the expense and gets
reimbursement from the employer).
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The above expenses are not treated as fringe benefits and therefore not taxable
provided:
a. The expenditures are duly receipted for and in the name of the employer, and
b. The expenditures are connected with the trade or business of the taxpayer, that is, they
are not personal expenses attributable to the employee.
3. Personal expenses of the employee (like purchases of groceries for the personal
consumption of the employee and his family) paid for or reimbursed by the
employer to the employee shall be treated as taxable fringe benefits of the
employee whether or not the same are duly receipted for in the name of the
employer.
4. Representation and transportation allowances which are fixed in amounts and are
regularly received by the employee as part of their monthly compensation income
shall not be treated as taxable fringe benefits.
Note: Such allowances are taxable as compensation income subject to regular tax
rates.
Problem & Solution
In 2011, J. Cruz, married, general manager of A Inc., received the following from his
employer:
Salary, net of WT of P267,000 P683,000
Allowances and benefits received:
1. Rent paid by A Inc., on the house which J. Cruz
occupies for residential purposes, net of WT of 5% 142,500
2. Entertainment allowance subject to liquidation 100,000
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Note: The amount of P75,000 was duly receipted in the name of A Inc., and used to
entertain the customers of A Inc. the balance of P25,000 was used to purchase a
TV set for the personal use of J. Cruz
3. Reimbursement of entertainment expenses paid by J. Cruz 40,000

Note: P17,500 was used to entertain J. Cruz’ family and friends and the balance of
P22,500 was used to promote the company’s business.
4. Fixed monthly allowance for entertainment (P5,000 x 12) 60,000
a. Compute the fringe benefits tax.

b. Determine the tax payable by Mr. Cruz.
a. Fringe benefits tax

Value of the benefit, rent paid (P142,500 ÷ 95%) P150,000
Monetary value – (P150,000 x 50%) P 75,000
Grossed-up value (75,000 ÷ 68%) P110,294
Fringe benefit tax (32% of P110,294) P 35,294
Value of benefit:
Amount used to purchase TV set P 25,000
Reimbursement of expenses for personal purposes 17,500
Total P 42,500
Grossed-up value (P42,500 ÷ 68%) P 62,500
Fringe benefit tax P 20,000
b. Tax payable by Mr. Cruz

Salary (P683,000 plus 267,000) P 950,000
Monthly entertainment allowance 60,000
Total P 1,010,000
Less: Personal exemption (married) 50,000
Taxable income P 960,000
Tax on P500,000 P 125,000

Tax on P460,000 at 32% 147,200
Tax due P 272,200
Less: Creditable WT on salary 267,000
Tax payable P 5,200
17
Note: The value of the fringe benefits is not returnable by Mr. Cruz because it is subject
to final WT.
g. Holiday and Vacation expenses

Holiday and vacation expenses of the employee borne by his employer shall be treated
as taxable fringe benefits.
h. Cost of insurance
1. Taxable fringe benefits – The cost of life or health insurance and other non-life
insurance premiums borne by the employer for its employees.
2. Non-Taxable fringe benefits

a. Contributions of the employer for the benefit of the employee pursuant
to the provisions of existing laws, such as contributions to the Social
Security System, the Government Service Insurance System and similar
contributions under the provisions of any other existing law.
b. The cost of premiums borne by the employer for the group insurance of
its employees.
i. Motor vehicle of any kind
Case 1 – The employer purchases the motor vehicle in the name of an officer
Value of the benefit – acquisition cost.
Monetary value – entire value of the benefit.
Case 2 – The employer provides an officer with cash for the purchase of a motor vehicle in
the name of the officer.
Value of the benefit – amount of cash received by the employee.
Monetary value – entire value of the benefit.
Case 3 – The employer shoulders a portion of the amount of the purchase price of a motor
vehicle in the name of an officer.
Value of the benefit – amount shouldered by the employer.
Monetary value – entire of the benefit.
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Case 4 – The employer purchases a car on installment in the name of an officer.
Value of the benefit – acquisition cost (exclusive of interest) divided by five (5) years life
Monetary value – entire value of the benefit
Tax base – grossed-up monetary value
Note: In cases 1 to 4, the monetary value of the fringe benefit shall be the entire value of
the benefit, regardless of whether the motor vehicle is used by the employee partly for
personal purposes and partly for the benefit of his employer.
Problems and Solutions

a. F Co. purchased a motor vehicle for the use of the manager and registered in his name.
Cost of the car was P612,000. The vehicle was uses partly for personal purposes and
partly for the benefit of F Co. Compute the fringe benefit tax.
Value of the benefit P612,000
Monetary value P612,000
Grossed-up value (P612,000 ÷ 68%) P900,000
Fringe Benefit Tax in 2011 (32% of P900,000) P288,000
b. Suppose F Co. in letter (a) shouldered only a portion of the cost of the car in the amount
of P244,800 and the balance paid by the manager. Compute the fringe benefit tax.
Value of the fringe benefit P244,800
Monetary value of fringe benefit P244,800
c. Suppose F Co. in letter (a) purchased the car in the name of the manager on the
installment basis. Compute the fringe benefit tax.
Value of benefit (P612,000 ÷ 5 years) P122,400
Monetary value P122,400
Note: Same amount is payable for each of the succeeding years.
Case 5 – The employer owns and maintains a fleet of motor vehicles for the use of the
business and the employees.
Value of the benefit – acquisition cost of all the motor vehicles not normally used for
business purposes divided by 5 years life.
Monetary value – 50% of the value of the benefit.
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Case 6 – The employer leases and maintains a fleet of motor vehicles for the uses of the
business and the employees.
Value of the benefit – amount of rental payments for motor vehicles not normally used for
business purposes.
Monetary value – 50% of the value of the benefit.
Problems and Solutions
a. G Co. owns a fleet of motor vehicles for the use of the business and its employees. One of
the cars (cost – P1,020,000) is not used for business purposes. Most of the time, it is
borrowed by the employees for personal purposes. Compute the fringe benefit tax.
Value of the benefit (P1,020,000 ÷ 5 years) P204,000
Monetary value (50% of P204,000) P102,000
Grossed-up monetary value (P102,000 ÷ 68%) P150,000
b. Suppose G Co. in letter (a) does not own the motor vehicles but leases them from Rent-a-
Car, Inc., and pays quarterly rental of P68,000 for the vehicle used by the employees for
personal purposes. Compute the fringe benefit tax.
Value of the benefit P 68,000
Monetary Value (50% of P68,000) P 34,000
Grossed-up value (P34,000 ÷ 68%) P 50,000
Case 7
a. The use of aircraft or helicopters owned and maintained by the employer shall not be
subject to the fringe benefit tax. The use shall be treated as business use.
b. The use of yacht, whether owned and maintained or leased by the employer shall be
treated as taxable fringe benefit. The value of the benefit shall be measured based on
the depreciation of a yacht at an estimated useful life of 20 years.
j. Educational Assistance
1. The cost of educational assistance to the employee which is borne by the employer shall
be treated as a taxable fringe benefit.
20
Exception – a scholarship grant to the employee by the employer shall not be treated as
taxable fringe benefit if:
a. The education or study involved is directly connected with the employer’s trade,
business or profession; and
b. There is written contract that the employee is under obligation to remain in the
employ of the employer for a period of time mutually agreed upon.
2. The cost of educational assistance extended by an employer to the dependents of an
employee shall be treated as taxable fringe benefits of the employee.
Exception – When the assistance is provided through a competitive scheme under a
scholarship program of the company.
6. Filling of return and payment of the final tax. The fringe benefit tax is a final income tax
on the employee to be withheld by the employer. The employer shall file the return and
pay the tax withheld within 10 days from the close of each calendar quarter. For
taxpayers under EFPS, 5 days later.
Problems
1. Which of the following statements on fringe benefits is correct?
a. Part of the taxable income of the employees
b. Subject to fringe benefit tax
c. Not part of taxable income of the employees
d. Maybe given to managerial and rank and file employees
2. Pingoy is a rank and file employee of Wietix Corporation. During the taxable year he
received a total salary of P240,000. In addition, he was given fringe benefits of free
quarters with a monthly value of P4,000 and free meal allowance of P5,000 per month.
How much are the fringe benefits received for the year subject to fringe benefits tax?
a. P0 b. P48,000 c. P60,000 d. P108,000
3. Which of the following is subject to fringe benefit tax?

a. Compensation of the rank and file employee.
b. Compensation of the supervisory or managerial employee.
c. Fringe benefit of the rank and file employee.
d. Fringe benefit of the supervisory or managerial employee.
4. Which of the following fringe benefits is not subject to the fringe benefits tax?
a. Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans
21
b. Housing
c. Expense account
d. Vehicle of any kind
5. The following earnings are subject to fringe benefit tax, except

a. Salary of the rank and file employee.
b. Housing necessary for the trade and for the convenience of the employer.
c. Food allowance for the convenience of the employer and necessary in the conduct
of business.
d. All of the above.
6. Statement 1: A fringe benefit which is not subject to the fringe benefit tax is taxable
income of the employee.
Statement 2: A fringe benefit which is subject to the fringe benefit tax is taxable income
of the employee.
a. First statement is true while second is false.
b. First statement is false while second is true.
c. Both statements are true.
d. Both statements are false.
7. Which statement is wrong? The fringe benefit tax is:

a. Imposed on the employer c. Withheld at source
b. Imposed on the employee d. Deductible by the employer
8. Fringe benefit tax is computed based on the:

a. Monetary value of the fringe benefit tax
b. Grossed-up monetary value of the fringe benefit
c. Book value of the fringe benefit
d. Fair market value of the fringe benefit
9. The following statement are true, except,

a. Fringe benefit shall be treated as final income tax on the employee, withheld and
paid by the employer on a quarterly basis.
b. The grossed-up monetary value of the fringe benefit is the actual amount received
by the employee.
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c. The grossed-up monetary value of the fringe benefit shall be determined by dividing
the actual monetary value of fringe benefit received by its equivalent monetary
value factor.
d. The person liable for fringe benefit tax is the employer, whether an individual,
professional partnership or a corporation, regardless of whether the corporation is
taxable or not, or the government and its instrumentalities.
Items 10 and 11 are based on the following information:

In 2011, an employer gave the following fringe benefits, in cash and in kind, to its employees:
To management level employees P2,040,000
To rank and file employees 5,000,000
10. The fringe benefit tax is:
a. P960,000 b. P652,800 c. P680,000 d. P750,000
11. The deduction from the gross income of the employer for fringe benefits is:
a. P3,000,000 b. P2,040,000 c. P8,000,000 d. P5,000,000

Journal entry in 2011:
Fringe benefit expense P389,000
Fringe benefit tax expense 136,000
Cash P389,000
Fringe benefit tax payable 136,000
12. The grossed-up monetary value of the fringe benefit to supervisory personnel is:
a. P425,000 b. P289,000 c. P186,000 d. P389,000
13. The monetary value of the fringe benefit to the rank and file employees is:
a. P425,000 b. P100,000 c. P289,000 d. P389,000
14. Statement 1: The fringe benefit tax is withheld by the employer.

Statement 2: The fringe benefit tax is deductible from the gross income of the employer.
a. First statement is true while second statement is false.
b. First statement is false while second statement is true.
15. Which statement is wrong? The amount on which the fringe benefit tax rate is applied is:
a. The actual monetary value of the fringe benefit received.
b. The grossed-up monetary value of the fringe benefit.
c. The amount deductible by the employer from the gross income.
d. Reflected in the books in the two accounts of fringe benefits and tax.
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In 2011, Petron Corporation furnished and granted the use of its condominium unit to its
Managing Director. The fair market (zonal) value of the property is P3,672,000 while the
acquisition cost is P3,264,000.
16. The monthly fringe benefit tax due thereon is:

a. P3,200 b. P3,600 c. P5,950 d. P7,650
17. The total monthly deductible expense from the gross income of Petron Corporation is:
a. P17,200 b. P13,600 c. P11,250 d. P3,600

In 2011, Upbeat Corporation assigned one of its officers in the head office in Manila to manage
their branch office in Baguio City. The company provided for the residential house of the
manager paying a monthly rental of P34,000.
18. The monthly fringe benefit tax thereon is:
a. P16,000 b. P10,880 c. P25,000 d. P8,000
19. The total monthly deductible expense from the gross income of upbeat Corporation is:
a. P17,000 b. P25,000 c. P42,000 d. P34,000
20. An employer paid the following to a managerial employee in 2011:
Loan granted January 1, 2011, evidenced by a non-interest bearing

promissory note. Term of the loan is one year P500,000
Actual medical benefits 46,000
Salaries of maid and personal driver 108,000
The fringe benefit tax expense is:
a. P68,480 b. P79,059 c. P96,000 d. P100,706
21. The following fringe benefits were given to an executive of XYZ Corporation in the first
quarter of the year 2011:
Rent for an apartment used as residence P300,000
Payment for groceries used by the executive’s family 119,875
Monthly transportation allowance (for three months)

How much is the fringe benefit tax due for the quarter?
a. P134,360 b. P197,588 c. P127,000 d. P169,353

In 2011, Caltex Corp. provided a 3-day free vacation in Boracay to all of its employees of which
80% are rank and file. Total expenses incurred by the company for the said vacation amounted
24
to P1,000,000.
22. The fringe benefits tax expense is:
a. P470,588 b. P376,471 c. P94,118 d. P294,118
23. The total deductible expense is:

a. P1,294,118 b. P1,470,588 c. P1,000,000 d. P1,094,118

Seaoil Company owns a fleet of motor vehicles. In 2011, one of the cars which was acquired at a
cost of P395,250 was allowed as service vehicle by one of its officials. During the year, its book
value amounts to P348,500.
24. How much is the fringe benefit tax due thereon?
a. P37,200 b. P18,600 c. P16,400 d. P32,800
25. Suppose Seaoil Company is just leasing the car that is being used partly for personal and for
business purposes and is paying an annual rental of P102,000. The fringe benefit tax is:
a. P4,800 b. P32,640 c. P24,000 d. P6,528
26. ABC Corporation made the following payments for the 3rd quarter of 2011 in behalf of Its
Executive Vice President:
To SM Supermarket, groceries consumed by the officer’s family P102,400
To Saint Louis University, tuition of EVP’s eldest son (one of the
company scholars chosen after passing the company’s qualifying
examination) 30,000
Brand new car leased from Rent-A-Car for use of the officer (quarterly
rental) 40,000
The fringe benefit tax for the quarter is:

a. P57,600 b. P67,012 c. P71,718 d. P55,168

Urduja, am executive, has received P950,000 from his employer during the year 2011. Included
in the said amount, among others, are the following:
13th month and other benefits P120,000
SSS, Pag-IBIG and Philhealth contributions 10,000
Rice allowance 2,400
Transportation allowance regularly received 60,000
Educational assistance to a son 68,000
Urduja is married and has four qualified dependents.
25
27. How much is Urduja’s taxable compensation income for 2011?
a. P689,600 b. P782,600 c. P830,000 d. P839,600
28. The final fringe benefit tax withheld by Urduja’s employer is:
a. P34,000 b. P33,000 c. P32,000 d. P21,760
29. On October 1, 2011, Toyota Company leased a residential house for the use of its executive,
Yakuza, a non-resident Japanese NETB here in the Philippines. The rent agreed upon was
P170,000 per month. The quarterly fringe benefit tax is:
a. P54,400 b. P120,000 c. P40,000 d. P85,000
30. In 2011, Agassi, an American, was employed as executive officer of the regional operating
headquarter in the Philippines of a multinational company. Salary agreed upon was
P3,000,000. In addition, the employer paid for the rental of a residential apartment in the
amount of P1,275,000 which Agassi occupies for residential purposes. The total final
withholding income tax is:
a. P937,500 b. P641,250 c. P562,500 d. P545,650
G. SUMMARY O TAXING ORDINARY AND CAPITAL ASSETS SALES TRANSACTIONS
26
Property classification, in general:
Real
Personal:
Tangible
Intangible
For income tax purposes only (classification exception), when there is a:
Sale-Cash vs Property
Exchange – Property vs Property
Property received essentially different from property given
Property received with market value
Other disposition – Pacto de retro sale
Other conditional sales
Gain or loss computation:
Sale Exchange
Selling price xxx
FMV of property received xxx
Basis of property sold (xxx) (xxx)
Gain xxx xxx
Loss (xxx) (xxx)
Basis of property (less accumulated depreciation, if used in business):

Purchase – Purchase cost
Inheritance – FMV subjected to estate tax
Donation – Purchase cost to last owner by purchase or lower FMV at time of gift (for the
purpose of determining the loss)
Property classification (only in case of sale, exchange or other disposition):
Ordinary asset:
1. Inventory or stock in trade
2. Property primarily held for sale in the ordinary course of trade or business
3. Property used in business subject to depreciation
4. Real property used in business
Taxability of gain or Deductibility of loss

Ordinary asset (always AITR under B compartment):
Ordinary gain – 100% Taxable
Ordinary loss – 100% Deductible
Capital asset (AITR under CA compartment, General Rule):

27
Individual:
1. With holding period (DA to DS)
a. Not > 12 months (short-term):
Capital gain – 100% Taxable
Capital loss – 100% Deductible
b. > 12 months (long-term):
2. Capital loss deductible only to the extent of capital gain

3. Net capital loss carryover (immediate ff. taxable year) allowed, in an amount not in excess of
the net income for such year
Corporation:
1. No holding period:
2. Capital loss deductible only to the extent of capital gain
3. No net capital loss carryover
Transactions deemed sale or exchange of capital asset covered by Gen. Rule (AITR under CA
compartment):
1. Worthlessness of security & debt investment

2. Early retirement or redemption of debt investment
3. Liquidation of investment asset
4. Option gain or option loss to buy or sell property
5. Gain or loss from short sale of property
Capital asset (Final Tax, Exception Rule):

Individual & Domestic Corporation only:
1. Sale, exchange or other disposition of real property (capital asset) located in the Philippines
(6% of GSP or FMV whichever is higher)
All income taxpayers (Individuals and Corporations):
2. Sale, exchange or other disposition of stock investment (capital asset) in a

Domestic Corporation (within Philippines) outside LSE. (First P100,000 – 5%,
Excess – 10%, of net capital gain)
CAPITAL GAINS AND LOSSES – GEN. RULE
28
1. Capital Assets defined- It means property held by the taxpayer (whether or nr connected with
his trade or business) but does not include:
a. Stock in trade or other property which would properly be included in the inventory year-
end.
b. Property primarily held for sale in the ordinary course of trade or business.
c. Real property used in trade or business.
2. Transaction covered by rules on capital gains and losses – Applicable only if the transaction on
the capital assets is by sale or exchange.
3. Limitation on deduction of capital losses – Losses from sale or exchange of capital assets shall be
allowed only to the extent of the gains from such sale or exchange.
4. Holding period – The length of time the asset was held by the taxpayer. It covers the period
from the date of acquisition of the asset to the date of sale.
5. Gain or Loss to be taken into account – If taxpayer is an INDIVIDUAL, the following percentage of
the gain or loss shall be taken into account:
100% If the asset has been held for not more than 12 months
50% If the asset has been held for more than 12 months
6. Capital loss carryover – If an individual taxpayer sustains in any taxable year a net capital loss,
such loss shall be treated in the succeeding taxable year as a loss from the sale or exchange of
capital asset held for not more than 12 months. Limitation – cannot exceed, however, the net
income of the year in which the loss was sustained.
7. Rulings on capital assets transactions:
a. Individual
1. Holding period
2. Capital losses are allowed only to the extent of the net income
3. Net capital loss carryover allowed
b. Corporation
1. No Holding Period
2. Capital losses are allowed only to the extent or capital gains
3. Net capital loss carryover is not allowed.
8. Transaction resulting in capital gains and losses even if there are no sales or exchanges (a-f) of
capital assets.
a. Worthless share of stocks – If shares of stocks become worthless during the taxable year
and are the capital assets, the loss shall be considered as a loss from the sale of exchange,
on the last day of such taxable year, of capital assets.
b. Worthless bond – If bonds, debentures, or other evidence or indebtedness of any
corporation (including those issued by the government) are ascertained to be worthless and
charged off within the taxable year and are capital assets, the loss shall be considered as a
loss from the sale or exchange, on the last day of such taxable year, of capital assets.
c. Retirement of Bonds – Amounts received by the holder upon the retirement of bonds,
debentures or other evidence of indebtedness issued by any corporation (including those
issued by the government) with interest coupons or in registered form shall be considered
as amounts received in exchange therefor.
29
d. Liquidating Dividend – When a corporation distributes all of its assets on complete
liquidation, the gain or loss sustained by the stockholder, whether individual or corporate, is
capital gain or loss as the case may be.
e. Liquidation of partnership – When a partner retires or the partnership is dissolved, he
realizes the capital gain or sustains capital loss as follows:
Amount received for his interest xxx
Less: Investments xxx
Share in undistributed partnership net income xxx xxx
Capital gain xxx
Capital loss (xxx)
f. Option gain or losses – Gains or losses attributable to the failure to exercise privileges or
options to buy or sell property shall be considered as capital gains or losses.
g. Gains and Losses from short sales – Gains and losses from short sales of property shall be
considered as gains or losses from sales or exchanges of capital assets.
Problems
1. A feature of ordinary gains as distinguished from capital gains:

a. Gains from sales of assets not stock in trade
b. May or may not be taxable in full
c. Sourced are capital assets
d. No holding period
2. Lots being rented when subsequently sold are classified as:
a. Capital assets b. Liquid assets c. Ordinary Assets d. Fixed Assets
3. The term “capital assets” includes:

a. Stock in trade or other property included in the taxpayer’s industry
b. Real property not used in the trade or business of taxpayer
c. Property primarily for sale to customer in the ordinary course of his trade or business
d. Property used In trade or business subject to depreciation
4. Which of the following is a capital asset?

a. stock in trade
b. Property held by the taxpayer primarily for sale to customers in the ordinary course of trade
or business
c. Personal property used in trade or business subject to depreciation.
d. Property of a kind which would not be included in inventory of the taxpayer of on hand at
the close of the taxable year
5. Wilson operates a retail store and owns the following property. Indicate which of the property is
capital asset in the hands of Wilson:
30
a. The building which houses the retail store
b. Inventory on hand at the end of the year
c. Fixtures used in the retail store
d. Trade accounts receivable
6. Individual, single, has the following records during 2011:

Net income from business P140,000
Sales of assets:
Gain, sale of ordinary asset held for 5 years 30,000
Gain, sale of capital assets held for 6 years 40,000
Loss, sale of capital assets held for 9 months 60,000
The taxable income of the taxpayer is:

a. P100,000 b. P120,000 c. P150,000 d. P170,000
7. In addition to his business as construction materials dealer, Henlin has the following capital
assets transaction in 2011:
Capital Date Date Selling Capital gain

Asset Sold Selling Price Acquired Cost Expenses (loss)
Jewelry 3/15/2011 P80,000 05/10/2008 P 10,000 P 1,000 P 69,000
M. Benz Car 05/16/2011 400,000 07/15/2009 350,000 20,000 30,000
Refrigerator 09/05/2011 6,000 02/09/2011 5,000 1,000
Ford car 12/05/2011 12,000 01/10/2011 20,500 (8,500)
The net capital gain of Henlin in 2011 is :

a. P27,000 b. P76,500 c. P42,000 d. P26,500
8. A resident citizen has the following records of transaction in 2011

Capital gains (short-term) on sale of:
Domestic share listed and traded in stock exchange P22,400
Vacant lot thru a broker, located in Baguio City
(market value – P700,00) 150,000
Residential house in Singapore 300,000
Capital loss (long-term) on sale of:
Land in New York City 125,000
Family car 50,000
The net capital gain/(loss) of the resident citizen is:

a. P212,500 b. (P175,000) c. P275,000 d. (P25,000)
31
9. Calendar year is 2011:
Taxpayer is citizen in the Philippines who is single.
Capital gain on sale of bonds held for 20 months P 50,000
Capital gain on sale directly to buyer of shares of domestic corporation 120,000
held for 6 months
Capital loss on sale of family car held for 11 months 80,000
Capital loss on sale of land in the Philippines held for 3 years on a selling 60,000
price of P800,000
Net capital loss in 2010 ( net income of the year was P10,000) 20,000
Total capital gains to consider at the end of the year:
a. P145,000 b. P25,000 c. P120,000 d. P130,000
Martin has the following data in 2011:
Sale of Property Holding Period Gain/(Loss)

Apartment House 10 years P 35,000
Residential House 6 years 120,000
Vacant Lot 12 years 72,500
Jewelry for personal use 6 months 4,200
Jewelry in a jewelry store 2 months 8,000
Car for personal use 4 years (20,000)
Transportation equipment 12 months (10,000)
The proceeds from the sale of residential house shall be used in acquiring a new residence. During the
year, Martin had a business income ( other than the sale of the properties above) in the amount of
P5,000.
10. The taxable income before personal exemption of Martin in 2011 is:
a. P32,200 b. P38,000 c. P22,200 d. P42,200
11. Assuming the net income of Martin in 2012 is P130,000 which includes a capital gain of P6,000.
The taxable income before personal exemption of Martin in 2012 is:
a. P125,000 b. P130,000 c. P124,200 d. 120,000
12. A resident citizen who is married had the following data in 2011:
Gross receipt from the sale of services P400,000
Capital gain on sale of asset held for 2 years 10,000
Dividend from resident corporation 15,000
Direct costs of the services sold 100,000
Capital loss on sale of asset held for 6 months 5,000
If choosing the Optional Standard Deduction (OSD), the taxable net income is :
a. P142,000 b. P202,000 c. P205,000 d. P256,000
32
A certain taxpayer has the following transaction:
2011 - Net income from business P 60,000

Dividends Received from Resident Foreign Corporation 15,000
Interest on saving deposit 1,600
Capital gains on capital assets held for 12 months 10,000
Capital losses on capital assets held for 11 months 15,000
2012 - Net income from business 120,000

Royalties received 4,000
Interest from time deposits 2,800
Dividends from a domestic corporation 20,000
Capital gains on capital assets held for 20 months 20,000
Capital losses on capital assets held for 10 months 5,000
13. The taxable income if taxpayer is an individual, married:

2011 2012 2011 2012
a. P20,000 P80,000 c. P25,000 P70,000
b. P21,600 P85,000 d. P43,000 P88,000
14. The taxable income if taxpayer is a domestic corporation:
2011 2012 2011 2012
a. P70,000 P130,000 c. P75,000 P135,000
b. P75,000 P120,000 d. P72,500 P88,000
15. Which statement is wrong? The rule that capital losses are deductible 0only to the extent of
capital gains is applicable:
a. To the corporation
b. To an individual
c. To an individual taking the Optional Standard Deduction (OSD)
d. To an individual taking the itemized deductions from gross income
16. One of the following is not a capital asset:

a. Stock investment
b. Interest of a partner in a partnership
c. Liquidating dividend
d. Machine with useful life of 10 years used in business
17. Bisaya bought shares of stock on October 31,2010 for P10,000 as investment. On October 31,
2011 the shares become worthless. For tax purposes,
33
a. Bisaya sustained a long term capital
b. Bisaya sustained a short term capital
c. Bisaya sustained an ordinary loss
d. Bisaya did not sustain any loss
18. A Co. has investments in shares of stock of B Co. that it acquired at a cost of P20,000. It also had
investments n share of stock of C Co. that it acquired at a cost of P40,000. The value of shares of
stock of B Co. had decreased to P15,000, while the shares of stock of C Co. are now worthless,
and had to be written off. The deductible loss is:
a. P45,000 b. P40,000 c. P60,000 d. P0
19. A professional partnership was organized in 2008. Bogart who is 40% partner contributed
P60,000. The partnership has the following net income:
2008 P50,000 - Distributed to the partners

2009 30,000 - Not distributed
2010 10,000 - Not distributed
In 2011 the partnership was dissolved and Bogart received a sum of P100,000 upon liquidation.
The taxable capital gain of Bogart in 2011 arising from the liquidation of his interest in the
partnership is:
a. P12,000 b. P20,000 c. P24,000 d. P40,000
20. Taxpayer, single, has the following income, expenses and transactions in 2011:
Business gross income P160,000

Business expenses 50,000
Gambling loss 20,000
Selling price – partnership interest (investment in 2007 – P40,000) 100,000
Gain on sale of capital asset held for 2 years 20,000
Loss on sale of capital asset held for 6 months 5,000
Loss on account of failure to exercise 1-month option to buy property 3,000
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Liquidating dividend (Investment in 2008 – 70,000) 50,000
The taxable income of the taxpayer is:
a. P82,000 b. P92,000 c.P112,000 d.P132,000
21. A transaction in which the speculator sells securities which he does not (he merely borrows
the stock certificate from his stock broker) in anticipation of a decline in its price and within a
reasonably short period of time buys or covers the stock to complete the transaction
a. Wash sale b. Short sale c. Auction sale d. Rescissible sale
22. All of the following, except one, results to a capital gain or loss:
a. Gain on short sales
b. Option loss
c. Worthless securities
d. Ordinary gains
H. Income from agriculture or farming
Problems
1. Which is correct? When it takes more than one year from the time of planting to the time of
harvesting and selling, income may be reported under the crop year method, under which,
deductions for expenses shall be allowed in the year that the income from the crop is realized.
a. This is an accounting period of more than twelve months.
b. This is an accounting method, not an accounting period.
c. There ate two accounting periods, one, a one-year period, and the other, a less than-one-
year accounting period.
d. There is no definite accounting period
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A farmer had the following:
Cash receipts from the sale of:
Vegetables P32,000
Livestock P60,000
Palay P100,000
Hand tractor P25,000
Cost of livestock purchased P45,000
Book value of hand tractor sold P20,000
Insurance proceeds from growing crops destroyed by fire P8,000
Beginning Inventory:
Livestock P10,000
Palay P15,000
Ending Inventory:
Livestock P12,000
Palay P8,000
Vegetables P2,000
2. Using the cash method of accounting, the gross income from farming is:
a. P60,000 b. P155,000 c. P157,000 d. P152,000
3. Using the accrual method of accounting, the gross income from farming is:
a. P60,000 b. P155,000 c. P157,000 d. P152,000
4. Which method of inventory valuation is used in income taxation for inventory of livestock
and farm products raised in the farm?
a. Cost c. Cost or market, whichever is lower
b. Market d. Farm price method
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I. Recovery of bad debts previously deducted – If deduction of bad debt in prior yearor years
resulted in income tax benefit to the taxpayer, the recovery is taxable. If no income tax benefit
resulted, recovery is not taxable.
Problems
1. Recovery of bad debt written off by a taxpayer:
No. 1: P20,000 from accounts written off in a year which had a net income of P200,000
before write-off (write-off for the year is P20,000)
No. 2: P5,000 from accounts written off in a year which had a net loss before a write-off
of P36,000 (write-off for the year was P5,000)
No. 3: P10,000 from accounts written off in a year which had a net income of P8,000
before write-off and a write-off by P12,000.
The income from the bad debt recovery is:
a. P35,000 b. P20,000 c. P26,000 d. P30,000
2. The following were taken from the income statement of domestic corporation for the taxable
year 2011:
Gross profit on sales P800,000
Less: Deductible expenses P440,000
Provision for bad debts 80,000 520,000
Net Income before income tax P 280,000
Additional information:
 Accounts written off during the year and charged to allowance for bad debts – P50,000
 Recoveries on accounts receivable previously written off in 2010 and credited to
allowance for bad debts.
Allowed as deduction by the BIR – P30,000
Disallowed by the BIR as deduction – P20,000
The taxable income of the corporation is:
a. P280,000 b. P260,000 c. P330,000 d. P340,000
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J. Leasehold improvement
1. Income of Lessor – When the Lessee makes improvement on leased premises and said
improvement will belong to the Lessor upon the termination of the lease, the Lessor may at his
option report income as follows:
a. Outright method – Report as income the fair market value of the improvement in the year of
completion
b. Spread-out method – Spread over the remaining term of the lease the depreciated (book)
value of such improvement at the termination of the lease, computed as follows:
Cost of leasehold improvement Pxxx
Less: Depreciation for the remaining term if lease xxx
BOOK VALUE END OF LEASE Pxxx
Book value end of lease = Income per
Remaining term of lease year
2. Deduction of Lessee – The lessee may claim depreciation of the improvement over the
remaining term of lease or the life of improvement, whichever is SHORTER.
Problems:
Cost of leasehold improvement P1,000,000
Less: Depreciation for the remaining term of lease 50 years
Remaining term of the lease or the life of the improvement 40 years
1. Income from the improvement, if reported in one lump sum:
a. P1,000,000 b. P800,000 c. P200,000 d. P100,000
2. If the income from the improvement is reported annually, the annual income is:
a. P5,000 b. P4,000 c. P200,000 d. P20,000
3. If the income from the improvement was reported annually, and at the beginning of the
twenty-first year of the improvement, when the fair market value thereof was P250,000, the
lessor took possession of the improvement, his income in year 21 is:
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a. P250,000 b. P100,000 c. P150,000 d. P50,000
4. If the income is reported annually, and the leasehold improvement was destroyed by fire at
the beginning of year 10, when the fair market value was P800,000 and insurance recovery of
the lessor was P40,000 only, the deductible loss of the lessor is:
a. P5,000 b. P800,000 c. P700,000 d. P45,000
Gatsby leased a land to Beauty (engaged in business) for a period of 11 years starting January 1,
2008 at an annual rental of P12,000. Observing the provisions of the contract, Beauty
constructed a building which shall become the property of Gatsby at the expiration of the lease.
The construction was completed on January 1, 2011 at a cost of P1,000,000 with an estimated
useful life of 20 years. It is also stipulated in the contract that the lessee will pay the P1,500
annual real property tax on the land.
5. Assuming that on January 1,2008, Beauty paid P24,000 to Gatsby covering the lease
contract for 2 years, how much income is to be reported by Gatsby in 2008?
a. P12,000 b. P13,500 c. P24,000 d. P25,500
6. How much income is to be reported by Gatsby I 2011 under the outright method?
a. P13,500 b. P613,500 c. P1,013,500 d. P88,500
7. How much income is to be reported by Gatsby in 2011 under the spread-out method?
a. P13,500 b. P1,500 c. P1,013,500 d. P88,500
8. How much is the deductible expense by Beauty in 2011?
a. P138,500 b. P63,500 c. P125,000 d. P13,500
9. Assuming that due to the fault of Beauty, the lease contract was terminated on January 1,
2013, how much income is to be reported by Gatsby in 2013?
a. P763,500 b. P750,000 c. P88,500 d. P1,013,500
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10. Statement 1: The cost of leasehold improvement shall be deductible by the lessee by
spreading the cost of improvement over the life of the improvement or remaining term of the
lease, whichever period is shorter.
Statement 2: Depreciation expense can be a deduction for both tangible and intangible
property with limited useful life.
b. First statement is false while second statement is true.
K. Forgiveness of indebtedness – Forgiveness of indebtedness may result in income or gift, or

capital transaction. If a corporation remits the debt of a stockholder, the transactions has the
effect of the payment of a dividend.
Problems
1. If an individual performs services for a creditor who in consideration thereof cancels the
debt, the cancellation of indebtedness may amount:
a. To a gift c. T o a donation inter vivos
b. To a capital transaction d. To a payment of income
2. If a corporation to which the stockholder is indebted forgives the debt, the transaction has
the effect of a payment of what kind of a dividend?
a. Stock dividend
b. Cash dividend
c. Liquidating dividend
d. Indirect dividend
3. A manager owed his employer P50,000. The money was advanced to him to pay for his
personal bills. Just recently, he submitted an excellent report to his employer who became very
pleased because it attracted a big client to their company. The employer, therefore, decided to
cancel the debt of the junior executive and in addition gave him a round trip ticket to Hong
40
Kong worth P20,000 plus pocket money of P10,000. How much additional gross income be
reported in the income tax return of the taxpayer?
a. P50,000 b. P60,000 c. P70,000 d. P80,000
L. Prizes and awards – They are taxable, unless given in recognition of religious, charitable,
scientific, educational, literary or civic achievement. They are not taxable if:
1. The recipient of the prize or award was selected without entering a contest or proceeding;
and
2. He is not required to render substantial future services as a condition to receiving the prize
or award.
Problems
a. Prize won in an essay c. Prize won as member of mythical team in the PBA
b. Nobel peace prize d. Award for being a model employee
2. Rewards given to persons instrumental in the discovery of violations of the National Internal
Revenue Code are subject to:
a. Final tax of 10% on rewards collected.
b. Final tax of 10% of P1,000,000.
c. Final tax of 10% of reward collected or P1,000,000, whichever is higher.
d. Final tax of 10% rewards collected or P1,000,000, whichever is lower.
3. Acting on the information given by Sipsip, the Government seized and confiscated smuggled
goods with a fair market value of P300 million. Sipsip’s reward will be subject to a final tax of:
a. P30 million b. P3 million c. P300,000 d. P100,000
M. Recovery of damages - Recovery of damages representing compensation for loss or profits

or income is taxable. Recoveries that are to compensate for damage to property, injury to
person, or loss of life are not taxable.
41
In infringement suits, recoveries that are to compensate for lost profits are taxable. Recovery of
damages that is to compensate for lost capital is not taxable.
Damages recovered from a breach of contract are taxable income.
Moral damages being purely compensatory in nature, are excludible from gross income.
Exemplary damages, not being a return of lost capital, are taxable.
Problems
1. Which of the following is a taxable income?
a. Income from qualified pension plan c. Moral damages
b. Compensation for personal injuries d. Interest on moral damages
2. Rosmax was hit by a wayward bus while on her way home. She survived but had to pay
P150,000 for her hospitalization. She was unable to work for six (6) months which meant that
she did not receive her usual salary of P10,000 a month or a total of P60,000. She sued the bus
company and was able to obtain a final judgment awarding her P150,000 as reimbursement for
her hospitalization, P60,000 for the salaries she failed to receive while hospitalized, and
P250,000 as moral damages for her pain and suffering. She
42
was able to collect in full from the judgment. How much income did she realize when she collected from
the judgment?
a. P460,000 b. P250,000 c. P60,000 d. P400,000
N. Income payments subject to creditable withholding tax
1. Professional fees, talent fees, etc. for services rendered by individuals:
a. Lawyers; CPAs; Doctors of Medicine; Architects; Engineers; Marine Surveyors; Doctors of

Veterinary; Dentists; Professional Appraiser; Connoisseurs of Tobacco; Actuaries; and Interior
Decorators. If current year’s gross income is:
≤ P720,000 10%
> 720,000 15%
b. Professional entertainers, such as, but not limited to, actors and actresses, singers and
emcees. If current year’s gross income is:
≤ P720,000 10%
> 720,000 15%
c. Professional athletes, including basketball players, pelotaries and jockeys. If current year’s
gross income is:
≤ P720,000 10%
> 720,000 15%
d. All directors and producers involved in movie, stage, radio, television and musical
productions. If current year’s gross income is:
≤ P720,000 10%
> 720,000 15%
e. Insurance agents and insurance adjusters. If current year’s gross income is:
≤ P720,000 10%
> 720,000 15%
f. Management and technical consultants. If current year’s gross income is:
≤ P720,000 10%
43
> 720,000 15%
g. Bookkeeping agents and agencies. If current year’s gross income is:
≤ P720,000 10%
> 720,000 15%
h. Insurance agents and insurance adjusters. If current year’s gross income is:
≤ P720,000 10%
> 720,000 15%
i. Fees of directors who are not employees of the company. If the current year’s gross income is:
≤ P720,000 10%
> 720,000 15%
j. Other recipients of talent fees. If current year’s gross income is:
≤ P720,000 10%
> 720,000 15%
2. Professional fees, talent fees, etc. for services of taxable juridical persons. If current year’s gross
income is:
≤ P720,000 10%
> 720,000 15%
3. Rentals: 5%
a. Real property
b. Personal property with gross rental in excess of P10,000 annually, except financial leases with
leasing and finance companies.
4. Cinematographic film rentals 5%
5. Income payments to certain contractors: 2%
a. General engineering contractors
b. General building contractors
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c. Specialty contractors
d. Other contractors
6. Income distribution to beneficiaries of estates and trust. 15%
7. Income payments to customs, insurance real estate and commercial brokers and agents of
Professional entertainers. 10%
8. Income payments to partners of GPPH. If current year’s gross income is:
≤ P720,000 10%
> 720,000 15%
9. Professional fees, paid to Medical practitioners (Doctors of Medicine/ Vet. Science/Dentist) by

hospitals/clinics/patients. If current year’s gross income is:
≤ P720,000 10%
> 720,000 15%
10. Gross selling price/fair market value for the sale/exchange/transfer of real property classified as
ordinary asset.
a. Those exempt from withholding tax at source Exempt
b. Where seller/transferor is habitually engaged in the real estate business and GSP/FMV is:
≤ P500,000 1.5%
> 500,000 to P2M 3%
> 2M 5%
c. Where seller/transferor is not habitually engaged in the real estate business 6%
11. Additional income payments to government personnel from importers, shipping and airline
companies or their agents. 15%
12. Certain income payments made by credit card companies 1% on
One half of the

gross amount
paid
13. Income payments made by top 10,000 corporations:
45
a. Local/resident supplier of goods 1%
b. Local/resident supplier of services 2%
14. Income payments made by government (except casual or single purchase of ≤P10,000)
a. Local/resident supplier of goods 1%
b. Local/resident supplier of services 2%
Who are required to withhold?
1. An individual with respect to payments made in connection with his trade or business.
2. Any juridical person, whether or not engaged in trade or business.
3. All government offices, including government owned or controlled corporations as well as
provincial, city and municipal governments.
Tax Credit – The amount of tax withheld shall be allowed as a tax credit against the income tax liability
of the payee in the taxable quarter or year in which the income was earned or received.
Monthly return and payment of taxes withheld at source
1. Where to file.
Creditable and final withholding taxes deducted and withheld by the withholding agents
shall be paid upon filing a return in duplicate with the authorized agent banks located within
the Revenue District Office (RDO) having jurisdiction over the residence or principal place of
business of the withholding agent. In places where there is no authorized agent banks, the
returns shall be filed directly with the Revenue District Officer, Collection Officer or the duly
authorized Treasurer of the city or Municipality where the withholding agent’s residence or
principal place of business is located, or where the withholding agent is a corporation,
where the principal office is located except in cases where the Commissioner otherwise
permits.
2. When to file
Whether large or non-large Manual EFPS

taxpayer
 Withholding tax on On or before the 10th day of the On or before the 15th day of the
compensation month following the month in month following the month in
(excluding the month of which withheld. which withheld.
December):
46
 Withholding tax on Not later than January 15 of the Not later than January 20 of the
compensation for the following year. following year.
month of December:
 Creditable and final Within 10 days after the end of Within 15days after the end of
withholding tax on each month. each month.
interest from any
currency bank deposit
and yield or any other
monetary benefit from
deposit substitutes and
from trust funds and
similar arrangements):
 Creditable and final On or before January 15 of the On or before January 20 of the
withholding tax following year. following year.
withheld for December:
 Final withholding tax on Within 10 days from the end of Within 15 days from the end of
interest from any each month. each month.
currency bank deposit
and yield or any other
monetary benefit from
deposit substitutes and
from trust funds and
similar arrangements:
Problems
1. Which is not a deductible withholding income tax?

a. Expanded withholding income tax.
b. Withholding income tax at source.
c. Withholding income tax on passive income.
d. None of these.
2. The income subject to this withholding tax is not includible in the computation of taxable
income:
a. Withholding tax on compensation income
b. Final withholding tax
c. Creditable withholding tax
d. All of these
3. Which of the following withholding income tax should be remitted to the Bureau of Internal
Revenue within ten days after the end of each month?
a. Withholding income tax on compensation income.
b. Withholding final income tax on passive income.
c. Withholding income tax under the Expanded Withholding Tax System
d. All of the above.
4. Mr. and Mrs. Pecson with 2 dependent children have the following income and expenses for
2011:
47
Mr. Pecson:
Rental of separate property, net of withholding tax of 5% P475,000
Expenses of rental business 100,000
Per diems received as a corporate director, net of WT of 10% 27,000
Prize won in a raffle, net of WT of 20% 80,000
Mrs. Pecson
Salary, net of WT of P15,000 & SSS premium of P3,000 105,000
Commission as real estate broker, net of WT of 10% 54,000
Royalty received as a textbook author, net of WT of 10% 63,000
Income of properties owned in common:

Rent from conjugal property, net of WT of 5% 136,800
Expenses connected with rent income 60,000
The income tax still due at the end of the year from the spouses is:
a. P81,000 b. P60,900 c. P59,200 d. P78,000
TAX – 1018.29
ITEMIZED DEDUCTIONS (BITCLoD³EP²) OPTIONAL STANDARD DEDUCTION (OSD)
1. Bad debts 1. Who may claim? This may be claimed in lieu of

2. Interest itemized deductions by self-employed and
3. Taxes professional individuals (other than non-resident
4. Charitable and other contributions foreign corporations).
5. Losses 2. Amount – 40% of gross sales or gross receipts
6. Depreciation for individuals and 40% of gross income for
corporations.
7. Depletion of oil and gas wells and mines 3. How will taxpayers elect optional? They must
8. Development and research signify in the return their intention to elect the
optional standard deduction.
9. Expenses, in general 4. Effect of election. Such election made in the
10. Pension trusts return shall be irrevocable for the taxable year
11. Premium on health and/insurance(for for which the return was made.
individual taxpayers only)
Problems
1. The optional standard deduction is forty percent (40%) of the gross income for corporations. For
purposes of the optional standard deduction gross income means:
a. If a trading concern, gross profit from sales.
48
b. If a service concern, gross receipts less direct cost of services.
c. Gross profit from sales, or gross receipts or revenues less direct cost of services, plus all
other items of gross income.
d. Includes the net capital gain of an individual.
2. A domestic corporation has the following data in 2011:

Gross receipts from sale of services P1,500,000
Direct cost of services sold 1,000,000
Long term capital gain 100,000
Short term capital loss 30,000
Dividend from resident foreign corporation 20,000
Operating expenses 200,000
Assuming the corporation chose the optional standard deduction, the taxable income is?
a. P342,000 b. P372,000 c. P354,000 d. P972,000
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3. A resident citizen who is married had the following data in 2011:
Gross sales P400,000
Capital gain on sale of assets held for 10 months 10,000
Dividend from resident corporation 15,000
Cost of goods sold 100,000
Capital loss on sale of asset held for 6 months 5,000
Operating expenses 20,000
If the taxpayer choose the optional standard deduction, the taxable income is:
a. P142,000 b. P145,000 c. P202,000 d. P205,000
4. A resident citizen of the Philippines, single, had in 2011 a gross compensation income (net of
exclusions) of P200,000, gross receipts from rental properties of P300,000, and expenses on the
rental properties of P100,000.
If the taxpayer choose the optional standard deduction, the taxable income is:
a. P250,000 b. P330,000 c. P350,000 d. P420,000
5. Jayson is a CPA. He is single, supporting a sister, 30 years old who is physically incapacitated.
His income during 2011 is shown below:
Salary as manager of Piltel Company P300,000
Fringe benefits, net of 32% withholding tax 136,000
Profits withdrawn from a general professional partnership
of which Joyson is 40% partner 20,000
Note: Net profits per books of the partnership is P75,000
The taxable income of Jayson, assuming he claimed the optional standard deduction, is:
a. P262,000 b. P268,000 c. P295,000 d. P404,000
6. One of the following statements is correct. A choice by an individual of optional standard

deduction means that:
a. His income tax return need not be accompanied by financial statements.
b. He need not keep books of accounts.
c. He need not have records of gross sales or gross receipts.
d. His choice can still be changed by filing an amended return.

The taxpayer is a resident citizen who is married, with gross receipts from business of P500,000,
business expenses with supporting receipts of P180,000 and premiums on health insurance of
P3,000, for 2011.
7. If the taxpayer chose the optional standard deduction, the taxable income is:
a. P247,600 b. P250,000 c. P267,600 d.P270,000
50
8. If a taxpayer chose the itemized deductions, the taxable income is:
a. P247,600 b. P250,000 c. P267,600 d. P270,000
9. Statement 1: Itemized deductions from income should be duly supported by vouchers or

receipts.
Statement 2: Only business expenses may be deducted from the income of taxpayers.
b. Both statements are true
c. First statement is false while second statement is true.
1. BAD DEBTS
a. Requisites for deduction
1. There must be a valid and subsisting debt.
2. It must be connected with the trade, profession or business
3. The debt is ascertained to be worthless.
4. It must be charged off within the taxable year.
b. Non-deductible bad debts
1. Those sustained in the transaction entered into by related taxpayers. (see P.9 letter e)
c. Recovery of bad debt previously deducted
1. Taxable if deduction of the bad debt resulted in income tax benefit to the taxpayer.
2. Not taxable if deduction did not result in income tax benefit to the taxpayer.
Problems
1. Which of the following statements is wrong?

a. A deduction for bad debt is not available when a provision for it is made.
b. A deduction for bad debt is available only when a write off is made.
c. There is no deduction for bad debt when there is a surety for the debtor against whom
collection may be enforced.
d. A deduction for uncollectible account is available to a taxpayer whether he is on the cash
or accrual basis of accounting.
2. Statement 1: In financial accounting, bad debt is an expense in the books of accounts when
a provision is made for it.
Statement 2: In income taxation, bad debt is a deduction from gross income when the
account is written off.
51
b. Both statements are true.
2. INTEREST
1. There must be an indebtedness.
2. There must be legal liability to pay interest.
3. The indebtedness must be incurred in connection with the taxpayer’s trade,
profession or business.
4. The allowable deduction for interest expense shall be reduced by an amount equal to
the following percentages of the interest income subjected to final tax, beginning:
November 1, 2005 – 42%
January 1, 2009 – 32 %
b. Non-deductible interest
1. Interest paid in advanced through discount on indebtedness incurred by an individual
taxpayer reporting income under cash basis. Such interest shall be allowed as deduction
in the taxable year that the indebtedness is paid. If indebtedness is payable in
installments, the amount of interest which corresponds to the amount of the amortized
principal shall be allowed as deduction in the year paid.
2. If the taxpayer and the person to whom the interest payment has been made are
related to each other.
3. If the indebtedness is incurred to finance petroleum exploration.
c. Optional treatment of interest expense – At the option of the taxpayer, interest incurred to
acquire property used in trade, business or exercise of a profession may be allowed as outright
deduction or treated as a capital expenditure.
52
PROBLEMS
1. The following interest payments were made by an individual income taxpayer in 2011:
Interest on loan from a bank used to finance a business P20,000
Interest on loan from a finance company to build residence 10,000
Interest on loan obtained from sister and used for business 5,000
Interest on loan from a lending institution used to buy office equipment 1,000
Interest for late payment of value-added tax 500
Interest on loan obtained to finance oil exploration 1,000
Interest on purchase price of residential lot bought in installments 2,000
Interest payment on a debt which has prescribed 5,000
The deductible interest expense in 2011 is:
a. P21,500 b. P26,500 c.P31,500 d. P44,500
2. In 2011, a taxpayer borrowed money from allied Bank, that gave him a business interest
expense of P8,000. He deposited the money with Export Bank, and he had an interest income
of P10,000. The deductible interest expense is:
a. P8,000 b. P3,900 c. P4,700 d. P3,800
3. For an individual on the cash basis of accounting, prepaid interest on business indebtedness is
deductible:
a. In the year that the interest is prepaid.
b. In the year that the principal is paid.
c. For the portion expired corresponding to the current accounting period.
d. As time goes by.

Roldan obtained a 1-year business loan from Manila Bank in the amount of P1,000,000, with
interest at the rate of 18% per annum. The loan was released on December 26, 2011 with the
interest for one year of P180,000 already discounted. On January 10, 2012, Roldan paid the
loan in full, getting a rebate of the excess discounted interest. (Assume 360 days in a year)
4. The interest deductions of Roldan for 2011 and 2012, if he is on accrual basis, are:
2011 2012 2011 2012
a. P2,500 P5,000 c. P0 P7,500
53
b. P5,000 P2,500 d. P7,500 P0
5. The interest deductions of Roldan for 2011 and 2012, if he is on cash basis, are:
2011 2012 2011 2012
a. P7,500 P0 c. P5,000 P2,500
b. P0 P7,500 d. P7,500 P5,000
6. Paloma is a service provider, on the cash basis of accounting. On September 1, 2011, he

borrowed P150,000 from a bank at an interest rate of twenty percent per annum. The bank
released to him P120,000, after deducting in advance an interest of P30,000. Payment on the
loan was at P12,500 a month, beginning October 1, 2011. How much was his deduction for
interest expense in 2011?
a. P0 b. P30,000 c. P7,500 d. P10,000
7. Statement 1: An individual in business and using cash basis of accounting shall deduct
interest paid in advance in the year that the principal is paid.
Statement 2: Interest paid or incurred in the acquisition of fixed assets used in business may
be capitalized to the asset account.

Fruity Company, on accrual basis, purchased factory equipment as follows:
Cost of equipment P1,000,000
Estimated useful life 5 years
Date acquired March 1, 2011
The equipment was financed through a 1-year loan with Makati Bank at an interest rate of 18%
per annum beginning on January 16, 2011 which was discounted in full. In 2011, Fruity
Company realized interest income on its bank deposit in the amount on P100,000, which was
subjected to 20% final income tax.
8. The deductible interest if treated as an expense:
a. P180,000 b. P172,500 c. P130,500 d. P139,500
9. The deduction if the interest is treated as a capital expenditure:
a. P166,667 b. P196,667 c. P200,000 d. P236,000
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10. Which interest expense can be deducted from gross income?
a. Interest expense on money borrowed to buy government bonds.
b. Interest expense on money borrowed to finance petroleum operations.
c. Interest expense between a corporation and the controlling individual.
d. Interest expense between a parent company and its subsidiary company.
11. Access Company is a service enterprise on the cash basis of accounting. On July 2, 2011, it
borrowed P100,000 from a bank with interest of twenty percent per annum and maturity of
one year. The bank deducted P20,000 and released an amount of P80,000 on the loan. How
much is the deduction for interest expense in 2011?
a. P10,000 b. P20,000 c. P15,000 d. None
3. TAXES
1. It must be paid or accrued within the taxable year.
2. It must be incurred in connection with the taxpayer’s trade, business or profession.
b. Non-deductible taxes
1. Philippine income tax.
2. Foreign income tax, if claimed as a tax credit.
3. Estate and gift taxes.
4. Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed.
c. Refund of taxes
1. If tax refund is deductible tax that resulted in income tax benefit to the taxpayer, refund
is taxable.
2. If tax refund is not deductible tax, if deductible, but the deduction did not result in
income tax benefit to the taxpayer, refund is not taxable.
Problems
1. Which of the following taxes is deductible from the gross income of a corporate taxpayer in
connection with its trade or business?
a. Real estate tax c. Special assessment
b. Transfer taxes d. Energy consumption tax
2. The following taxes were paid by an individual income taxpayer in 2011:

Real property tax on residential house P6,500
Real property on apartment house 18,000
Value-added tax on importation of TV for personal use 2,500
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Value-added tax on machinery imported for business use 30,000
Value-added tax on importation of equipment used in business 75,000
Income tax paid for being engaged in business 190,000
Value-added tax paid for a restaurant business 105,000
Special assessment on real property used in business 10,200
Travel tax paid in going abroad on pleasure trip 2,000
Professional tax as CPA practitioner 300
The deductible taxes expense from the taxpayer’s gross income in 2011 is:
a. P18,300
b. P228,300
c. P238,500
d. P439,500
3. Harlem is a single proprietor in trading business, with his place of business in a building
where he uses the first floor as his store and the second floor as his residence. In 2011,
he made the following payments of taxes:
Registration fee for 2011 of the business with the Bureau

of Internal Revenue P 500
Income tax of 2010 200,000
Value-added taxes (including interest of P20,000 and

surcharges of P60,000) 420,000
Fringe benefit tax to his manager 32,000
Community tax 2,005
Real estate tax on his land and building 7,000
City business taxes and city mayor’s permit 5,500
Motor vehicle registration fee (car is for non-business use) .

Including interest of P50 and surcharge for penalty of P1,500 3,050
The deduction for taxes is:
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a. P43,505 b. P11,005 c. P211,505 d. P638,055
4. Taxes paid by a corporation within the year were:
National income tax:
Normal tax P500,000
Improperly accumulated profit tax 300,000
Capital gain tax 740,000
Final tax 50,000
Community tax 10,500
Value-added tax 89,000
Local taxes and licenses 10,000
Interest for late payment of national and local taxes 40,000
Surcharges for late payment of national and local taxes 60,000
The deduction for taxes is:
a. P618,500 b. P20,500 c. P1,799,000 d. P1,899,000
5. The following tax refunds were received by an income taxpayer in 2011:

Refund of income tax P30,000
Refund of real property tax on apartment 18,000
Refund of special assessment 15,000
Refund of gift tax 3,000
Refund of value-added tax 26,000
Refund of customs duties 52,000
The taxable tax refund in 2011 is:
a. P144,000
b. P100,000
c. P96,000
d. P70,000
6. Which of the following tax refunds constitute income?
a. Refund of Philippine income tax . c. Refund of donor’s tax.
b. Refund of estate tax. d. Refund of percentage tax.
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d. Tax credit for foreign income tax
1. Option – Taxpayer has the option to claim the foreign income tax either as:
a. Tax credit, or b.
Deduction from income
2. Who can claim tax credit? Only resident citizens and domestic corporations.
3. Who can not claim tax credit or deduction? Non-resident citizens, aliens and
foreign corporations.
4. Limitation on tax credit
1st limitation 2nd limitation
Foreign taxable income X Phil. Income Tax Total foreign taxable income X Phil. Income Tax
Total taxable income Total taxable income
Problems
1. Privilege granted a taxpayer to deduct or set-off against Philippine income tax the
income tax that he has paid or has accrued in a foreign country.
a. Tax exemption
b. Tax consolidation
c. Tax deductions
d. Tax credit
2. What foreign tax may be taken as tax credit against Philippines income tax?
a. Foreign income tax c. Foreign excess-profit tax
b. Foreign war-profit tax d. All of these
3. Who is not entitled to a tax credit for income tax paid to foreign country?
a. Resident citizen of the Philippines c. Foreign corporation
b. Domestic corporation d. None of these
4. Tax credit for foreign income tax paid or incurred is allowed to a resident citizen of the
Philippines or a domestic corporation.
Statement 1: When a taxpayer is qualified to take a tax credit for a foreign income tax
paid, he may take a deduction instead for such tax.
Statement 2: When there are several foreign countries to which income taxes were paid,
a taxpayer qualified and who opts to take tax credit, must take all the income taxes paid
to foreign countries as tax credit.
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Statement 3: The term “income tax” for which credit may be taken means tax proper
only, and would not include any interest or surcharge thereon.
Statement 4: When there is a tax refund of a foreign income tax previously claimed as a
tax credit, the refund will constitute taxable income.
a. True, true, true, true
b. False, false, false, false
c. True, true, true, false
d. False, false, false, true
5. In 2011, Filmax Company, a domestic corporation, has a net income from the Philippines
of P200,000, and from the USA, P300,000. Income tax paid to US government for income
derived from USA, P110,000. The tax credit on income tax paid to the US government is:
a. P100,000 b. P90,000 c. P105,000 d. P110,000
A domestic corporation, had the following data for 2011:
Taxable income, Philippines P1,000,000
Taxable income, X foreign country 600,000
Taxable income, Y foreign country 400,000
Income tax paid to X foreign country 250,000
Income tax paid to Y foreign country 100,000
Philippine income tax paid, three quarters of the year 110,000
6. Tax credit for foreign income taxes paid is:

a. P390,000 b. P350,000 c. P280,000 d. P300,000
7. The Philippine income tax still due, after credit for foreign income taxes paid as
deduction from income, how much would have been the income tax still due?
a. P190,000 b. P210,000 c. P320,000 d. P490,000
8. What if the corporation chose to claim the foreign income taxes paid as deduction from
income, how much would have been the income tax still due?
a. P490,000 b. P406,000 c. P385,000 d. P400,000
9. A domestic company has the following income and expense for 2011:
Gross income, Phil. P400,000
Expense, operating 150,000
Other income:
Rent, net of creditable withholding tax of 5% 47,500
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Dividend from domestic company 100,000
Dividend from foreign company, net of foreign tax of P40,000 60,000
Interest on time deposit, gross of applicable withholding tax 20,000
The income tax still due after tax credits is:
a. P85,500 b. P77,500 c. P87,500 d. P102,500
10. Mabait, resident citizen, married and with 2 dependent children, has the following
income and expenses in 2011:
Gross income Business expenses Foreign tax
Phil. P322,000 P112,000 -
U.S. 450,000 270,000 P40,000
The income tax still due claiming tax credits is:
a. P65,000 b. P50,000 c. P26,000 d. P25,000
4. CHARITABLE & OTHER CONTRIBUTIONS
1. The contribution or gift must be actually paid.
2. The contribution of property shall be measured based on acquisition cost.
3. It must be given to the organizations specified herein.
4. The net income of the institution must not inure to the benefit of any private
stockholder or individual.
5. The taxpayer making the charitable contribution must be engaged in trade, profession
or business.
CONTRIBUTIONS SUBJECT TO LIMIT DEDUCTIBLE IN FULL

A. Donations to the Government of the A. Donations to the Government or
Phil. or political subdivisions political subdivisions including fully
exclusively for public purposes. owned government corporations to
be used exclusively in undertaking
priority activities in:
B. Donations to non-government 1. Education
organizations or to DOMESTIC 2. Health
corporations organized exclusively 3. Youth and sports development
for the following purposes. 4. Human settlements
1. Religious 5. Science and culture
2. Charitable 6. Economic development
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3. Scientific PROVIDED, HOWEVER, that any
4. Youth and sports development donation to the government, etc. not
5. Cultural in accordance with said priority plan
6. Educational shall be subject to the limit.
B. Donations to foreign institutions or
7. Rehabilitation of veterans international organizations in
8. Social welfare compliance with agreements or
treaties.
C. Limit - Based on taxable income C. Donations to accredited non-
derived from trade, profession or government organizations. The term
business without the benefit of the non-government organization means
deduction for contributions: a non-profit domestic organization.
1. Organization exclusively for:
10% - Individual a. Scientific
5% - Corporation b. Research
D. Computation: c. Educational
Gross business income Pxxx d. Character building
Less itemized deductions e. Youth and sports
(except contributions) xxx development
f. Health
g. Social welfare
Net business income h. Cultural
Before contributions and i. Charitable
non business income j. Combination thereof
(basis of limit) xxx 2. The donation must be utilized not
Less contributions: later than the 15th day of the 3rd
Deductible in full Pxxx month following the close of its
Deductible with limit xxx xxx taxable year.
3. The administration expense must
Balance xxx not exceed 30% of total
Add non-business income xxx expenses.
Taxable income, if corporation Pxxx 4. Upon dissolution, assets must be
Less personal exemptions xxx distributed to another non-profit
Taxable income, if individual xxx domestic corporation or to the
State.
Note: Partners in GPP shall report as
GI their distributive share in the NI of Note: If the above conditions are
the partnership. NI of the GGP shall not complied with, the
be computed in the same manner as contribution may be deducted
the NI of a corporation subject to limit.
Problems:
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1. Statement 1: Contributions or donations given directly to individuals cannot be deducted
from gross income.
Statement 2: Contributions by the employer to a pension trust for past service cost is
deductible in full in the year that the employer made the contributions, if it is on the cash
basis of accounting.
2. Jasper is the President of Toyota Corp. engaged in the marketing of cars. When Jasper’s
son got married to the daughter of a senator, the corporation gave the newly-wed
couple a brand new Toyota Fortuner worth P1,800,000 and entered the wedding gift in
its books as a representation expense. As a result of the above, the Toyota car is:
a. Taxable income to the couple
b. Deductible expense of the corporation
c. Not taxable income to the couple and not deductible expense of the corporation
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3. Which statement is not correct?
a. The deduction of an individual for contributions subject to limitation should not exceed ten
percent (10%) of his taxable income from business, trade or profession before deduction for
contributions.
b. The deduction of corporations subject to limitation should exceed five percent (5%) of its
taxable income from business or trade before deduction for contributions.
c. Contributions to media in its fund drive for the relief of calamity victims are deductible from
gross income.
d. Contributions of canned goods to student organizations during the Christmas season for
distribution to Muntinlupa are deductible from gross income.
4. Contributions and donations were made by a taxpayer, as follows:
To the Quiapo Catholic Church P15,000

To the society for the Blind, Inc., Philippines P10,000
To beggars in the streets P5,000
To Sistine Chapel in Rome P20,000
The actual contributions to be compared with the 5%/10% limitation is:
a. P50,000 b. P25,000 c. P45,000 d. P20,000
5. Husband and wife, with three dependent children, have the following income and expenses during
2011:
Salary, Husband P140,000
Salary, Wife 84,000
Donation to San Agustin Church (Wife) 2,000
Donation to PNRC (Husband) 3,000
Theft loss of books used in teaching (Husband) 4,000
Premium payments on health and/or hospitalization 8,000
Insurance (Wife)
The taxable income of the spouses are:
Husband Wife
a. P12,600 P34,000
b. P15,000 P34,000
c. P34,000 P12,600
d. P34,000 P15,000
6. Jekell, a CPA widower with 2 dependent children, has the following income and expenses in 2011:
Gross income from business P310,000
Business expense (deductible) 112,000
Charitable contributions:
To the national government for priority activities in health 25,000
To the church 15,000
To fire victims in the neighbourhood 5,000
The taxable income of Jekell is:
a. P48,000 b. P53,000 c. P53,200 d. P58,000
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7. A domestic company has the following income and expenses in 2011:
Gross income, business P1,400,000
Gain from the sale of business equipment 800,000
Operating expenses of the business 865,000
Donation to the National Government for priority
Activities in education 50,000
Donation to Sto. Domingo Church 10,000
The taxable payable by the company in 2011 is:
a. P170,960 b. P177,600 c. P166,500 d. P194,250

A general professional partnership and its partners have the following income and expenses during
2011:
Partnership:
Gross income P330,000
Business expense 185,000
Donation to the government for priority activities in economic 20,000
Development
Donation to the City of Manila for its street lights project 150,000
Partner Jack, legally separated, with one court awarded
Dependent child, owning 60% interest:
Rental income 170,000
Interest, time deposit, PNB, Manila 60,000
Rental expenses (deductible) 35,000
Donation to Espiritu Santo Church 20,000
Partner Jill, single, with an illegitimate dependent, owning 40% interest:
Gross salary 210,000
Prize won in a raffle valued at 12,000
8. The net income of the partnership is:

a. P110,000 b. P117,750 c. P118,750 d. P125,000
9. The taxable income of Partner Jack is:
a. P79,260 b. P100,085 c. P118,750 d. P163,260
10. The taxable income of Partner Jill is:
a. P79,260 b. P100,085 c. P118,750 d. P163,260
5. LOSSES
1. Loss must be actually sustained during the taxable year.
2. It must be sustained in a closed and completed transaction.
3. The loss must be that of the taxpayer.
4. Not compensated by insurance or other forms of indemnity.
5. The loss must be reported to the BIR within 45 days from the date of loss.
6. Not claimed as a deduction in the estate tax return for individual income taxpayers only.
b. Deductible losses
1. Loss incurred in trade, profession or business.
2. Loss due to fire, storm, shipwreck or other casualty if the property is connected with trade,
profession or business.
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3. Loss due to theft, robbery or embezzlement. If the property is connected with trade, profession
or business.
c. Computation of amount of loss deductible in (b2) and (b3) above.
1. Total loss- book value
2. Partial loss- replacement cost of the damaged portion of the asset or book value thereof at the
time of loss, whichever is lower.
Problems
1. One of the following is not correct for deductibility of losses from gross income:
a. It must arise from fire, storm, or other casualty, robbery, theft or embezzlement.
b. It must not be compensated by insurance or any form of indemnity.
c. a declaration of loss by casualty should be filed with the Bureau of Internal Revenue.
d. It is of property owned by the taxpayer, whether used in business or not.
2. Statement 1: In a total loss due to casualty , the measure of loss is the book value of the asset reduced
by any form of indemnity.
Statement 2: In a partial loss due to casualty, the measure of loss is the cost of the property, or the cost
to restore the property to its normal operating condition, whichever is lower, reduced by any form of
indemnity.
a. First statement is true while the second statement is false.
c .First statement is false while the second statement is true.
d. Both statement are false.
3. Which statement is correct?
a. A casualty loss which is not covered by a declaration of loss may nonetheless be deducted from
gross income.
b. A total loss from casualty, even if on non- business asset, may be deducted from the gross income
c. Deduction for loss may be postponed until insurance company admits its liability and the amount it
will pay is determined already.
d. A loss from embezzlement cannot be deducted in a year different from that in which the
embezzlement happened.
An office building was partially destroyed by fire in 2011. The building had a book value of P4,000,000. The
insurance company was willing to pay P3,000,000 which was refused by the owner of the building. Finally,
the claim was settled in 2012 for P3,500,000.
4. The P3,500,000 proceeds is:
a. Exempt from tax income c. Subject to final tax
b. Taxable in full d. Partly taxable, partly exempt.
5. The taxpayer can claim a deductible loss of:
a. P1,000,000 in 2011
b. P1,000,000 in 2012
c. P500,000 in 2011
d. P500,000 in 2012
6. Fatman acquired equipment for use in his business. Sometime later, the equipment suffered damages
during a fire which broke out within the company premises. The details of the loss are:
Acquisition cost of equipment P200,000
Accumulated depreciation 60,000
Replacement cost and damaged portion 180,000
Estimated remaining useful life 6 yrs
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What are the deductible loss, the new cost basis of the equipment and the annual depreciation after?
Deductible loss Equipment cost Annual depreciation
a. P140,000 P180,000 P30,000
b. P180,00 P140,000 P30,000
c. P200,000 P180,000 P30,000
d. P140,000 P200,000 P30,000
d. Loss of income- Loss of income or worthless debt arising from unpaid rent, interest or similar items is
not deductible, unless the income such items represent has been reported under the accrual method.
e. Losses from sales or exchanges of property which are not deductible(between related taxpayers)
1. Between members of a family. Family of an individual shall include only his brothers and sisters
(whether by whole or half-blood) spouse, ancestors and lineal descendants.
2. Between the grantor and fiduciary of any trust.
3. Between the fiduciary of a rust and the fiduciary of another trust; if the same person is grantor
with respect to each other.
4. Between the fiduciary of a trust and beneficiary of such trust.
5. Except in case of distribution in liquidation:
a. Between an individual and a corporation. If the individual owns directly or indirectly
more than 50% in value of the outstanding stock.
b. Between corporations if more than 50% in value of the outstanding stock in both is
owned directly by the same individual, and only if either one of the corporations was
personal holding company for the taxable year preceding the date of the sale or
exchange.
Problems
1. The family of an individual shall include his brothers and sisters, whether by whole of half-blood,
spouse, ancestors and lineal descendants. In which of the following does the concept not apply?
a. Non-deductible loss from sales or exchanges of property between members of the family.
b. Non-deductible bad debts on transactions between members of the family.
c. Non-deductible interest expense between members of the family.
d. Deductible premiums on hospitalization and health insurance of a family.
2. Statement 1: A corporation cannot deduct a loss arising from sale between the controlling individual
stockholder.
Statement 2: A corporation cannot deduct a loss arising from sale between the corporation and the
controlling parent stockholder.
a.. First statement is true while the second statement is false.
Net operating loss carry-over (NOLCO)- Any excess of allowable deductions over gross income of a
business in a taxable year immediately preceding the current taxable year shall be carried over as a
deduction from gross income for the next 3 consecutive taxable years immediately following the year of
such loss.
Problems
1. Statement 1: A net operating loss is the any excess of allowable deductions over gross income of a
business in a taxable year.
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Statement 2: A net operating loss which had not previously been deducted from gross income shall be
carried over as a deduction only in the next year immediately following the year of such loss.
a.. First statement is true while the second statement is false.
2. Which statement is wrong? The net operating loss carry-over (NOLCO) is:
a. Available to a domestic corporation.
b. Available to a registered general partnership in business in the Philippines.
c. Available to an individual in business in the Philippines.
d. Not available to a general professional partnership in the Philippines.
3. A domestic corporation had a net operating loss in 2010 of P300,000, and the following data in 2011:
Gross income from operations P2,000,000
Expenses of operations 2,600,000
Capital gain 200,000
Capital loss 300,000
The net operating loss carry-over available in 2011 is:
a. P300,000 b. P600,000 c. P900,000 d. P1,000,000
A domestic corporation had:
Year Gross profit from business Business expenses
2008 P600,000 P700,000
2009 500,000 470,000
2010 900,000 850,000
2011 850,000 900,000
2012 920,000 620,000
4. The taxable income in 2011:
a. P50,000 b. P0 c. P20,000 loss d. Some other amount
5. The taxable income in 2012:
a. P250,000 b. P0 c. P300,000 d. Some other amount
6. Statement 1: Capital losses are deductible only to the extent of capital gains.
Statement 2: Wagering losses are deductible only to the extent of wagering gains
a. Both statement are true.
b. Both statement are false.
c. The first statement is true, but the second statement is false.
d. The first statement is false, but the second statement is true.
7. A corporation bought a piece of land with a building at a cost of P4,000,000 for the land and
P1,000,000 for the building. It was not the intention of the corporation to use the building but to have it
razed to make the land available for the construction of its offices. Upon razing the old building at a cost
of P200,000 the corporation shall have a deductible loss of:
a. P0 b. P1,000,000 c. P1,200,000 d. P200,000
6. DEPRECIATION
1. The property must be used in trade, profession or business.
2. The property must have a limited useful life.
3. The provision must be charged off during the taxable year.
4. The provision must be reasonable.
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b. Proprietary or private educational institution may at its option elect either to:
1. Deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during
the taxable year for the expansion of school facilities; or
2. Deduct allowance for depreciation
Problems
1. Statement 1: The cost of leasehold improvements shall be deductible by the lessee by spreading the
cost of the improvements over the life of the improvements or remaining the term of lease, whichever
period is shorter.
Statement 2: Depreciation expense can be a deduction for both tangible and intangible property with
limited useful life.
a. Both statements are true.
b. Both statements are false.
2. Which of the following assets is subject to depreciation for income tax purposes?
a. Inventories or stock in trade. c. Equipment used in business
b. Goodwill d. Residential house
3. The basis of computing depreciation of an assets is always:
a. Cost of the property.
b. Fair market value of the property.
c. The adjusted basis for computing loss on the sale of the property.
d. Value of the property at the time of acquisition.
4. Plinky has determined from business experience that an item of machinery is usually last s
approximately seven years for the purpose for which it was acquired. The life of a similar asset in the
general industry was eight years. A close competitor uses a similar item for ten years. The manufacturer
guarantees the product and recommends a life of five years. In determining depreciation, Plinky should
use a life of:
a. 5 years b. 7 years c. 8 years d. 10 years
5. A store building was constructed on January 2, 2006 with a cost of P570,000. Its estimated useful life
is 16 years with scrap value of P70,000 after 16 years. In January 2011 replacement of some worn-out
parts of the building costing P50,000 was spent. After the repairs, the building was appraised with a fair
market value of P770,000. The allowable deduction for depreciation for the year 2011 is:
a. P35,795.45 b. P43,750.00 c. P49,431.82 d. P31,250.00
6. Ateneo is a private educational institution recognized by the Government. It submitted the

following data for the fiscal year ending April 30, 2011:
Tuition fees P9,500,000
Miscellaneous fees 1,200,000
Cash dividends from domestic corporation 80,000
Income from bookstore 350,000
Interest on bank deposit 70,000
Income of school canteen 180,000

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Salary, allowance and bonus 6,400,000
Other operating expenses (except the expenditures below) 2,600,000
Other expenditures for improvement of school facilities:
Construction of additional classrooms 1,300,000
Furniture and equipment of library 400,000
The income tax due for the fiscal year ending April 30, 2011 is:
a. P223,000 b. P169,600 c. P185,500 d. P53,000
7. DEPLETION
a. What method of depletion is provided by law? COST DEPLETION.
b. Who may avail of cost depletion? Oil and gas wells and mines.
c. Basis of cost depletion – Adjusted cost or capital investment in the mine, which is the
accumulated exploration and development expenses.
d. Limit of depletion – It cannot exceed the capital invested in the mine.
e. Computation of unit depletion charge:
Adjusted cost (Capital invested in the mine)
= Unit depletion charge
No. of recoverable units in the mine
Problems
1. Which statement is not correct? Deduction for depletion:

a. Is allowed on wasting assets only.
b. For foreign corporations engaged in doing business in the Philippines, is allowed only
if the mine is located in the Philippines.
c. For domestic corporations, shall be allowed only if the mine is located in the
Philippines.
d. Is separate from deduction for depreciation of building in the mine site.
2. The books of a newly organized mining company show the following data:
Capital invested in the mine P20,000,000
Operating expenses (not including depletion) 1,200,000
Selling price per ton 1,000
No. of recoverable units in the mine (tons) 50,000
No. of tons mined and sold during the year 3,000
The taxable income of the mining company is:

a. P600,000 b. P1,200,000 c. P1,800,000 d. P3,000,000
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8. RESEARCH AND DEVELOPMENT EXPENDITURES
1. It must be paid or incurred during the taxable year.
2. It must be connected with the trade, profession or business.
3. It is not chargeable to capital account.
b. Amortization of certain research and development expenditures
1. Chargeable to capital account but not chargeable to property of a kind which is

subject to depreciation or depreciation.
2. Taxpayer opted to treat the expenditures as “Deferred Expenses” rather than outright
expense in the taxable year paid or incurred.
3. Amortized over a period of not less than 60 months starting with the month in which
the taxpayer first realized benefits from such “Deferred Expenses.”
c. Non-deductible research and development expenditures
1. Any expenditures for the acquisition or improvement of land;
2. Any expenditures for the improvement of property to be used in connection with

research and development of a kind which is subject to depreciation and depletion;
and
3. Any expenditures paid or incurred for the purpose of ascertaining the existence,
location, extent, or quality of any deposit of one or other mineral, including oil and
gas.
Problems
1. Which statement is wrong? Research and development costs:

a. On land and building acquired for research and development purposes is not
deductible as research and development cost.
b. May be claimed as an outright deduction from gross income.
c. May be treated as a deferred expense to be amortized over the period which will
benefit from the expenditure.
d. May be treated as a deferred expense to be amortized over a period of not less than
sixty months from the date benefit from the expenditure is derived.
2. Which statement is wrong? Research and development costs:
a. When related to the acquisition and/or improvement of land and building, must be
capitalized.
b. If not related to land and building, may be treated as an outright deduction.
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c. If not related to land and building, may be treated as a deferred expense which may
be amortized.
d. Cannot be deducted because it has unlimited life.
3. Statement 1: Research and development costs may be treated as outright deduction or
deferred expense.
Statement 2: Expenditures of private educational institutions for expansion of school
facilities may be treated as outright deduction or capitalized.
a. Both statements are true.
b. Both statements are false.
9. EXPENSES IN GENERAL
1. It must be ordinary and necessary.
2. It must be paid or incurred during the taxable year.
3. It must be directly attributable to the development, operation, management and/or

conduct of the trade, profession or business.
4. It must be reasonable.
5. The amount paid shall be allowed as a deduction only if it is shown that the tax
required to be deducted and withheld therefrom has been paid to the BIR.
6. It must be supported by official receipts or adequate records.
b. Requisites for deduction of compensation
1. Personal services must have been actually recorded.
2. The compensation for such services must be reasonable, including the grossed-up
monetary value of fringe benefit furnished to the employee and the applicable final
tax remitted to BIR.
c. Requisites for deduction of traveling expense
1. It must be incurred while away from home.
2. It must be incurred in the pursuit of trade, profession or business.
d. Requisites for deduction of entertainment, amusement or recreation expense (EAR)
1. It must be directly related to or in furtherance of the conduct of trade, profession or

business.
71
2. It must not be contrary to law, morals, good customs, public policy or public order.
3. It must not have been paid directly or indirectly to an official or employee of the
government (national or local, including GOCC), or of a foreign government, or to a
private individual, corporation, GPP, or a similar entity, if it constitutes bribe,
kickback or other similar payment.
4. The official receipts, invoices, bills or statement of accounts should be in the name of
the taxpayer claiming the deduction.
5. In no case shall such deduction exceed 0.5% of net sales (gross sales less sales
returns, allowances and discounts) for taxpayers engaged in sale of goods or
properties; or 1.0% of net revenue (gross revenue less discounts) for taxpayers
engaged in sale of services, including exercise of profession and use or lease of
properties. If the taxpayer is deriving income from both, however, the allowable EAR
expense shall in all cases be determined based on an apportionment formula below,
but in no case shall exceed the maximum percentage ceiling herein specified.
Apportionment formula:
Net sales or net revenue
X Actual EAR expense
Total net sales and net revenue
Problems
1. The following are examples of corporate expenses deductible from gross income, except
one:
a. Representation expenses designed to promote business.
b. Contributions to drum up business, like contributions of softdrinks to barrio fiestas.
c. Expense paid to an advertising firm in order to create a favorable image for the
corporation.
d. Premiums on life insurance covering the life of an employee if the beneficiary is his
heirs.
2. Beauty, supporting a sister who turned 21 years old during the year, has the following
income and expenses in 2011:
Professional Income, net of w/h tax of 10% P72,000
Rent for two years, receive February 1 at P20,000 per year,
Net of w/h tax of 5% 38,000
Interest on time deposit, gross of applicable w/h tax 40,000
Professional expenses 30,000
Household expenses 25,000
Premium on life insurance 2,500
Premium, insurance of office equipment for the year, paid
August 12,400
Car expense, used for practice 50% of time 20,000
Cost of office electronic computer purchased December 31 30,000
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Depreciation of rental property 10,000
The taxable income assuming Beauty claims the:
Itemized deductions OSD c. P69,000 P72,000

d. P72,000 P69,000
a. P19,000 P22,000
b. P22,000 P19,000
Itemized Deduction OSD
3. A newly BIR registered domestic company, engaged in brokerage business, has in 2011
the following income and expenses:
Commission, net of withholding tax of 10% P4,500,000
Business expenses 3.000,000
Other expenses:
Traveling & entertainment allowance of president 50,000
Advertising expenses 50,000
Premium on life insurance of president, with company as beneficiary 190,000
Premium on life insurance of manager, with manager’s wife as
Beneficiary 100,000
Cost of office equipment purchased April 1 with useful life of 5 years 300,000
Fire insurance premium on office equipment for one year paid on
August 1 6,000
Rent of office space where tax was not withheld and remitted to the BIR 60,000
Other income:
Dividend from domestic corporation 100,000
Gain on sale of investment in Meralco shares 200,000
Interest on PNB deposit 18,000
Rent from lease of lot, net of withholding tax of 5% 190,000
The income tax payable by the corporation is:
a. P75,750 b. P95,600 c. P173,375 d. P114,800
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4. Nestea Corporation is engaged in the sale of goods and services with net sales and net
revenue of P2,000,000 and P1,000,000, respectively. The actual entertainment,
amusement and recreation expense allowed as deduction from gross income for the
quarter is:
a. P30,000 b. P25,000 c. P20,000 d. P10,000
5. A domestic corporation had in 2011 the following income and expenses:
Net sales P1,000,000
Cost of sales 600,000
Salaries and wages 20,000
Representation and entertainment 6,000
Bad debts written off 10,000
Deductible taxes 2,000
Deductible interest 3,000
Contribution to religious organization 8,000
Contribution to Development Academy of the Phil. 3,000
Contribution to the Government for public purpose 12,000
The taxable income of the corporation is:
a. P339,000 b. P338,050 c. P337,000 d. P336,000
10. CONTRIBUTION TO PENSION TRUST
a. Contribution deductible by employer:
1. Payments to the trust to cover pension liability accruing during the year. (Deductible
in full)
2. Payments to the trust in excess of contributions in No. 1. This must be pro-rated

over a period of 10 years beginning with the year in which the contribution was
made.
Problems
1. Which statement is wrong? Contributions made by an employer to a pension trust:

a. For lump sum payment to cover past service cost, is allowable as deduction
beginning with the year the payment was made.
b. For lump sum payment to cover past service cost is allowable as deduction
amortized for period of ten years.
c. For a lump sum payment to cover past service cost, may be amortized over a period
of more than, but not less than ten years.
d. For present service cost, is deductible in the year that payment is made.
2. A domestic company made the following payments to its pension trust.
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2011 2012
Payment if current pension P 5,000 P 5,000
Payment of past pension 40,000 60,000
The deductible expense for contribution to pension trust in:

2011 2012 2011 2012
a. P5,000 P11,000 c. P4,000 P6,000
b. P9,000 P15,000 d. P9,000 P5,000
EXPENSES NOT DEDUCTIBLE FROM GROSS INCOME

1. Personal, living and family expenses.
2. Any amount spent in restoring property or in making good the exhaustion thereof for which
an allowance has been made.
3. Any amount paid out for new buildings or permanent improvements or betterments made
to increase the value of any property.
4. Premiums paid on any life insurance policy covering the life of an officer or employee, or
any person financially interested in the trade or business of the taxpayer, when the
taxpayer is the beneficiary, directly or indirectly, under such policy.
Problems
1. Which of the following is a deductible expense for income tax purposes?
a. Salaries of domestic servants c. Provision for doubtful accounts
b. Ordinary repair of personal car d. None of these
2. Kadiwa Corporation took two keymen insurance on the life of its president. In one policy,
the beneficiary is the corporation to compensate it for its expected loss in case of death of
its president. The other policy designates the president’s wife as its irrevocable beneficiary.
Question 1: Are the insurance premiums paid by Kadiwa Corporation in both policies
deductible?
Question 2: Will the insurance proceeds be treated as income subject to tax by Kadiwa
Corporation and by the wife?
a. Yes to 1st and no to 2nd questions c. Yes to both questions
b. No to 1st and yes to 2nd questions d. No to both questions
3. Received by the taxpayers under policies:
Proceeds of life insurance (as beneficiary of mother) P 400,000
Proceeds of life insurance (as beneficiary of father) 600,000
Insurance purchased from the father at cost to taxpayer of 200,000
Additional premiums paid by the taxpayer to continue the 50,000
policy
Amount received upon the death of the father 500,000
Proceeds of endowment policy upon maturity, with 1,000,000
premium payments made of P800,000
Proceeds of comprehensive car insurance 100,000
Crop insurance from crops destroyed by typhoon 50,000
The income from the amounts received is:
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a. P2,300,000 b. P500,000 c. P600,000 d. P50,000
TAX-1019.30
INSTALLMENT METHOD
1. Under Section 49 of the tax code, income (taxable in the AITR or subject to final tax) may be
returned or paid in installment in 3 cases only:
a. Sale of personal property by a dealer (always taxable in the AITR only).

b. Casual sale of personal property (taxable in the AITR or subject to FT):
1. Selling price over P1,000
2. Initial payments must not exceed 25% of S.P.
3. Property is not of a kind which would be included in inventory if on hand at the close
of the taxable year.
c. Sale of real property (taxable in the AITR or subject to FT):
2. Definition of terms:
a. SELLING PRICE – entire amount for which the buyer is obligated to the seller. Whether
the “mortgage exceeds or does not exceed the basis”, it includes:
Cash received by seller xxx
FMV of the property given by buyer xxx
Evidence of indebtedness (Installment obligations of the buyer) xxx
Mortgage assumed by the buyer xxx
Selling price (SP) xxx
b. CONTRACT PRICE (only when there is mortgage assumed)
Mortgage does not exceed the basis Mortgage exceeds the basis
Selling price xxx Selling price xxx
Less: Mortgage assumed by buyer xxx Less: Mortgage assumed by buyer xxx
Contract price (CP) xxx Balance xxx
Add: Excess of mortgage over cost xxx
Contract price (CP) xxx
c. INITIAL PAYMENTS – payments made by the buyer in cash or property, other than
evidence of indebtedness, during the taxable year in which the sale is made.
Down payment xxx Down payment xxx
Add: Installment payment received xxx Add: Installment payment received xxx
Initial payments xxx Excess of mortgage over cost xxx
Initial payments xxx
3. Forms of computation:
a. Gross profit rate formula:
Gross profit = Gross profit rate
CP or SP
b. Year of sale:
Taxable gross profit in the AITR Final tax payable
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Initial payments x Gross Initial payments x Final tax
CP or SP CP or SP
c. Succeeding year:
Collections x Gross profit Collections x Final tax
CP or SP CP or SP
d. Gain or loss on repossession:

FMV at repossession xxx
Less: Uncollected installments xxx
Less: Gross profit on uncollected installments xxx xxx
Indicated gain or loss xxx
Less: Expenses of repossession xxx
Gain or loss upon repossession xxx
e. Gain or loss if repossessed property is re-sold:

Selling price xxx
Less: FMV of property at the time of repossession xxx
Gain or loss upon resale xxx
f. Income on sale or discount of note:

Selling price xxx
Less cost of note sold:
FV of note xxx
Less: Income realized xxx xxx
Gain or loss xxx
Problems
1. An individual income taxpayer casually sold the following personal properties (not part of
inventory):
Property X Property Y
Cost P400,000 P500,000
Mortgaged for 150,000 150,000
__Sold in 2011 under the following terms:__
__ Cash received in 2011__________ 200,000 250,000
Mortgage assumed by buyer 150,000 150,000
Balance payable equally in four (4) years 450,000 300,000
Can income be reported in installment?
Property X Property Y Property X Property Y
a. No Yes c. No No
b. Yes No d. Yes Yes
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Items 2 through 6 are based in the following information:
A certain taxpayer has the following data:
Lot A Lot B Lot C
Acquisition mode Inheritance Donation Purchase
Basis P 80,000 P120,000 P150,000
Mortgage 120,000 80,000
Sold in 2011 under the following terms:
2011 Downpayment 50,000 50,000 40,000
Installment payment 20,000 40,000
2012 Installment payment 160,000 100,000 80,000
Mortgage assumed 120,000 80,000
2. The selling prices are:
Lot A Lot B Lot C Lot A Lot B Lot C
a.P500,000 P400,000 P200,000 c.P420,000 P320,000 P200,000
b.P380,000 P320,000 P200,000 d.P500,000 P200,000 P400,000
3. The contract prices are:

a.P380,000 P320,000 P200,000 c.P420,000 P200,000 P320,000
b.P420,000 P320,000 P200,000 d.P500,000 P400,000 P200,000
4. The initial payments are:

a. P50,000 P50,000 P40,000 c. P110,000 P90,000 P40,000
b. P110,000 P40,000 P50,000 d. P70,000 P90,000 P40,000
5. The gross profit are:

a. P300,000 P200,000 P50,000 c. P340,000 P200,000 P50,000
b. P420,000 P80,000 P250,000 d. P420,000 P280,000 P50,000
6. The gross profit rates are:

a. 84% 70% 25% c. 100% 87.5% 25%
b. 100% 70% 25% d. 87.5% 84% 70%
7. Ystilo is a dealer of household furniture regularly selling on installments. It made a sale of a

bedroom set, with a cost of P4,000, for P10,000, receiving as downpayment P1,000 on the
date of sale on December 15, 2011, and P1,500 the day after, and monthly thereafter at
P2,500.
The gross income to report on the installment method in 2012 is:
a. P0 b. P4,500 c. P7,500 d. P1,500
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8. A construction company sold a hauling truck in installment, the particulars of which are as
follows:
Date of installment sale 5/1/2011
Cost of truck – 1/2/2009 P120,000
Accumulated depreciation as of 5/1/2011 82,000
Terms of sale:
Downpayment – 5/1/2011 20,000
Due on 5/1/2012 25,000
Due on 5/1/2013 35,000
The amount of ordinary gain that is taxable each year:

2011 2012 2013 2011 2012 2013
a. P42,000 P0 P0 c. P10,500 P15,750 P15,750
b. P10,500 P13,125 P18,375 d. P13,125 P10,500 P18,375
79
2. A domestic company made the following payments to its pension trust.
2011 2012
Payment if current pension P 5,000 P 5,000
Payment of past pension 40,000 60,000
The deductible expense for contribution to pension trust in:

2011 2012 2011 2012
a. P5,000 P11,000 c. P4,000 P6,000
b. P9,000 P15,000 d. P9,000 P5,000
EXPENSES NOT DEDUCTIBLE FROM GROSS INCOME

5. Personal, living and family expenses.
6. Any amount spent in restoring property or in making good the exhaustion thereof for which
an allowance has been made.
7. Any amount paid out for new buildings or permanent improvements or betterments made
to increase the value of any property.
8. Premiums paid on any life insurance policy covering the life of an officer or employee, or
any person financially interested in the trade or business of the taxpayer, when the
taxpayer is the beneficiary, directly or indirectly, under such policy.
Problems
4. Which of the following is a deductible expense for income tax purposes?
e. Salaries of domestic servants g. Provision for doubtful accounts
f. Ordinary repair of personal car h. None of these
80
5. Kadiwa Corporation took two keymen insurance on the life of its president. In one policy,
the beneficiary is the corporation to compensate it for its expected loss in case of death of
its president. The other policy designates the president’s wife as its irrevocable beneficiary.
Question 1: Are the insurance premiums paid by Kadiwa Corporation in both policies
deductible?
Question 2: Will the insurance proceeds be treated as income subject to tax by Kadiwa
Corporation and by the wife?
e. Yes to 1st and no to 2nd questions g. Yes to both questions
f. No to 1st and yes to 2nd questions h. No to both questions
6. Received by the taxpayers under policies:
Proceeds of life insurance (as beneficiary of mother) P 400,000
Proceeds of life insurance (as beneficiary of father) 600,000
Insurance purchased from the father at cost to taxpayer of 200,000
Additional premiums paid by the taxpayer to continue the 50,000
policy
Amount received upon the death of the father 500,000
Proceeds of endowment policy upon maturity, with 1,000,000
premium payments made of P800,000
Proceeds of comprehensive car insurance 100,000
Crop insurance from crops destroyed by typhoon 50,000
The income from the amounts received is:
b. P2,300,000 b. P500,000 c. P600,000 d. P50,000
TAX-1019.30
INSTALLMENT METHOD
2. Under Section 49 of the tax code, income (taxable in the AITR or subject to final tax) may be
returned or paid in installment in 3 cases only:
a. Sale of personal property by a dealer (always taxable in the AITR only).

b. Casual sale of personal property (taxable in the AITR or subject to FT):
81
4. Selling price over P1,000
6. Property is not of a kind which would be included in inventory if on hand at the close
of the taxable year.
c. Sale of real property (taxable in the AITR or subject to FT):
5. Definition of terms:
d. SELLING PRICE – entire amount for which the buyer is obligated to the seller. Whether
the “mortgage exceeds or does not exceed the basis”, it includes:
Cash received by seller xxx
FMV of the property given by buyer xxx
Evidence of indebtedness (Installment obligations of the buyer) xxx
Mortgage assumed by the buyer xxx
Selling price (SP) xxx
e. CONTRACT PRICE (only when there is mortgage assumed)
Selling price xxx Selling price xxx
Less: Mortgage assumed by buyer xxx Less: Mortgage assumed by buyer xxx
Contract price (CP) xxx Balance xxx
Add: Excess of mortgage over cost xxx
Contract price (CP) xxx
f. INITIAL PAYMENTS – payments made by the buyer in cash or property, other than
evidence of indebtedness, during the taxable year in which the sale is made.
Down payment xxx Down payment xxx
Add: Installment payment received xxx Add: Installment payment received xxx
Initial payments xxx Excess of mortgage over cost xxx
Initial payments xxx
82
6. Forms of computation:
g. Gross profit rate formula:
Gross profit = Gross profit rate
CP or SP
h. Year of sale:
Initial payments x Gross Initial payments x Final tax
CP or SP CP or SP
i. Succeeding year:
Collections x Gross profit Collections x Final tax
CP or SP CP or SP
j. Gain or loss on repossession:

FMV at repossession xxx
Less: Uncollected installments xxx
Less: Gross profit on uncollected installments xxx xxx
Indicated gain or loss xxx
Less: Expenses of repossession xxx
Gain or loss upon repossession xxx
k. Gain or loss if repossessed property is re-sold:

Selling price xxx
Less: FMV of property at the time of repossession xxx
Gain or loss upon resale xxx
l. Income on sale or discount of note:
83
Selling price xxx
Less cost of note sold:
FV of note xxx
Less: Income realized xxx xxx
Gain or loss xxx
Problems
9. An individual income taxpayer casually sold the following personal properties (not part of
inventory):
Property X Property Y
Cost P400,000 P500,000
Mortgaged for 150,000 150,000
__Sold in 2011 under the following terms:__
__ Cash received in 2011__________ 200,000 250,000
Mortgage assumed by buyer 150,000 150,000
Balance payable equally in four (4) years 450,000 300,000
Can income be reported in installment?
Property X Property Y Property X Property Y
e. No Yes c. No No
f. Yes No d. Yes Yes
Items 2 through 6 are based in the following information:

A certain taxpayer has the following data:
Lot A Lot B Lot C
Acquisition mode Inheritance Donation Purchase
Basis P 80,000 P120,000 P150,000
Mortgage 120,000 80,000
Sold in 2011 under the following terms:
84
2011 Downpayment 50,000 50,000 40,000
Installment payment 20,000 40,000
Mortgage assumed 120,000 80,000
10. The selling prices are:
a.P500,000 P400,000 P200,000 c.P420,000 P320,000 P200,000
b.P380,000 P320,000 P200,000 d.P500,000 P200,000 P400,000
11. The contract prices are:

a.P380,000 P320,000 P200,000 c.P420,000 P200,000 P320,000
b.P420,000 P320,000 P200,000 d.P500,000 P400,000 P200,000
12. The initial payments are:

a. P50,000 P50,000 P40,000 c. P110,000 P90,000 P40,000
b. P110,000 P40,000 P50,000 d. P70,000 P90,000 P40,000
13. The gross profit are:

a. P300,000 P200,000 P50,000 c. P340,000 P200,000 P50,000
b. P420,000 P80,000 P250,000 d. P420,000 P280,000 P50,000
14. The gross profit rates are:

c. 84% 70% 25% g. 100% 87.5% 25%
d. 100% 70% 25% h. 87.5% 84% 70%
85
15. Ystilo is a dealer of household furniture regularly selling on installments. It made a sale of a
bedroom set, with a cost of P4,000, for P10,000, receiving as downpayment P1,000 on the
date of sale on December 15, 2011, and P1,500 the day after, and monthly thereafter at
P2,500.
b. P0 b. P4,500 c. P7,500 d. P1,500
16. A construction company sold a hauling truck in installment, the particulars of which are as
follows:
Cost of truck – 1/2/2009 P120,000
Terms of sale:
Downpayment – 5/1/2011 20,000
Due on 5/1/2012 25,000
Due on 5/1/2013 35,000
The amount of ordinary gain that is taxable each year:

2011 2012 2013 2011 2012 2013
a. P42,000 P0 P0 c. P10,500 P15,750 P15,750
b. P10,500 P13,125 P18,375 d. P13,125 P10,500 P18,375
86
9. Unilab sold a factory site for P5,000,000. It had a book value of P4,000,000. Payments on the
selling price were: assumption by the buyer of a mortgage on the property of P2,500,000; on
the date of the sale in June 2011, P500,000; and P500,000, every six months thereafter.
a. P400,000 b. P600,000 c. P1,000,000 d. P500,000
10. Powers Co., a resident corporation, sold its land and building that houses its offices for
P10,000,000. It had a book value of P4,000,000. Payments on the selling price were:
assumption of a mortgage on the property of P5,000,000; on the date of the sale in December
2011, P1,000,000; and every six months thereafter, P1,000,000.
a. P4,000,000 b. P3,000,000 c. P6,000,000 d. P2,000,000
11. Ticsay owns a personal automobile which he sold in installments, as follows:

Cost of automobile, 1/2/2009 P60,000
Terms of sale:
Downpayment, 12/1/2011 10,000
Amount paid, 12/15/2011 5,000
Due on 12/1/2012 25,000
Due on 12/1/2013 40,000
The taxable gain of Ticsay in:
2011 2012 2013 2011 2012 2013
a. P20,000 P0 P0 c. P10,000 P0 P0
b. P1,875 P3,125 P5,000 d. P3,750 P6,250 P10,000
12. in 2011, a resident citizen, single, made a sale for P400,000 of bonds held for four years, in
installments terms where payments in cash of P100,000 in 2011 and P300,000 in 2012. He
chose to report gain from the sale under the installment method of accounting. The asset had a
cost to him of P200,000. He had the following data on income, gain and loss in 2012:
Net income from business P200,000

Gain on sale of shares of foreign corporation held for three years 60,000
Loss on sale of family car held for six months 20,000
87
The taxable income for 2012 is:
a. P160,000 b. P210,000 c. 235,000 d. P350,000
13. On March 23,2011, Aczuna sold directly to buyer shares of stock for a total fair market value
of P200,000, which he acquired in 2009 for a total amount of P120,000. Under the agreement,
P40,000 will be paid as down payment and the balance payable in two-year equal installment
beginning 2012. Assuming that during the year no other stock transaction took place. The
capital gain tax payable by Azcuna in:
2011 2012 2013 2011 2012 2013

a. P4,000 P0 P0 c. P1,600 P3,200 P3,200
b. P800 P1,600 P1,600 d. P800 P1,600 P3,200
Sylvia sold a vacant lot to her sister, Melody. The details of which are as follows:
Acquisition cost of land, March 5,2008 P450,000

Cash payments:
Date of sale, December 15,2011 100,000
Payment, January 15,2012 100,000
Mortgage assumed by Melody 500,000
14. The initial payment is:
a. P100,00 b. P250,000 c. P150,000 d. P200,000
15. The selling price of the property is:
a. P150,000 b. P550,000 c. P700,000 d. P250,000
16. The contract price is:
a. P150,000 b. P550,000 c. P700,000 d. P250,000
17. The final tax payable in 2011 is:
a. P42,000 b. P25,200 c. P9,000 d. None
18. The final tax payable in 2012 is:
a. P42,000 b. P25,200 c. P16,800 d. None

88
19. On capital gain tax on real property, which of the following statements is not true?
a. The tax should be paid, in one lump sum, within 30 days from the date of sale.
b. The term “initial payments” is synonymous to “down payment”.
c. The installment payment of the tax should be made within 30 days from receipt of each
installment payment on the selling price.
d. The tax may be paid in installment if the initial payments do not exceed 25% of the selling
price.
20. In 2011, a domestic corporation sold a capital asset that it held for two years for
P2,000,000, with terms of payment at P800,000 in 2011 and the balance, evidenced by a
mortgage note for P1,200,00, with a fair market value at 85% of the face value. The asset had a
cost to it of P700,000. The gain from the sale was reported in 2011 under the deferred payment
method of accounting. In 2012, the corporation collected only P1,000,000 on the mortgage
note, and gad a net income from business of P1,200,000.
The taxable income for 2012 is:

a. P1,200,000 b. P1,275,000 c. P1,350,000 d. P1,950,000
21. Selling price of inventory in installments P100,000

Cost of the inventory sold 40,000
Collection on the selling price 45,000
Fair market value of property when repossessed
for buyer’s default 25,000
a. Gain on repossession is P3,000.

b. Loss on repossession is P28,000.
c. Loss on repossession is P2,000.
d. Gain or loss on repossession is some other amount.
TAX-1020.31
CORPORATE READJUSTMENT
Merger or Consolidation Transfer of property to controlled corporation
 No cash or property received in -No cash or property is received in the

the exchanged (shares vs. shares) transfer, hence transfer is solely for stock &
the transferor (alone or with maximum of 4
others)
89
gains control of the corporation.
Gain- Not recognized Gain- Not recognized
Loss- Not recognized Loss- Not recognized
 Cash or property is received - Cash or property is received in the

(aside from shares) in the exchange transfer, hence transfer
(cash, property & shares vs. shares) is not solely for stock or in kind and
the transferor (alone or with
maximum of 4 others) gains control
of the corporation.
Gain- Recognized to the extent of the sum Gain- Recognized to the extent of the sum
of money and FMV of the property received of money and FMV of the property received
Basis of the new shares received in the Basis of the new shares received in the
exchange (statutory formula): transfer (statutory formula):
Basis of the new shares surrendered: xxx Basis of the property exchanged xxx
Gain recognized xxx Gain recognized xxx
Cash & FMV of the property received xxx Cash & FMV of the property received (xxx)
Basis of new shares received xxx Basis of new shares received xxx
Loss- Not recognized Loss- Not recognized

- Control already existing before the
transfer, whether the transfer is solely
for stock or otherwise (not a corporate
readjustment).
Gain- Recognized
Loss- Recognized
Problems
Winrox Company was merged into Exodus Company. Winrox Company transferred all its
properties with a book value of P4,000,000 to Exodus Company for which it received shares of
the latter with a fair market value of P3,600,000. Topgun was a stockholder of Winrox Company
90
(which he acquired at a cost of P500,000) when the merger was effected and received shares of
stock of exodus Company with a fair market value of P360,000.
1. The amount of loss deductible by Winrox Comapany is:
a. P400,000 b. P4,000,000 c. P140,000 d. None
2. The amount of loss deductible by Topgun is:
a. P400,000 b. P140,000 c. P500,000 d. None
Caltex Co. was merged into Petron Co., and only Petron Co. continues to exist. Gatsby, a
stockholder of Caltex Co. was aske4d to surrender his 100 shares of Caltex Co. that he acquired
for P100,000, and received under the merger 100 shares of Petron Co. with a fair market value
of P130,000 and cash of P30,000.
3. The gain to Gatsby on the merger is:
a. P60,000 b. P30,000 c. None d. Some other amount
4. The basis to Gatsby of the shares of Petron Co. received is:
a. P100,000 b. P130,000 c. P70,000 d. Some other amount
5. Starex Co. was merged into jaguar Co. Godiva, a shareholder of Starex Co., was required to
surrender her shares of Starex Co., which she acquired at a cost of P180,000, and received in
exchange shares of Jaguar Co. with a fair market value of P120,000, plus cash of P30,000, and
property with a fair market value of P20,000. Godiva sold the shares of jaguar Co. for P150,000.
The gain on the sale of Jaguar Co. shares is:
a. P30,000 b. P25,000 c. P35,000 d. P20,000
6. Philex Company transferred property to Holcim Company. As a result of the transfer Philex
Company acquired control over Holcim Company. The property had a book value of P1,000,000
to Philex. As a consideration, it received shares of stock of Holcim with a fair market value of
P960,000. As a consequence of the transaction, Philex Company shall claim a deductible loss of:
a. P1,000,000 b. P960,000 c. P40,000 d. None
7. Isabel transferred her commercial land with accost of P500,000 but with a fair value of
P750,000 to Vision Corporation in exchange for the stocks of the corporation with par value of
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P1,000,000. She became the majority stockholder of the corporation right after. As a result of
the transfer:
a. The recognized gain is the difference between the fair market value of the shares of stocks
and the cost of the land.
b. The recognized gain is the difference between the par value of the shares of stocks and the
fair market value of the land.
c. No recognized gain because the land was in exchange for purely stocks and Isabel became
the majority stockholder.
d. No recognized gain because the land was in exchange for stocks of the corporation.
8. Dyango has forty percent interest in Banana Co. He transferred property with a basis to him
of P2,000,000 to the company and gained control to the extent of seventy percent. He received
for his property shares of Banana Co. with a fair market value of P1,900,000, cash of P500,000
and property with a fair market value of P600,000. He simultaneously sold the shares of Banana
Co. and the property he received for P2,500,000 and P700,000, respectively.
The gain on the sale is:
a. P200,000 b. P1,200,000 c. P700,000 d. P1,300,000
9. Boljak owns a parcel of land worth P500,000 which he inherited from his father in 2011 when
it was worth P300,000. His father purchased it in 2008 for P100,000. If Boljak transfers this
parcel of land to his wholly owned corporation worth P450,000, Boljak’s taxable gain is:
a. Zero b. P150,000 c. P200,000 d. P350,000
10. Which of the following losses is deductible?
a. Loss on wash sale.
b. Loss on merger.
c. Loss on a transfer of property to a corporation solely for stock resulting in control.
d. Loss on a transfer of property to a controlled corporation solely for stock.
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TAX-1020.32
COMPREHENSIVE PROBLEMS
1. The following 2011 data pertain to Fiesta Company, a domestic corporation:
Net Sales P1, 850,000

Cost of goods sold 1,025,000
Gross profit 825,000
Sundry income 70,200
Gross income 895,200
Operating expenses and other charges 260,000
Net income per books P 635,200
Additional information:
a. Included in the sundry income are:
Dividend from domestic corporation P42, 500
Dividend received from resident foreign corporation 15,000
Income from sale of ordinary asset 4,750
b. Included under operating expenses and other charges are:
Donation to typhoon victims P12,000
Provision for doubtful accounts 17,500
Local taxes and licenses 8,620
Premiums paid on insurance of buildings 4,500
c. The company wrote off in 2010 against allowance for bad debts uncollectible
receivables amounting to P15,000 which was allowed as deduction from gross income. This
amount was recovered in 2011.
d. In October 2010 one of the company’s buildings was totally destroyed by fire when
the book value was P260,000. The liability of the insurance company was settled in 2011 and
Fiesta Company was paid P150,000.
The income tax payable in 2011 by Fiesta Corporation is:

a. P17,354 b. P158,160 c. P184,520 d. P168,704
2. The income tax return (ITR) of Junior, single, for taxable year 2011, reported a taxable
income of P520,240. A careful scrutiny revealed that some items included as income and
expenses are the following:
Income:
Compensation income P180,000
Cash dividend 122,800
Stock dividends 73,500
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Property dividends 27,000
Gambling winnings 23,100
Donation received 16,000
Gain on sale of capital asset-15 months 8,000
Gain on sale of his vacant lot 120,000
Income on rice land 60,000
Total P 630,400
Expenses:
Real estate tax P 3,500
Community tax 945
Surcharge for late filing of 2009 ITR 12,000
Interest on personal loan 24,000
Gambling losses 32,000
Personal and living expenses 50,000
Loss on sale of capital asset 8 ½ months 5,000
Loss on crops due to flood 27,250
Total P 154,695
The correct amount of Junior’s taxable income is:

a. P246,940 b. P255,840 c. P252,840 d. 256,840
3. Under the net worth-expenditures method of investigation, unexplained increase in net

worth is attributed to undeclared income.
Statement 1: The finding of the Bureau of Internal Revenue of undeclared income is
presumed correct, unless the taxpayer proves otherwise.
Statement 2: The under declaration of income is presumed to be fraudulent and the
assessment of the tax by the Bureau of Internal Revenue will impose a surcharge of fifty
percent.
b. Bothe statements are true.
4. The taxpayer is a resident citizen who is married with two qualified dependent children.
For 2011 which is under investigation, he had the following data:
Net worth, December 31, 2010 P 400,000
Net worth, December 31, 2011 600,000
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Interest received on long-term investment in banks 2,000
Dividends on shares of stock of domestic corporation 5,000
Rent income per books (out of an advance rental of 60,000) 10,000
Income tax paid for 2010 60,000
Interest paid on money borrowed for use in acquiring
long-term investment 1,000
Personal, living and family expenses 100,000
Cost to repair residential house partially destroyed by fire 30,000
Premiums on family health and hospitalization insurance 7,400
Capital gains on bonds of a domestic corporation
held for 8 months 30,000
Capital loss on bonds of a domestic corporation
held for 18 months 70,000
The taxable income per investigation is:

a. P331,400 b. P376,400 c. P381,400 d. P433,400
TAX-1021.33
DECLARATION AND QUARTERLY PAYMENTS OF INCOME TAX FOR SELF-EMPLOYED
INDIVIDUALS
1. Individuals covered:
a. Self-employment income only; or
b. Self-employment income in combination with salaries and wages; or
c. Self-employment income combined with other fixed or determinable income.
2. Individuals not covered:
a. Nonresident Filipino citizens, with respect to income from sources without
the Phil.; and
b. Nonresident aliens not engaged in trade or business in the Phil.
3. Declaration required and time of filing:
a. Each calendar year, a declaration of estimated income tax shall be filed on or
before April 15.
b. The annual income tax return for the preceding calendar year shall serve as
the declaration of estimated income tax for the current taxable year.
c. If during the current taxable year, the taxpayer reasonably expects to pay a
bigger income tax, he shall file an amended return or declaration during any
interval of the installment payment dates.
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4. Estimated income tax defined. It means the amount which a self-employed
individual declared as income tax in his final adjusted and annual income tax return
for the preceding calendar taxable year minus the sum of tax credits allowed against
said income tax.
5. Installment payments of estimated income tax:
1st - At the time of filing the return or declaration on or before April 15 of the
current year
2nd - August 15 of the current year
3rd - November 15 of the current year
4th - On or before April 15 of the following calendar year when the final
adjusted income tax return is due to be filed
Problems
Doctor Heart is a practicing physician. He filed his income tax return for 2010 on April 15, 2011.
It shows, among other information, the following:
Tax due P 524,000
Less tax credit:
Taxes withheld on professional income 24,000
Income tax due and payable P 500,000
1. The declared estimated income tax for 2011 is:

a. P125,000 b. P250,000 c. P500,000 d. P524,000
2. The installment payable, of the declared estimated income tax, on April 15 (the time of
the declaration), August 15 and November 15 of 2011 is:
a. P 125,000 b. P131,000 c. P 137,000 d. P256,000
3. All the following statements, except one, are correct. Which is wrong?
a. April 15, August 15, November 15 of the current year, and April 15 of the
succeeding year are dates (last day) for paying in installments the declared
estimated income tax of individuals who are self-employed.
b. April 15 is the last day for filing the annual income tax return of an individual
who is self-employed.
c. April 15 is the last day for filing of the income tax return for individuals who have
gross compensation income only, but the income tax of which has not been
withheld correctly.
d. The dates will be other than the dates mentioned in (a) to (c) if the individual has
a fiscal year accounting period.
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TAX -1022.34
COMMUNITY TAX CERTIFICATES (CTC) – LGU TAX
Inhabitants, Phil. > 3 mo. stay, Phil.
INDIVIDUAL CORPORATION
 BASIC
 ADDITIONAL
 P1.00 OPTIONAL (if exempt)

1. BASIC 2. ADDITIONAL
Class A Class C-1
P5 P2/P5,000 of (prior year, Phil.):
2. ADDITIONAL a. RPAV- Real Property
Class B Assessed Value
P1/1,000 GR (prior year, Phil.) from: b. GR from: Business &
a. Business Dividend income
b. Salaries
Profession OR, P10,000 maximum
Occupation
c. RPR- Real Property Rental
OR, P5,000 maximum
3. H & W to pay basic CTC each, but
based on consolidated GR for
additional CTC.
1. BASIC
Class C
P500
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PAYMENT
QUALIFIED LAST DAY
Jan. 1 Feb. 28 or 29
After 1/1 – 3/31 Within 20 days
After 3/31 – 6/30 Immediately
PROBLEMS
1. First statement: Basic community tax on individual is imposed on every inhabitant of the
Philippines, eighteen years of age or over, who is regularly employed on a wage or salary
basis for at least (30) consecutive working days during any calendar year; or engaged in
business or occupation; or owns real property with an aggregate assessed value of P1,000 or
more; or required by law to file an income tax return.
Second statement: An inhabitant of the Philippines is a person who shall have stayed in the
Philippines for more than (3) months.
a. True, true b. False, false c. True, false d. False, true
2. One of the following inhabitants (individual) is not required to pay basic community tax:
a. Engaged in business or occupation
b. Owns real property with an aggregate assessed value of one thousand pesos (P1,000) or
more.
c. Required by law to file an income tax return.
d. Diplomatic and consular representatives
3. The basic community tax of P5 of an individual (Class A) is:

a. An excise tax b. A direct tax c. A national tax d. An ad
valorem tax
4. The additional community tax of individuals (Class B):

I. Considers data of the preceding year in the Philippines.
II. Is P1 for every P1,000 (the total of which shall not exceed P5,000) of: (1) Gross receipts
derived from business; (2) Salaries or gross receipts derived from exercise of profession or
pursuit of any occupation; and (3) Gross receipts from rental of real property, in the
Philippines.
a. I only b. II only c. Both I and II d. Neither I nor II
5. An individual, single, had the following data in 2010:

Salaries P125,300
Sales of trading business:
Cash sales P300,000
Open account sales P200,000
Sales returns P 4,000
Sales allowance P 2,000
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Collection on open account sales P130,400
Cash received as income from property:
Dividend income P 3,000
Interest on bank deposit P 3,300
Rentals from real property:
Cash received P120,500
Receivable P 5,200
How much is the additional community tax for 2011?
a. P882 b. P675 c. P676 d. P682

a. Husband and wife each has a basic community tax.
b. Husband and wife has one additional community tax only based on the
consolidated data of husband and wife.
c. The basic community tax and the additional community tax must be paid at the
same time.
d. Even if taxable data in the preceding year were earned in different local
government areas, the additional community tax may be paid to one local
government only.
7. Husband and wife, citizens and resident of the Philippines, had the following data for
2010:
Husband:
On business in the City of Pines (Baguio):
Net sales (with cash receipts of P345,246) P500,000
Cost of sales 150,000
Operating Expenses 600,000
On practice of profession in Manila, cash received 323,430
On real property in 100 Islands City (Alaminos):
Rentals received 120,000
Assessed value 100,000
Wife:
On practice of profession in Bangus City (Dagupan):
Professional fees received from clients 236,465
Professional fees receivable from clients 56,320
On real property in Vigan City (Ilocos Sur):
Rentals received 46,342
Assessed value 48,350
How much is the additional community tax of the spouses for 2011?
a. P1, 070 b. P1,226 c.P1,219 d. P1,071
8. The basic community tax of P500 of a corporation (Class C) is:

a. A local tax b. A national tax c. An excise tax d. An ad valorem
tax
9. The additional community tax of corporations (Class C-1):

I. Considers data of the preceding year in the Philippines.
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II. Is P2 for every P5,000 (the total of which shall not exceed P10,000) of : (1)
assessed value of real property owned in the Philippines; and (2) Gross receipts,
including dividend income, derived from business, in the Philippines.
a. I only b. II only c. Both I and II d. Neither I nor II
10. A domestic corporation had the following data for 2010:

Sales, business operations:
Cash sales P3,250,500
Open account sales 4,398,250
Installment Sales 5,239,654
Collection from:
Account sales 3,905,678
Installment sales 3,264,328
Cash dividend received 25,240
Interest on bank savings deposits 56,320
On real property:
Income received in cash 300,000
Assessed value 3,256,000
How much is the additional community tax for 2011?
a. P5,504 b. P6,466 c. P5,480 d. P5,600
11. If an individual or a corporation is liable, i.e., possesses the qualifications required by law
as of January 1 of the year, the community tax shall be paid not later than the last day of:
a. February b. March c. April d. May
12. First statement: If an individual or a corporation becomes liable on or before March 31

of the year, the community tax shall be paid within twenty (20) days from the date he/it
becomes liable.
Second statement: If an individual or a corporation becomes liable after March 31 up to
June 30 of the year, the community tax shall be paid on the date he/it becomes liable
a. True, true b. False, false c. True, false d. False, true

a. An individual or a corporation that is exempt from the community tax may pay an
optional community tax of P1.
b. Diplomatic and consular representatives of foreign countries are exempt from the
community tax.
c. Transient visitors whose stay in the Philippines does not exceed three months is exempt
from the community tax.
d. Foreign news correspondents who stay in the Philippines for more than three months
need not pay the community tax.
14. One of the following is not required to pay the community taxes. Identify.
a. A domestic corporation engaged or doing business in the Philippines
b. A resident foreign corporation engaged or doing business in the Philippines.
c. General professional partnerships in the Philippines.
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d. An estate or trust with income from the Philippines.
15. No person shall be imprisoned for non-payment of:

a. Property tax b. Excise tax c. Poll tax d. None of these
TAX-1024.36
TAX REMEDIES
A. Three stages in the imposition of taxes:
1. LEVY-imposition of the tax by the legislature
2. ASSESSMENT- official determination of the tax due from the taxpayer
3. COLLECTION- getting the amount involved from the taxpayer.
B. REMEDIES OF THE GOVERNMENT

1. Assessment of taxes:
a. An assessment contains not only a computation of tax liabilities but also a demand
for payment within a prescribed period. It also signals the time when penalties and
interests begin to accrue against the taxpayer.
b. Time of assessment (statute of limitation or prescriptive period) - national internal
revenue taxes shall be assessed within 3 years:
1. After the due date for the filing of the return (a return filed before the due
date shall be considered as filed on such due date);
2. From the day the return was filed, where the return is filed beyond the due
date; and
3. From the filing of the amended return, if the return was amended
substantially.
c. EXCEPTIONS- The 3-year prescriptive period of assessment is extended if:
1. False or fraudulent return with intent to evade the tax was filed- the
assessment may be made within 10 years from the discovery of the falsity or
fraud;
2. No return is filed-assessment may be made within 10 years after the
discovery of the failure or omission to file the return; and
3. Before the expiration of the 3-year prescriptive period for assessment of
the tax, both the taxpayer and the CIR have agreed in writing to its
assessment after such time, the tax may be assessed within the period agree
upon. The period so agreed upon may be extended by subsequent written
agreement made before the expiration of the period previously agreed upon.
d. If the government tries to assess a tax beyond the prescriptive periods, the
taxpayer may claim defense of prescription of the right of the government to assess.
The defense of prescription, however, is not jurisdictional and must be raised
seasonably, otherwise it is deemed waived.
PROBLEMS
1. Where a return was filed, as a general rule, the prescriptive period for assessment after
the date the return was due or was filed, whichever is later, is within:
a. Two years b. Three years c. Five years d. Ten years
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2. Date of death-March 2, 2008. Date the estate tax was filed – April 10, 2008. Last day for
the Bureau of Internal Revenue to make assessment for a deficiency estate tax:
a. March 2, 2011 b. April 10, 2011 c. April 15, 2011 d. September 2, 2011
2. Collection of taxes:
a. As a rule, assessment shall precede collection, except when the unpaid tax is a tax
due per return as in the case of a self-assessed tax under the pay-as-you-file system
in which case collection may be instituted without the need of assessment.
b. After an assessment has been made, the government shall collect the tax, either
by:
1. Summary proceedings (distraint and levy), or
2. Judicial proceedings
c. Time of collection (statute of limitation or prescriptive period):
1. Return filed was not false or fraudulent
a. Collection with prior assessment – within 5 years from the date of
assessment, either by summary proceedings of distraint and levy or by
judicial proceedings only.
b. Collection without prior assessment – within 3 years from the date of filing
the return or from the last day required by law for filing, if the return was
filed on or before such last day, by judicial proceedings only.
2. Return file was false or fraudulent with intent to evade the tax or no return is
filed.
a. Collection with prior assessment – within 5 years from the date of
assessment, either by summary proceedings of distraint and levy or judicial
proceedings.
b. Collection without prior assessment – within 10 years after the discovery of
the falsity, fraud or omission to file the return, by judicial proceedings only.
d. Any internal revenue tax, which has been assessed within the period agreed upon
by the taxpayer and the CIR, may be collected by distraint or levy or by a proceeding
in court within the period agreed upon in writing before the expiration of the 5 years
prescriptive period to collect. The period so agreed upon may be extended by
subsequent written agreement made before the expiration of the period previously
agreed upon.
e. If the government tries to collect by any of the above remedies beyond the
prescriptive periods, the taxpayer may claim defense of prescription of the right of
the government to collect. The defense of prescription, however, otherwise it is
deemed waived.
1. Suspension of statute of limitations or prescriptive periods – the running of the

prescriptive period on the making of assessment and collection of taxes is suspended:
(POWAR)
a. When the CIR is prohibited from making assessment or beginning distraint or levy or
a proceeding in court and for 60 days thereafter, such as when there is a
pending petition for review in the CTA from the decision on a protested assessment,
the filing of such petition interrupts the running of the prescriptive period for
collection. The filing of criminal case against the taxpayer, however, does not
102
suspend the prescriptive period; the criminal action for the tax violation is entirely
separate and distinct from the civil action;
b. When the taxpayer is out of the Philippines;
c. When the warrant of distraint and levy is duly served;
d. When the taxpayer cannot be located in the address given by him in the return
(except if the taxpayer informs the CIR of any change in address); and
e. When the taxpayer requests for reconsideration of reinvestigation which is granted
by the CIR.
C. REMEDIES OF THE GOVERNMENT FOR COLLECTION OF DELINQUENT TAXES (PLDT FC 2)
1. Civil penalties
a. Surcharges
25% - Failure to file any return and pay the tax due thereon.
- If the return is not filed with the proper internal revenue officer.
- Failure to pay on time the deficiency tax shown in the notice of assessment.
- Failure to pay the full or part of the amount of tax shown on any return required
to be
filed, or the full amount of tax due for which no return is required to be filed, on
or before the date prescribed for its payment.
50% - Willful neglect to file return on time.
- False or fraudulent return is wilfully filed (failure to report sales, receipts of
income in an amount exceeding 30% of that declared per return, and a claim of
deductions in an amount exceeding 30% of actual deductions, shall render the
taxpayer liable for substantial overstatement of deductions, thus making the
return filed false or fraudulent).
b. Interest
1. In general, there shall be assessed and collected on any unpaid amount of tax,
interest at the rate of 20% per annum, or such higher rate as may be prescribed
by rules and regulations, from the date prescribed for payment until the amount
is fully paid.
2. Deficiency interest – any deficiency in the tax due, as the term is defined in the
Tax Code; shall be subject to the interest at the rate of 20% per annum, which
inters shall be assessed and collected from the date prescribed for its payment
until the full payment thereof.
3. Delinquency interest in case of failure to pay:
a. The amount of the tax due on any return required to be filed, or
b. The amount of the tax due for which no return is required, or
c. A deficiency tax, or any surcharge or interest thereon on the due date
appearing in the notice and demand of the CIR, there shall be assessed and
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collected on the unpaid amount interest at the rate of 20% per annum until
the amount is fully paid, which interest shall form part of the tax.
4. Interest on extended payment – if any person required to pay the tax is qualified
and elects to pay the tax on instalment under the provisions of the Tax Code, but
fails to pay the tax or any installment thereof, or any part of such amount of
installment on or before the date prescribed for its payment, or where the CIR
has authorized an extension of time within which to pay a tax or a deficiency tax
or any part thereof, there shall be assesses and collected interest at the rate of
20% per annum on the tax or deficiency tax or any part thereof unpaid from the
date of notice and demand until it is paid.
Problems
1. For filing a false and fraudulent return, a surcharge is imposed. Which of the
following is correct?
a. 50% as administrative penalty c. 25% plus 50%
b. 50% as criminal penalty d. 25% as criminal penalty
2. Statement 1: A return, statement or declaration filed with the Bureau of Internal
Revenue may not anymore be modified, changed or amended.
Statement 2: A substantial underdeclaration of taxable of sales, receipts or income,
or a substantial overstatement of deductions shall constitute prima facie evidence of
a false or fraudulent return.
c. First statement is false while the second statement is true.
3. Which is the correct answer? The following additions to the delinquency tax are
called “civil penalties”:
a. Deficiency interest
b. Delinquency interest
c. Interest on extended payment
d. All of these
4. Keppel Company filed its annual income tax return on April 10, 2010 for its income
for the year 2009. The tax due per return was P500,000. Upon investigation, the BIR
found that the tax due should have been P700,000 due to the taxpayer’s honest
mistake in the interpretation of tax laws. An assessment notice was sent after the
corporation failed to respond to a pre-assessment notice. The due date per
assessment was April 15, 2011. How much is the total amount due per the
assessment notice.
a. P200,000
b. P240,000
c. P250,000
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d. P290,000
5. Income tax return for the calendar year 2010 was due for filing on 2011 but the
taxpayer voluntarily filed his tax return, without notice from the BIR, only on June
30,2011. The tax due per return amounts to P100,000. Ignoring any compromise
penalties, the total amount due from the taxpayer as of June 30,2011 is:
a. P100,000
b. P104,167
c. P129,167
d. P154,167
6. Mirant Corporation filed its final adjustment income tax return for calendar year
2009 with a taxable income tax of P500,000. At the applicable income tax rate of
30% for the year 2009, its income tax amounted to P150,000. However, upon
investigation, it was disclosed that its income tax return was false or fraudulent
because it did not report a taxable income amounting to another P500,000. On its
taxable income of P1,000,000, per investigation, the income tax due is P300,000.
Deducting its payment per return filed, the deficiency, excluding penalties,
amounted to P150,000. It was duly informed of this finding through a Preliminary
Assessment Notice. Failing to protest on time against the preliminary assessment
notice,, a formal letter of demand and assessment notice was issued on May 31,
2011 calling for payment of the deficiency income tax on or before June 30,2011.
The total amount due per the assessment notice is:
a. P304,792
b. P261,250
c. P217,292
d. P150,000
2. Levy upon real property and interest in or rights to real property and distraint of
personal property such as goods, chattels, or effects, including stocks or other
securities, debts, credits, bank accounts and interest in and rights to personal
property.
a. Levy upon real property
1. After the expiration of the time required to pay the delinquent tax or
revenue, real property may be levied upon, either before, simultaneously,
or after the distraint of personal property belonging to delinquent
taxpayer.
2. Levy shall be affected by writing upon duly authenticated certificate
showing the name of the taxpayer and the amount of the delinquent tax
and penalty due from him and the description of a real property upon
which the levy is made.
3. Written notice of the levy shall be mailed to or served upon the:
a. Register of Deeds of the Province or City where the real property is
located, and
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b. Upon the delinquent taxpayer
c. Or, if the delinquent taxpayer is absent from the Philippines, to his
agent or the manager of the business in respect to which the liability
arose,
d. Or, if there is none, to the occupant of the real property subject of the
levy.
b. Actual or constructive distraint
1. Actual distraint – the physical taking of the taxpayer’s personal property
to answer for tax deficiency.
2. Constructive distraint – the service of a notice upon the taxpayer that he
could not dispose of his personal property until he was paid the tax
deficiency.
c. Persons who shall seize and distraint personal property (actual distraint)
1. CIR or his duly authorized representative, if the amount of delinquent tax
is over P1,000,000.
2. RDO, if the amount of delinquent tax is P1,000,000 or less.
The CIR or his duly authorized representative shall have the power to lift
order of distraint.
d. Distinction between actual or constructive distraint
Actual Distraint Constructive Distraint

1. Personal property is physically taken. 1. Personal property is not physically taken.
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2. The taxpayer is already delinquent. 2. There is no findings yet a delinquency,
only that
the taxpayer is leaving the country or disposing
of his property to defraud his creditors
(including his tax obligation to the government)
or is in the process of liquidation.
e. Distinctions among warrant of levy, warrant of distraint and warrant of garnishment

LEVY DISTRAINT GARNISHMENT
1. As to subject Real property Personal Property Personal Property
matter owned by and in owned by and in owned by but in the
the possession of the possession of possession of a third
the taxpayer the taxpayer party
2. As to disposition Foerfeited in Purchased by the Purchased by the
for want of bidders favour of the government then government then
or bids inadequate government then resold to meet resold to meet the
to satisfy tax sold to meet the the deficiency deficiency
deficiency deficiency
2. as to Advertisement No advertisement No advertisement is
advertisement for once a week for is required required
sale three weeks
f. Redemption of the real property sold

1. The real property sold may be redeemed by the delinquent taxpayer within 1
year from the date of sale by paying:
a. The amount of the unpaid tax;
b. Penalties; and
c. Interest therein from the date of delinquency to the date of sale, together
with 15% interest per annum of the purchase price from the date of
purchase to the date of redemption.
2. The owner shall not be deprived of the possession of the real property sold and
shall be entitled to rents and other income thereof until the expiration of the
time allowed for redemption.
g. Release of distraint property upon payment prior to sale – If at any time prior to the
consummation of the sale, all proper charges are paid to the officer conducting the
sale, the goods or effects distraint shall be restored to the owner.
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h. Further levy and/or distraint – the remedies of levy upon real property and distraint
of personal property may be repeated if necessary until the full amount due,
including all expenses, is collected.
i. The remedies of levy and distraint shall not be availed of where the amount of taxes
involved is not more than P100.
j. Injunction not available to restrain collection of tax.
1. No court shall have the authority to grant an injunction to restrain the collection
of any national internal revenue tax, fee or charge imposed by the Tax Code.
2. The Court of Tax Appeals (CTA) can issue injunctions while in the exercise of its
appellate jurisdiction in cases pending before it.
3. The CTA may enjoin collection of taxes if in its opinion the same may jeopardize
the interest of the government and/or the taxpayer.
Problems
1. Statement 1: There must be an assessment of a deficiency tax before there can be a judicial
action for collection.
Statement 2: The state can collect the tax by summary proceedings of distraint o personal
property and levy on real property, one after the other, but not simultaneously.
c. First statement is false while the second statement is true.
2. A car dealer could not pay his taxes on sales. The dealer delivered several units of the car to
the Bureau of Internal Revenue in payment of the taxes. Which of the following statements
is correct?
a. There is a valid payment of the tax.
b. There is in effect a collection of the tax by distraint.
c. There is a valid forfeiture of property.
d. There is not a valid procedure for collection of the tax.
3. On January 20, 2006, a taxpayer filled a protest on request for reconsideration of an
assessment of a tax. He received a final decision of the Bureau of Internal Revenue on ghee
protest on April 30, 2006. He failed to appeal the decision to the Court of Tax Appeals. The
Bureau of Internal Revenue was collecting the tax by summary proceedings on June 20,
2011.
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The taxpayer was opposing the collection of the tax on the ground of prescription of the right of
the government to collect.
a) The last day for collection was April 30, 2011.

b) The last day for collection was June 29, 2011.
c) The last day for collection was May 30, 2011.
d) The last day for collection was July 29, 2011.
4. The distinction between actual distraint and constructive distraint is that:
a) Actual distraint may be made on the property of any taxpayer whether

delinquent or not while constructive distraint is made on the property only of a
delinquent taxpayer.
b) In actual distraint, there is a taking of possession , while in constructive distraint,
the taxpayer is merely prohibited from disposing of the property.
c) Actual distraint is effected by requiring the taxpayer to sign a receipt of the
property or by the revenue officer preparing and leaving a list of the distrained
property or by service of a warrant of distraint of garnishment.
d) Answer not given.
5. Which statement is wrong?
a) Stocks and securities shall be distrained by serving a copy of the warrant of

distraint upon the taxpayer and upon the president, manager, treasurer or other
responsible officer of the corporation, company or association which issued said
stocks or securities.
b) Debts and credits shall be distrained by leaving with the person owing the debts
or having in his possession or control such credits a copy of the warrant of
distraint.
c) Bank accounts are garnished by serving a warrant of garnishment upon the
taxpayer and upon the president, manage, treasurer or other responsible officer
of the bank.
109
d) None of the above.
6. Statement 1: Judicial proceedings for the collection of an internal revenue tax may be
instituted even without a prior assessment of the tax on the taxpayer.
Statement 2: No court shall have the authority to grant an injunction to restrain the
collection of any national revenue tax, fee or charge imposed by the National Internal
Revenue Code.
a) First statement is true while second statement is false.

b) Both statements are true.
c) First statement is false while second statement is true.
d) Both statements are false.
3. Tax liens
a) A tax lien is a legal claim or charge on property (whether real or personal)

established by law as a sort of security for the payment of tax obligations.
b) An unpaid internal revenue tax, together with related interest, penalties and
cost, constitute a lien in favor of the government from the time an assessment
therefore is made and until paid, upon all property and rights to property
belonging to the taxpayer. However, the lien is not valid against any mortgagee,
purchaser, or judgement creditor until notice of such lien shall have been filed in
the register of deeds of the province or city where the property of the taxpayer
is located.
Problem
1. Statement 1: A tax lien attaches to all the property and property rights of a taxpayer only
from the time when the assessment was made by the Bureau of Internal Revenue for the
unpaid tax, with interests, penalties, and costs.
Statement 2: A tax lien shall not be valid against mortgagee, purchaser or judgement creditor
until notice of such lien shall be filed in the office of the Register of Deeds of the province or
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city where the property is situated or located.
a) First statement is true while second statement is false.

b) Both statements are true.
c) First statement is false while second statement is true.
d) Both statements are false.
4. Forfeiture
a) The forfeiture of chattels and removable fixtures of any sort shall be enforced by
seizure and sale, or destruction, of the specific forfeited property.
b) The forfeiture and real property shall be enforced by a judgement of
condemnation and sale in a legal action or proceeding, civil or criminal.
c) In forfeiture, as distinguished from seizure, all the proceeds of the sale will go to
the coffers of the government. In seizure for enforcement of tax lien, the
residue, after deducting the tax liability and expenses, will go to the taxpayer.
5. Civil or criminal action
a) Civil action is resorted to when a tax liability becomes collectible, that is, the
assessment becomes final and unappealable, or the decision of the CIR has
become final , executor and demandable.
b) Criminal action, like civil action, cannot be instituted without the approval of the
CIR, It is resorted to not only for collection of taxes but also for enforcement of
statutory penalties of all sorts. The judgement in the criminal case shall not only
impose the penalty but also order the payment of the taxes.
c) The extinction of a taxpayer’s criminal liability does not necessary result in the
extinguishment of his civil liability. Conversely, the subsequent satisfaction of a
tax liability will not operate to extinguish the criminal liability.
Problem
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1. Which of the following statements is not true?
a) If a taxpayer is acquitted in a criminal violation of the Tax Code, this acquittal

does not exonerate him from his civil liability to pay the taxes.
b) A conviction for tax evasion is not a bar for collection of unpaid taxes.
c) A tax assessment is necessary to a criminal prosecution for willful attempt to
defeat and evade payment of taxes.
d) Criminal proceedings under the Tax Code is now a mode of collection of internal
revenue taxes, fees or changes.
6. Compromise
a) A compromise is an agreement between 2 or more person who, to avoid a

lawsuit, amicably settle their differences on such terms as they can agree on. A
compromise penalty, on the otherhand, is a certain amount of money which that
taxpayer pays to compromise a tax violation. Compromise penalty is paid in lieu
of criminal prosecution, but cannot be imposed unless the taxpayer consented
to it.
b) Cases which may be compromised:
1. Delinquent accounts;
2. Cases under administrative protest after issuance of the final assessment
notice to the taxpayer which are still pending in the BIR RO, RO, LS, LTS
and other National Offices;
3. Civil tax cases being disputed before the MTC, RTC, CTA, SC;
4. Collection cases filed in courts;
5. Criminal violations, except those already filed in court or those involving
criminal tax fraud; and
6. Cases covered by pre-assessment notices but taxpayer is not agreeable to
the findings of the audit office as confirmed by the review office.
c) The CIR may:
1. Compromise the payment of any internal revenue tax;
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2. Abate or cancel tax liability; and
3. Credit or refund:
a. Taxes erroneously or illegally received or penalties imposed
without authority;
b. The value of internal revenue stamps when returned in good
condition by the purchaser; and
c. The value, upon proof of destruction, of unused stamps that are
unfit for use.
d) Payment if tax may be compromised when:
1. A reasonable doubt as to validity of the claim against the taxpayer exists,
or
2. The financial position of the taxpayer demonstrates a clear inability to
pay the assessed tax.
a. Prescribed minimum compromise rates:
1. Financial incapacity – 10% of the basic assessed tax
2. Other cases – 40% of the basic assessed tax
b. Compromised settlement subject to approval of the Evaluation
Board, composed of the CIR and the 4 Deputy Commissioners:
1. Where the basic tax exceeds P1,000,000, or
2. Where the settlement offered is less than the prescribed
minimum rates above.
3. Tax liability may be abated or cancelled when:
a. The tax or any portion thereof appears to be unjustly or

excessively assessed, or
b. The administration and collection costs involved do not justify the
collection of the amount due.
4. Tax credit or refund
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a. No credit or refund of taxes or penalties shall be allowed unless
the taxpayer files in writing with the CIR a claim for credit of
refund within 2 years after the payment of the tax or penalty.
b. A return filed showing an overpayment shall be considered as a
written claim for credit or refund.
c. A Tax Credit Certificate (TCC) validly issued under the provisions
of the Tax Code may be applied against any internal revenue tax
(except withholding taxes) for which the taxpayer is directly liable.
Problems
1. Which of the following violations cannot be subject to compromise penalties?
a) Failure to keep/preserve books of accounts and accounting records.

b) Failure to keep books of accounts or records in a native language or English.
c) Failure to have books of accounts audited and have a financial statements
attached to income tax return certified by independent CPA.
d) Keeping two sets of books of accounts or records.
2. Which of the following statements are wrong?
a) Tax certificate validly issued by the Bureau of Internal Revenue may be used as
credit against any internal revenue tax.
b) All public officials who acquire information on violation of internal revenue laws
in the performance of their duties during their incumbency are prohibited from
claiming informer’s reward.
c) All taxes collected by the Bureau of Internal Revenue are national internal
revenue taxes.
d) Any person who violates any provision of the National Internal Revenue Code, or
any revenue regulation, for which no specific penalty is provided by law, shall
upon conviction for each offense or omission, be punished by a fine of not more
than P1,000, or imprisoned for not more than six months, or both.
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D. REMEDIES OF THE TAX PAYER AGAINST ASSESSMENT WHERE THE TAX HAS NOT BEEN PAID
BIR TAXPAYER
Administrative remedies
Notice of informal conference (NIC) Respond to the NIC within 15 days from the
date of receipt.
Pre-assessment notice (PAN) Respond to the PAN within 15 days from the
date of receipt.
Formal assessment notice (FAN) Within 30 days from receipt of the FAN,
protest the assessment.
Within 60 days from filing of the protest,
submit all relevant supporting documents.
Judicial remedies
Protest denied or unacted within 180 days Within 30 days from receipt of adverse
from submission of all relevant supporting decision by the CIR or within 30 days from the
documents. lapse of the 180 days period, appeal to the
CTA.
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Appeal denied by the CTA Within 15 days (extendable 15 days) from
receipt of adverse decision by the CTA, appeal
to the CTA en banc.
Appeal denied by the CTA en banc Within 15 days (extendable 30 days) from
receipt of adverse decision by CTA en banc,
appeal to the SC.
Note. The assessment becomes final,

executory and demandable, should the
taxpayer fail to avail of the administrative and
judicial remedies provided to him by law.
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1. Reasons why the BIR has the right to verify and counter check the return filed by a taxpayer:
a. The declarations made by the taxpayer in the return, even under the penalty of perjury, are
construed to be DISPUTABLE PRESUMPTIONS.
b. CPA’s report of audited financial statements attached to the return filed by the taxpayer.
2. The BIR after observing an audit selection criteria, issues a Letter Authority (LA) empowering a
Revenue Officer (RO) to examine and scrutinize the books of accounts and other accounting
records in order to determine the correct internal revenue tax liabilities of the taxpayer. The LA
is also sometimes called Letter Notice (LN), Audit Notice (AN), Mission Order (MO), and Tax
Verification Notice (TVN).
3. After audit, the BIR will inform the taxpayer of the discrepancies in his tax payment. This is
called Notice of Informal Conference (NIC).
4. The taxpayer must respond within 15 days from the receipt of NIC, otherwise he will be
considered in default.
5. The finding of the RO and the response of the taxpayer will be reviewed by the Assessment
Division of the RDO, or the CIR, or his duly authorized representative to determine the
existence of sufficient basis for an assessment.
6. If there is sufficient basis for an assessment, the BIR will issue to the taxpayer, by registered
mail or personal service, a pre-assessment notice (PAN) stating the facts, law, rules, regulations
and jurisprudence on which the proposed assessment is based. However, pre-assessment
notice shall not be required in the following cases: (MADRE)
a. When finding for any deficiency tax is the result of mathematical error in the computation of
the tax as appearing on the face of the return; or
b. When an article locally purchased or imported by an exempt person, such as, but not limited to,
vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred
to non-exempt persons; or
c. When discrepancy has been determined between tax withheld and the amount actually
remitted by the withholding agent; or
d. When the taxpayer who opted to claim a tax refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and automatically
applied the same amount claimed against the estimated tax liabilities for the taxable quarter or
quarters of the succeeding taxable year; or
e. When excise tax due on excisable articles has not been paid.
7. The taxpayer must respond to the pre-assessment notice within 15 days from receipt thereof,
otherwise he will be considered in default, or if he responds, but the response is not found
meritorious, the BIR will issue a formal letter of demand and assessment. The letter of demand
shall state the facts, law, rules, regulations and jurisprudence on which the deficiency
assessment is made, otherwise the assessment shall be void.
8. The taxpayer must file a letter of protest (request for reconsideration or reinvestigation) within
30 days from the date of receipt thereof. He shall state in his protest the facts, law, rules,
regulations and jurisprudence on which the protest is made, otherwise the protest will be
considered void and without force and effect. On issues not protested, a collection letter shall
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be issued to the taxpayer calling for the payment of the deficiency tax. No action shall be taken
on the disputed issues until the taxpayer has paid the deficiency attributable to the said
undisputed issues. On the issues protested, the prescriptive period on assessment and
collection will be suspended. If the taxpayer failed to file a valid protest against the formal
letter of demand and assessment notice within the prescribed period, the assessment will
become final, executory and demandable.
9. The taxpayer must submit all relevant documents supporting his protest within 60 days from
the filing of the letter of protest, otherwise the assessment shall become final, executory and
demandable.
10. If the protest is denied in whole or in part, the taxpayer may appeal to the CTA within 30 days
from the date of receipt of the final decision.
11. If the decision on the protested assessment is by a duly authorized representative of the CIR
only, before going to the CTA, the taxpayer may elevate the protest to the CIR within 30 days
from the date of receipt of the final decision of the authorized representative (the latter’s
decision will not be considered final, executory or demandable), in which case the protest shall
be decided by the CIR.
12. The decision of the CIR or his duly authorized representative shall state the facts, law, rules and
regulations or jurisprudence on which such decision is based, otherwise the decision shall be
void, in which case the same shall not be considered a decision on a protested assessment. The
decision shall state that the decision is final.
13. The final decision of the CIR or his duly authorized representative may be appealed to the CTA
within 30 days from the receipt of the final decision.
14. If the CIR or his duly authorized representative fails to act on taxpayer’s protest within 180 days
from the date of submission of all relevant documents supporting the protest, the taxpayer
may appeal to the CTA within 30 days from the lapse of the said 180 days period, otherwise the
assessment becomes final, executory and demandable.
15. Within fifteen (15) days (extendable 15 days) from receipt of the final decision of the CTA, the
taxpayer may appeal to the CTA en banc.
16. Within fifteen (15) days (extendable 30 days) from receipt of the final decision of the CTA en
banc, the taxpayer may appeal to the Supreme Court through a petition for review on
certiorari.
Problems
1. Statement 1: As a rule, a pre-assessment notice shall be required before an assessment may be
made.
Statement 2: The taxpayer shall be informed in writing of the law and the facts on which the
assessment is made, otherwise the assessment shall be void.
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2. Statement 1: The taxpayer shall respond to the pre-assessment notice, and if he fails to
respond, an assessment shall be issued.
Statement 2: An assessment issued may be questioned administratively with the Bureau of
Internal Revenue.
3. Which statement is correct? In case of an assessment of a tax:
a. The assessment shall include only the tax proper.
b. The assessment should be made by the Bureau of Internal Revenue within five years from the
date of filing of the return.
c. A protest must be filed by the taxpayer any time before the Bureau of Internal Revenue collects
the tax.
d. A protest should be filed by the taxpayer, otherwise the assessment becomes final and cannot
be questioned anymore in court.
4. An assessment shall become final if:
Statement 1: The assessment is not protested administratively by filing a protest with the
Bureau of Internal Revenue within thirty days from receipt of the assessment.
Statement 2: Relevant supporting documents were not presented to the Bureau of Internal
Revenue within sixty days from filing the protest on the assessment.
5. Which of the following statements is wrong? An appeal on an assessment may be made to the
Court of Tax Appeals:
a. If the Bureau of Internal Revenue denies the protest in whole or in part.
b. If the Bureau of Internal Revenue does not act on the protest within one hundred eighty days
from the taxpayer’s submission of all relevant documents supporting his protest.
c. Within thirty days from receipt of the decision of the Bureau of Internal Revenue on the protest
or within thirty days from the lapse of the one hundred eighty days period (submission of all
relevant documents on the protest)
d. None of the above.
a. An assessment on which is not protested and appealed to the Court of Tax Appeals becomes
final, executory and demandable.
b. The proceedings on the protest in the Bureau of Internal Revenue is an administrative
proceedings.
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c. The proceedings in the Court of Tax Appeals is a judicial proceedings.
d. The proceedings in the Court of Tax Appeals is a quasi-judicial proceedings.
7. Statement 1: The decision of the Commissioner of Internal Revenue on a protested assessment
should state that it is a final decision in order that it may be appealable to the Court of Tax
Appeals.
Statement 2: When the Bureau of Internal Revenue decided a protested assessment with
finality, the period to the appeal to the Court of Tax Appeals is counted not from the date of the
decision but from the date of receipt of the decision.
8. Date assessment was received- January 2, 2011. Petition for reconsideration was filed with the
Bureau of Internal Revenue - January 12, 2011. Documents supporting the petition for
reconsideration was filed with the Bureau of Internal Revenue - January 22, 2011. No decision
on the protest by July 12, 2011. Last day to appeal to the Court of Tax Appeals:
a. July 21, 2011
b. No more appeal, as the period to appeal had elapsed
c. August 20, 2011
d. None of these
9. Assessment received – January 5, 2011. Petition for reconsideration filed with the Bureau of
Internal Revenue – February 1, 2011. Documents supporting the petition filed by the taxpayer –
February 7, 2011. Decision of the Bureau of Internal Revenue denying the petition was received
- March 22, 2011. Second request for the reconsideration filed with the Bureau of Internal
Revenue – March 30, 2011. Decision of denial of second request for reconsideration was
received – April 12, 2011. Last day to the appeal to the Court of Tax Appeals:
a. May 12, 2011 b. July 4, 2011 c. May 4, 2011 d. None of these
10. Date assessment was received – February 8, 2011. Petition for reconsideration was filed with
the Bureau of Internal Revenue of February 18, 2011.Documents supporting the petition were
filed with the Bureau of Internal Revenue on February 28, 2011. Decision of denial of the
petition was received on March 11, 2011.Second request for the reconsideration was filed with
the Bureau of Internal Revenue on March 21, 2011. Date revised assessment was received was
on April 2, 2011. Last day to act to the Court of Tax Appeals:
a. April 22, 2011 b. May 2, 2011 c. May 3, 2011 d. None of these
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E. REMEDIES OF THE TAXPAYER AGAINST ERRONEOUSLY OR ILLEGALLY PAID TAX
Taxpayer
Administrative Remedies BIR
Within 2 years from the date of payment, A return filed showing an overpayment is
file a claim for refund. automatically considered written claim for
refund.
If tax is paid in installments, the 2-year The CIR may, even without a written claim
period is counted from the date of the last therefore, refund any tax erroneously or
installment payment. illegally collected, when this is evident in the
return filed.
Judicial Remedies
Within thirty days from receipt of the adverse Claim for the refund denied, or unacted by the
decision by the CIR but still within the 2-year CIR while the 2-year period is about to elapse.
peremptory period, where the claim for
refund is still unacted by the CIR yet the 2-year
peremptory period is about to expire: appeal
or institute judicial action with the CTA of the
claim for refund.
Within 15 days (extendable 15 days) from the Appeal denied by the CTA.
receipt of the adverse decision by the CTA,
appeal the claim for the refund to the CTA en
banc.
Within 15 days (extendable 30 days) from the Appeal denied by the CTA en banc.
receipt of the adverse decision by the CTA en
banc, appeal the claim for the refund to the
SC.
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Note: The tax erroneously or illegally paid is forfeited in favor of the government as a general-
fund, should the taxpayer fail to avail of the administrative and judicial remedies provided to
him by law.
1. File a claim for refund with the CIR within 2 years from the date of payment of the tax. If the
tax is paid in installments, the 2-year period shall be counted from the date of final
installment payment.
2. Within 30 days (but still within 2 years form the date of payment of the tax) from receipt of
the final adverse decision of the CIR on the claim for refund, file an appeal with the CTA,
raising questions of facts and/or law.
3. Within 15 days (extensible 15 days) from receipt of the final adverse decision of the CTA, file
an appeal with the CTA en banc.
4. Within 15 days (extensible 30 days) from receipt of the final adverse decision of the CTA en
banc, file an appeal with the Supreme Court through a petition for review on certiorari.
5. No suit or proceeding shall be filed after the expiration of 2 years from the date of payment
of the tax or penalty, regardless of any supervening cause that may arise after payment.
6. Instances that suspend the running of the 2-year peremptory period:
a. If the CIR made the taxpayer asking for refund believe that he would be credited for
the overpayment; and
b. If there is an agreement between the taxpayer and the CIR that they would wait for
the decision of the Supreme Court to guide them in the settlement of the question/s
involved in the refund.
7. A return filed showing an overpayment shall be considered a claim for refund. The CIR may,
even without written claim therefore, refund or credit any tax, where on the face of the
return upon which payment was made, such payment appears clearly to have been
erroneously paid.
Problems
1. Where any national revenue tax is alleged to have been erroneously or illegally collected
the taxpayer should first:
a. File a claim for refund or credit with the Bureau of Internal Revenue.
b. File an action for refund with the Regional Trial Court.
c. File an action for refund with the Court of Tax Appeals.
2. Which statement is correct? In case of a tax erroneously collected:
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a. A case for refund may be filed with the court simultaneously with the filing of a claim for
refund with the Bureau of Internal Revenue.
b. A case for refund may be filed with the court even without filing a claim for refund with
the Bureau of Internal Revenue.
c. A case for refund must first be filed with the Bureau of Internal Revenue and a decision
of the Bureau must, under any circumstance, be awaited before a case for refund may
be filed with the court.
d. A claim for refund must first be filed with the Bureau of Internal Revenue and, in a given
situation, a case for refund may be filed with the court without awaiting the decision of
the Bureau.
3. When a taxpayer erroneously paid a tax in installments, the prescriptive period for a claim
for refund should be counted:
a. From the date of payment of the first installment.
b. From the date of payment of the last installment.
c. From the last day required by law for the payment of the tax in one lump sum.
d. None of the above.
4. Date of tax erroneously paid June 10, 2009

Date of claim for refund was filed with the BIR March 3, 2011
Date of BIR decision of denial was received April 5, 2011
Last day to appeal to the Court of Tax Appeals is on:
a. June 8, 2011 c. March 3, 2011
b. June 10, 2011 d. May 5, 2011
5. On April 15, 2009, Imelda filed her income tax return for her 2008 income and paid the tax
due thereon. In 2010, when Imelda hired a new CPA to prepare her income tax return, she
was informed that she made an overpayment in her income tax return filed in 2009.
Convinced that she erroneously computed her tax in favor of the government, Imelda
engaged the services of a lawyer and filed a written claim for refund of tax erroneously
collected with the CIR on December 15, 2010. On April 10, 2011, without receiving a reply
or decision on her claim for refund, Imelda’s lawyer filed in the Court of Tax Appeals a
petition for review on her claim for refund of tax erroneously collected. Did the Court of Tax
Appeals acquire jurisdiction over the petition for review of Imelda?
1st Answer: No, because the appeal is premature, there being no decision yet on said claim
for refund. The Court of Tax Appeals did nor acquire jurisdiction over the appeal because its
jurisdiction is to review by appeal decisions of the CIR.
123
2nd Answer: Yes, because while the CIR has not yet rendered a decision on said claim for
refund, the peremptory period of two years within which a claim for refund of taxes
erroneously collected may be filed is about to expire on April 15, 2011 and the failure of the
CIR to act on the claim for refund is tantamount to denial of the taxpayer’s claim, hence
appealable to the Court of Tax Appeals
a. First answer is wrong, second answer is correct.
b. Both answers are correct.
c. First answer is correct, second answer is wrong.
d. Both answers are wrong.
6. Date the national internal revenue tax was erroneously paid April 10, 2009
Claim for refund as filed with the Bureau of Internal Revenue March 10, 2010
Date decision of denial of refund was received March 21, 2011
Last day to appeal to the Court of Tax Appeals:
a. April 20, 2011
b. April 10, 2011
c. April 21, 2011
d. None of these
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7. Statement 1: The Commissioner may refund a tax even without a claim for refund from the
taxpayer where on the face of the return upon which the payment was made, such
payment clearly appears to have been erroneously made.
Statement 2: No suit or proceeding shall be brought for refund of tax after 2 years from the
date of payment, regardless of any supervening cause that may arise after payment.
8. The following are administrative remedies available to a taxpayer in connection with

collection of taxes, except one”
a. Filing a claim for tax refund or credit.
b. Filing a petition for reconsideration or reinvestigation.
c. Filing of criminal complaint against erring BIR officials or employees.
d. Entering into a compromise.

a. A taxpayer may appeal to the Court of Tax Appeals.
b. The government may appeal to the Court of Tax Appeals.
c. A taxpayer may appeal from a decision of the Court of Tax Appeals.
d. The government may appeal from a decision of the Court of Tax Appeals.
F. FORFEITURE OF CASH REFUND AND OF TAX CREDIT

1. Forfeiture of refund – a refund check or warrant, which shall remain unclaimed or uncashed
within 5 years from the date of the said check or warrant was mailed or delivered, shall be
forfeited in favor of the government and the amount shall revert to the General Fund.
2. Forfeiture of tax credit – a tax credit issued in accordance with the provisions of the Tax
Code, which shall remain unutilized after 5 years from the date of issue shall, unless
revalidated, be considered invalid, and shall not be allowed as payment for internal revenue
tax liabilities of the taxpayer and the amount covered by the certificate shall revert to the
General Fund.
Problems
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1. Statement 1: A refund check or warrant, which shall remain unclaimed or uncashed within 5
years from the date of the said check or warrant was mailed or delivered, shall be forfeited
in favor of the government.
Statement 2: A tax credit certificate which shall remain unutilized after 5 years from the
date of issue shall, unless revalidated, be considered invalid, and shall not be allowed as
payment for internal revenue tax liabilities of the taxpayer.
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CRC-ACE Taxation Topics Guide

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CRC-ACE

The Professional CPA Review School

 TAX- 1017 GROSS INCOME

Dean Ruben D. Morante

2. Annuities and pensions;

3. Gains derived from dealings in property, whether real or personal;

4. Winnings, cinematographic films and similar works, prizes, royalties, interests,

7. Transaction of any business carried on for gain or profit; and

D. Exclusions from gross income

3. Gift, bequest, devise or descent.

6. Retirement benefits, pension, gratuities, etc.

a. Retirement benefits received by officials and employees of private firms, whether

Requisites for exemption:

1. There must be a reasonable private benefit plan maintained by the employer.

3. Not less than 50 years of age at the time of retirement.

4. The benefit of exemption may be availed of only once.

4. Any cause beyond the control of the official or employee.

c. Retirement benefits, pensions and similar benefits received from foreign

d. Benefits received from U.S Veterans Administration.

e. Benefits received from S.S.S.

f. Benefits received from G.S.I.S.

g. Benefits received by government officials and employees.

7. Income of the Philippine government or political subdivisions derived from:

b. The exercise of any essential governmental function.

b. Financing institutions owned by them, and

c. International or regional financing institutions established by them from their

9. Prizes and awards in recognition of religious, charitable, scientific, educational,

Requisites for exemption:

a. Recipient was selected without entering any contest or proceedings.

b. Recipient is not required to render substantial future services.

10. Prizes and awards in sports competition.

12. “De minimis” benefits.

b. Medical cash allowance to dependents of employees not exceeding seven hundred

15. Gains from redemption of shares in mutual fund.

1. Which of the following is not income:

a. Gain from labor c. Return of capital

b. Gain from capital d. Gain derived from a sale of asset

a. P500,000 b. P120,000 c. P380,000 d. None

3. A tax exclusion is defined as

b. The grant of immunity to particular persons or corporations from a tax which

c. Income received but which is not taxable as it is exempted by law or by treaty

4. Proceeds of insurance taken by corporation on the life of an executive to indemnify it

a. Exempt from income tax c. Subject to final tax

b. Part of taxable income d. Party exempt, party taxable

5. Amount receivable by the estate of the deceased, his executor or administrator as a

Items 6 through 8 are based on the following information:

11. Which of the following is taxable?

12. Which of the following is taxable?

1. When services are paid for in non-interest-bearing note, taxpayer:

2011 2012 2011 2012

a. P437,500 P87,000 c. P420,000 P105,000

Salary, net of P15,000 exclusions for

How much income tax was withheld on the compensation income?

8. Marfil, has the following income in 2011:

How much compensation income is subject to basic tax?

1. Fringe benefits to rank and file employees; and

Taxable fringe benefits to rank and file employees

1. Meals furnished or subsidized by employer.

Exempt fringe benefits to rank and file employees

1. Meals, living quarters, de minimis entertainment, medical services, courtesy

2. Which of the following statements is not correct?

a. P8,000 P5,000 c. P8,000 P8,000