1-Ass. -2021 TAX Review Exercises PDF

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USJ-R LAWTAXATIONRead each question very carefully and write your answer concisely****. Your answer should demonstrate your ability to analyze the facts presented by the question, to select the material from the immaterial facts, and to discern the points upon which the question turns. It should sho...

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USJ-R LAW TAXATION Read each question very carefully and write your answer concisely. Your answer should demonstrate your ability to analyze the facts presented by the question, to select the material from the immaterial facts, and to discern the points upon which the question turns. It should show your knowledge and understanding of the pertinent principles and theories of law involved and their qualifications and limitations. It should demonstrate your ability to apply the law to the given facts, to reason logically in a lawyer-like manner, and to form a sound conclusion from the given premises.

1. The BIR investigated Mister Pagu, an individual taxpayer, and discovered that he is a major stockholder of at least ten (10) big corporations which are all earning millions of pesos annually. The BIR found out further, that the Income Tax Return filed by Mister Pagu for CY 2020 reported a gross income of only P400,000.00. The BIR could not believe the apparent disparity and is planning to file a tax evasion case against Mister Pagu based on best evidence obtainable for his failure to declare his correct income. a) If you were the tax lawyer of Mister Pagu, how will you defend him under such case? If I were the tax lawyer of Mister Pagu, I shall request the CIR to make or amend the return. Under Sec. 6 (b) of NIRC as amended, in case a person fails to file a required return or other document at the time prescribed by law, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes. Here, it was found out that the income tax return filed by Mister Pagu for CY 2020 reported a gross income of only P400,000. As such, a request for the CIR to amend such in order to obtain the correct amount and to have proper assessment. b) What is Best Evidence Obtainable Rule? Pursuant to CIR’s power to make assessment, the CIR shall assess the proper tax on the best evidence obtainable on the following: (1) when a report required by law as a basis for the assessment of any national

internal revenue tax shall not be forthcoming within the time fixed by law or regulation; or (2) when there is reason to believe that any such report is false, incomplete, or erroneous (Sec. 6(b), NIRC). 1

2. Ms. A is employed as a cashier in a general merchandise store owned by its sole proprietor Mr. B. She had a cash advance from her employer amounting to P50,000.00 which she used to pay the hospital bill when she gave birth to her 7th child. Since Ms. A had faithfully served her employer for ten (10) years as Cashier without embezzling even a single centavo, Mr. B offered to condone her Cash Advance. Ms. A does not want to owe gratitude to her boss, thus, she just offered to clean the house of Mr. B every Sunday for four (4) consecutive Sundays in exchange for the condonation of her cash advance to which he agreed. Mr. B house is being used at the same time as a warehouse of the store’s merchandise. Upon examination by the BIR of Mr. B’s financial statements, it discovered that Advances to Employees amounting to P50,000.00 were written off as bad debts. Upon knowing the reason of the write-off, the BIR assessed Mr. B of 30% Donor’s Tax on its condonation of the Cash Advances. Is the BIR correct? No, the BIR is not correct. One of the transfers which may be constituted as donation is when there is condonation or remission. The rules when the creditor condones the indebtedness of the debtor are as follows: (a) when on account of debtor’s services to the creditor the same is in taxable income to the debtor; (b) if no services where rendered but the creditor simply condones the debt, it is taxable gift not a taxable gift. In the present case, Mr. B offer to condone her Cash Advance was not a gratuitous act, but rather it was due to Ms. A’s faithful service to her employer for ten (10) years as cashier without embezzling even a single centavo. It was not an act of liberality, but it is on account of Ms. A’s services to Mr. B. Hence, it is not a taxable gift. As such, BIR is not correct in assessing donor’s tax. 3. MDC Corporation, a VAT registered exporting company, filed its Quarterly VAT Return for the 4th quarter of CY 2017 on January 25, 2018. The said return showed an Excess Input VAT in the amount of P3,000,000.00. On December 01, 2020, MDC filed before the BIR an administrative claim for refund of its excess input VAT. Thereafter, or on December 27, 2020, fearing that the period for filing a judicial claim for refund was about to expire, MDC proceeded to file a petition for review before the CTA, without waiting for the CIR’s action on the administrative claim.

The CIR questioned the claim for refund for being unsubstantiated. The CTA Second Division partially granted MDC’s petition and awarded a refund for only P2,000,000.00. Both MDC and the CIR filed a motion for 2

reconsideration but were both denied prompting them to appeal to the CTA en banc which likewise affirmed in toto the decision of the CTA Division. Feeling aggrieved by the decision of the CTA en banc, the CIR filed a petition for review on certiorari before the Supreme Court and also raising for the first time the lack of jurisdiction of the CTA to rule on the case. a) Is MDC’s petition for review to the CTA Division even before the BIR acted on its claim procedurally correct? b) Did the CTA acquire jurisdiction over the case? c) Explain briefly the 120+30-day periods (now 90+30-day periods) in claiming for refund of input taxes. 4. a) Distinguish Itemized Deductions and Optional Standard Deduction. In Itemized Deductions, it must be substantiated by receipts, whereas in Optional Standard Deduction, it requires no proof of expenses incurred because the allowable deduction is a percentage not exceeding 40% of gross sales or receipts or gross income as the case may be. The former is those allowed by the NIRC to be deducted from the gross income before the income is subjected to tax (Sec. 34), while the latter is a fixed percentage deduction without regard to any actual expenditure, in lieu of the itemized deductions. It is merely a privilege that may be enjoyed by certain taxpayers (Sec. 34 (L)). b) Discuss briefly the difference, if any, between the Optional Standard for individual taxpayers and for corporations. The OSD for individual taxpayers except non-resident aliens (NRA), it may be taken in lieu of itemized deduction except those earning purely compensation income. If opted to use OSD, he is no longer allowed to deduct cost of sales or cost of services. He is not required to submit final statements provided he shall keep such records pertaining to his gross sales or gross receipts. The OSD for corporations applies to domestic and resident foreign corporations. They are still required to submit their financial statements when they file their annual ITR and to keep such records pertaining to its gross income.

5. Dani Alforx had filed his administrative protest on February 01, 2020 to the CIR on a disputed assessment issued to him. On March 01, 2020, he submitted all relevant supporting documents. On September 27, 2020, there was still no action from the BIR on his protest, thus he prepared his appeal

to the CTA and plans to file on or before October 27, 2020 thinking that it is the deadline for his appeal. Dani intimated his case to his lawyer friend, Atty. Tingale Co, but Atty. Co said that Dani’s action is procedurally 3

incorrect stressing that the correct action is to wait for the CIR’s decision on his protest and file his appeal to the CTA within thirty (30) days from his receipt of said decision.This, according to him, is in compliance with the principle of exhaustion of administrative remedies and in order not to bypass the authority of the BIR. Dani Alforx however argued that it is unfair and unjust for him to be made to wait forever the BIR’s decision and that taxpayers should not suffer from the laziness and intentional inaction of the BIR, if such be the case. You are a new tax lawyer and happened to pass by your two friend arguing with each other. If asked, how do you advise them of the correct procedure to settle their argument on the matter? 6. The mayor of Davao City had a personal grudge with a certain bank in its locality. Upon knowing that an affiliate of said bank is planning to open at least ten (10) branches in the city in a couple of months, the City Mayor immediately ordered the City Treasurer to charge an “Entry Tax” in the amount of P1,000,000.00 per branch of bank that will do business in the city. In order not to make it obvious that he is singling out the said bank and violate the equal protection of the laws, the Mayor made this applicable to all banks coming in the city. Is the said “Entry Tax” a valid imposition? 7. Mr. Akira Akuymo is a newly promoted sales manager of ADITIV Corp., a big company selling feed additives. Desiring to boost his sales and earn credit, he approached several feed manufacturing companies to sell them their additives. Competition was stiff and after two (2) months, he still did not get any single customer. Mr. Akuymo then developed a new strategy, he befriended the Nutritionist and Quality Control Managers of the manufacturing companies and offered each a monthly fee of P50,000.00 in the guise of “rebates” in exchange for their acceptance of the feed additives of Mr. Akuymo that will eventually lead these companies to buy the additives on a regular basis for their regular production needs. The strategy was successful boosting the sales of Mr. Akuymo to new heights. The “rebates” were taken by Mr. Akuymo from his revolving fund and ADITIV Corp. sanctioned his practice so long as the payees sign some Vouchers for BIR purposes. a) If you were the BIR examiner and you think the above described expense cannot be allowed as an itemized deduction of ADITIV Corp., what will be your basis? b) If you were the tax lawyer of ADITIV CORP., how will you defend

the deductibility of the said expense?

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c) If you were the justice of the tax court, how will you decide the issue?

8. CROCOCorporation, a corporation engaged in a pioneer business located in Mactan Economic Processing Zone II (MEPZ II) in Lapu-Lapu City, Cebu, is enjoying indirect tax exemption under a special law.

In 2019, it had imported from Japan a hammer mill machinery worth P25,000,000.00. In 2020, CROCO decided to replace the hammer mill it just bought and imported a new and more sophisticated machinery. The Company decided to sell it’s the replaced machinery to BIRABIRA Inc., a vatable person based in Cebu City. After an audit examination under a Letter of Authority conducted by the BIR, the latter immediately issued a Final Assessment Notice (FAN) with a Formal Letter of Demand to BIRABIRA assessing the latter of the unpaid VAT on its purchase of the hammer mill machinery from CROCO Corporation. BIRABIRA timely filed a protest with the BIR raising the following arguments: a) That it is not liable for VAT on the said purchase since it is the Seller, CROCO, who is the statutory taxpayer for VAT, and BIRABIRA should not be faulted if the person statutorily liable did not shift the VAT to the buyer. b) That the BIR violated procedural due process when it issued FAN immediately without apprising first the taxpayer of its findings through a Pre-Assessment Notice. Rule on the above arguments.

9. As per study, there are lot of properties, both personal and real, inherited by heirs that remain unutilized, stagnant and undeveloped and cannot be completely transferred due to non-payment of estate taxes either because of illiquidity or simply because of the lack of ample knowledge of the estate tax law. Thus, the current administration has passed a Tax Amnesty for estate taxes. They hope that such measure will spur economic activity due to the ease of transferring ownership of properties after the estate tax problems are hurdled.

One of your clients asked the following questions: 5

a) What is tax amnesty? Tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties. It partakes of an absolute waiver by the government of its right to collect what is due. b) How does tax amnesty differ from tax exemption? As to the coverage, tax amnesty covers pas tax liability, whereas tax exemption covers future tax liability. As to the benefit, in the former, there is immunity from civil, criminal, and administrative liability arising from non-payment of taxes, while in the latter, it is from civil liability as to the relief from paying taxes. c) What’s the difference between estate tax and donor’s tax when both are imposed to gratuitous transfers for property? As to the nature of transfer, estate tax takes place upon death of decedent (mortis causa) and between natural persons only, whereas in donor’s tax takes place during the lifetime of the donor (inter vivos) and between natural and juridical persons. As to the time of filing of return, in estate tax it shall be filed within 1 year from the decedent’s death, whereas in donor’s tax it shall be filed within 30 days after donation was made. Answer briefly.

10. Mr. Aco Raca is very wealthy with lots of real properties and cars. Last February 14, Valentines Day, he wanted to give a small parcel of land and one of his cars to his beloved and very beautiful Josenian girlfriend. However, his girlfriend denied it as she did not want to owe so much gratitude to Aco Raca and she doesn’t know what to do with those properties in case they break up in the future. Thus, Mr. Aco Raca just sold it to his girlfriend at a very cheap price to which the latter agreed. The fair market value and zonal value of the land and the car are the same at P1,000,000.00 EACH, but Aco Raca sold the land and the car to his girlfriend for only P200,000.00 and P100,000.00 respectively. No taxes had been paid on these transactions. Come the BIR investigation on Mr. Aco Raca and at this time, Aco Raca and his girlfriend had already broken up and this pained him so much. The BIR assessed the latter of 6% Capital Gains Tax for the sale of the land which is a capital asset of Aco Raca and Donor’s Tax on the P800,000.00 price difference versus the Zonal Value, all plus interests and penalties. Also, the price difference of the car amounting to

P900,000.00 is subjected by the BIR to Donor’s Tax plus interests and penalties. 6

Aco Raca protested to these assessments arguing as follows: 1)that it should be his Ex-girlfriend who will be liable for the taxes since he who earns the income must be the one to pay the tax. That he even suffered significant losses when he sold those properties at a very lower amount; and 2)there is no donation to speak of because both the two transactions had valuable considerations and that settled is the rule that gross inadequacy of the price does not affect the validity of the sale. a) Is the sale of the land in the instant case subject to Donor’s Tax? b) Was there donation in the sale of the car? c) Is Aco Raca correct in saying that it should be his girlfriend who must pay the taxes on the said transactions? Explain.

11.SANJO Inc., a closely-held corporation, is engaged in manufacturing and distributing of soft drinks. It has 1,000,000 authorized shares with P100 par value, all of which are fully subscribed and paid. After the close of the taxable year 2019, the Accountant of SANJO is very happy to inform the Board of Directors during a board meeting that 2019 was their luckiest year ever as they posted an income of P100, 000,000.00 which causes the Company’s accumulated earnings to exceed their paid-up capital by the same amount. The Chairman asked the Accountant if it is okay to declare dividends this year.Trying to suggest a tax-saving measure to impress her boss, the Accountant advised forgoing for now the dividend declaration, which is subject to 10% dividends tax, to avoid any tax imposition on the said earnings.

Seeking confirmation, the Chairman hired you, a new bar passer, as their Tax Lawyerasking clarifications as follows: c) Wouldthe suggestion of the Accountant really free the Company of any tax on its retained earnings? d) Assuming the Company decided not to declare dividends and that it has plans of an immediate expansion of business, what will be your advice to avoid any tax imposition on the said earnings?

12.One Hundred Eighty (180) days had expired when taxpayer Jose Reco had filed his administrative protest to the CIR on a disputed assessment, but still 7

the Commissioner did not act on it. He fully knows that he has two (2) options after such expiry as to when to file a petition for review with the Court of Tax Appeals (CTA), thus, he took his time and just wait for the perfect timing to file his petition. Forty (40) days had already elapsed after the expiration of the 180-day period, but still the Commissioner did not act on his protest. Hence, Jose Reco became impatient and decided finally to file a petition for review with the CTA as he can no longer tolerate the blatant inaction of the CIR. Is the action of Jose Reco procedurally correct?

13.Ms. SisaSwerte is an employee of a private company earning a monthly basic pay of P15,000.00. One day, her philanthropist neighbor give her by way of gift money amounting to P1,000,000.00. The corresponding donor’s tax for said donation is, however, not paid by the donor. One day, the BIR issued a deficiency assessment to SisaSwerte for her failure to file an income tax return declaring the P1 Million donation and to pay income tax thereon. The BIR maintained that the donation is not exempt from income tax for two (2) reasons. First, the donor’s tax is not paid for such donation, and second, the Tax Code provides that gross income subject to tax means all income derived from whatever source. Decide. 14.A tax law was passed granting tax exemptions to certain activities as enumerated in the said law. MUGIWARA Corp. is uncertain whether its business activities are included in the tax exemption, thus, it requested a ruling from the BIR to clarify the matter. The BIR asked MUGIWARA to submit relevant documents and to state all material facts related to the issue. Months later, the BIR issued a ruling that the applicant’s business activities are covered by the exemption. Relying on the said ruling, MUGIWARA did not pay the corresponding tax on said activities. Two years later, the BIR discovered that MUGIWARA failed to disclose some material documents and that the facts are materially different from the facts on which the ruling was based. Consequently, the BIR reversed its previous ruling and issued a new one stating that MUGIWARA’s activities are not exempt from tax. BIR now assessed the company of taxes from the last two years but MUGIWARA refused citing the principle of nonretroactivity of rulings.

a) Discuss briefly the principle of non-retroactivity of rulings.

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