TAXATION LAW

Q1: Three brothers inherited in 1998 a parcel of land valued for real estate tax purposes at P3 million which they held in co-ownership. In 2000, they transferred the property to a newly-organized corporation as their equity which was placed at the zonal value of P6 million. In exchange for the property, the three brothers each received shares of stocks of the corporation with a total par value of P2 million, or altogether, a total of P6 million, representing 60% of the outstanding shares of stocks of the said corporation. No business was done by the corporation, and the property remained idle. In the early part of 2002, one of the brothers, who was in dire need of funds, sold his shares to the two brothers for P2 million. Which is a correct internal revenue tax consequence of the abovementioned transactions? A. The transfer of the land to the corporation shall be subject to capital gains tax. B. The transfer of the land to the corporation shall be exempt from income tax. C. The sale of the shares to the brothers shall be exempt from income tax but shall be subject to donor D. The sale of the shares to the brothers shall be subject to an ordinary income tax. Q2: A provision in the income tax law envisioned to shoulder the personal, living and family expenses of the taxpayer refers to ______. A. Optional Standard Deduction B. Itemized Deductions C. Personal Exemptions D. Special Deductions Q3: Which of the following would be a correct application of an essential character of taxation? A. Taxpayers may choose which tax to pay. B. The Bureau of Internal Revenue may not choose which tax law to implement. C. Income of Filipinos abroad may not be the subject of Philippine income taxes. D. The payment of taxes may be done through real properties. Q4: In a suit for damages filed by X against Y due to the latters negligence in driving his motor vehicle, the court awarded the following in favor of X: Php100,000 representing the amount spent by X for his hospitalization and medication; Php200,000 for moral and exemplary damages; Php150,000 representing 3 months unearned salary; Php300,000 lost profits; and Php600,000 representing the current replacement cost of the Xs car, originally valued three (3) years ago at Php500,000. Which of these receipts, if any, are part of Xs taxable income? A. The Php150K unearned salary, Php300K lost profits, and Php100K from the personal car. B. The Php150K unearned salary, Php300K lost profits, and Php50K from the personal car. C. The Php300K lost profits, and Php100K from the personal car. D. The Php300K lost profits, and Php50K from the personal car. Q5: Y leased his building to a religious organization, which made use of the said building actually, Taxation Law/ Page 1 of 5

directly and exclusively for religious purposes. The lease term indicated in the contract was covering the period 1 January 2006 to 1 January 2007. Upon these facts, which of the following is correct? A. Y can be exempted from the payment of the real property tax for the year 2006 only. B. Y can be exempted from the payment of the real property tax for the years 2006 and 2007. C. Y cannot claim exemption from the real property tax because he does not enjoy any exemption from such tax. D. Y cannot claim exemption from the real property tax because he is not the one actually, directly and exclusively using the property for religious purposes. Q6: Which of the following may NOT be done by the Commissioner of Internal Revenue (CIR)? A. Issue rulings with established precedents. B. Issue revenue regulations. C. Issue revenue memorandum circulars. D. All the above may be done by the CIR. Q7: A corporation, which is on its second year of operation, incurred a net loss for the year. Is the corporation required to file an annual income tax return? A. No, because it is not liable for any tax. B. No, because corporate taxpayers incurring losses need not file returns. C. Yes, because it is required to file a tax return notwithstanding a loss. D. Yes, because it is still liable for income taxes notwithstanding a loss. Q8: In order to raise more funds for the government, a value-added tax on toll fees was imposed. Is it valid? A. No, because toll fees are equivalent to taxes; thus, to impose a tax on toll would be amounting to a violation of due process. B. No, because it would amount to direct duplicate taxation. C. Yes, because toll fees are charges demanded by reason of ownership; thus, it may be the subject of a tax. D. Yes, because toll fees are collected by private corporations; thus, there is no prohibition to tax the same. Q9: B Development Corporation, a real-estate developer organized in the 1970s, bought several parcels of land in Tuba, Benguet during the mid-70s. It has never registered as VAT-liable since its sales during the past years did not meet the mandatory liability for VAT. However, during the current year, due to increased transactions, it became liable for the first time for VAT. B Development Corporation invoked entitlement to transitional input taxes on all its landholdings, but the same was disallowed because according to the Bureau of Internal Revenue (BIR), the purchase of these lands happened at a time when no VAT was imposed in the country, and that no input VAT was actually paid on such lands. Was the action of the BIR proper? Decide. A. B is entitled to transitional input VAT regardless of its prior non-VAT registration. B. B is entitled to transitional input VAT only if it can prove that it shouldered the burden of the VAT during the prior years. C. B is not entitled to transitional input VAT as it never registered itself in the past as VAT liable. Taxation Law/ Page 2 of 5

D. B is not entitled to transitional input VAT because when the purchase was made, the VAT law was not yet in force. Q10: OX, the President of ZOZ Corporation, died. ZOZ Corporation gave to OXs widow an amount equivalent to OXs salary for one year. Is the amount considered as taxable income to the widow? A. Yes, because the widow received a flow of wealth other than a return of capital. B. Yes, because the widow received something which is of economic benefit to her. C. No, because the widow received a gift. D. No, because the widow received an inheritance. Q11: JRB Union, on behalf of its members, demanded from JRB Corporation payment for the employees underpayment of salaries and bonuses for the past three years, with legal interest accruing thereon. Realizing the merits of JRB Unions claim, JRB Corporation decided to give the employees underpaid salaries and bonuses, with legal interest. From the foregoing facts, which of the following statements is correct? A. The salaries, bonuses and the legal interest should not be considered as income because the non-payment thereof for the past years is beyond the control of the employees. B. The salaries, bonuses and legal interest should be considered as income in full during the year of receipt, applying the control test. C. The salaries and legal interest should be recognized as income in full during the year of receipt; while the bonuses should be considered as income only to the extent of its excess over Php30,000.00. D. The salaries may be declared as income to be prorated within three (3) years; the bonuses should be considered as income only to the extent of its excess over Php90,000.00 (Php30,000 x 3 yrs); while the interest should not be considered as income becau Q12: Which of the following is NOT VAT-exempt? A. Export sales by non-VAT registered persons. B. Lease of residential apartments where the monthly rental is less than Php10K, even if the total rentals from all apartments during the year exceeded Php1.5M. C. Sale of services by a VAT registered person in favor of a foreign client, and the payment is made in Philippine currency. D. Payment for professional services rendered by a lawyer whose income during the year is less than Php1.5M. Q13: Which of the following is subject to Philippine final income taxes? A. Cash dividends declared by non-resident foreign corporations received by resident citizens. B. Property dividends declared by domestic corporations received by a resident foreign corporation. C. Stock dividends declared by a domestic corporation received by a resident citizen. D. Property dividend declared by a domestic corporation received by a non-resident alien engaged in trade or business in the Philippines. Q14: The City Council of Davao enacted an ordinance requiring all professionals engaged in the practice of profession to secure business permits and pay business taxes. In the ordinance, there was a levy of a fixed amount of tax based on certain brackets, which in turn, was dependent on the gross receipts of the professional during the immediately preceding calendar year. JRB Law Office wants to know from you whether or not it (or its lawyers) should pay the tax. Taxation Law/ Page 3 of 5

A. It should not pay the tax because it is not engaged in business. B. It should not pay the tax because the imposition is a form of a percentage tax on services, which is prohibited by the local government code. C. It should pay the tax because the imposition of business tax is applicable to all persons D. It should pay the tax because the imposition of business tax is applicable to all those engaged in the sale of services, which, under the law, partakes the nature of business. Q15: Taxpayer K Corporation filed its Annual Income Tax Return for taxable year 1998 on 14 April 1999. Records of the case show that while the Bureau of Internal Revenue (BIR) avers that it sent the assessment notice dated 1 February 2002 on 6 February 2002, taxpayer K Corporation denies having received an assessment notice from the BIR. K Corporation alleges that it came to know of the deficiency tax assessment only on 17 March 2003 when it was served with the Warrant of Distraint and Levy. From the foregoing facts, which is correct? A. The BIR has the burden of evidence to prove that the assessment has indeed been sent. B. The taxpayer should prove that there was no such notice of assessment received. C. The BIR can invoke the presumption under Section 3(v), Rule 131 of the Rules of Court that when a mail matter is sent by registered mail, there exists a presumption that it was received in the regular course of mail; thus, the burden rests on the taxpa D. The BIR can invoke the presumption that official duties were regularly complied with. Q16: Which of the following is NOT within the scope of the revenue raising power of Provinces? A. Amusement tax. B. Fees or charges on services rendered by the Province. C. Fees or charges on inspecting certain businesses. D. Real Property Taxes. Q17: For valuable services rendered by K to her employer, G Corporation, K was given an Option to Buy 1,000 G Corp. shares of stocks. The current market price of G Corp. is P100/share; but in the Option to Buy, K was granted the right to buy the shares at only P50/share. What is the income tax consequence of the foregoing transaction? A. At the moment of receipt of the option to buy, K shall be liable for income tax. B. At the moment of exercise of the option to buy, K shall be liable for income tax. C. There is no liability for income tax, whether at the time of the receipt or at the time of the exercise of the option to buy. D. There will be liability for capital gains tax on the sale of shares of stocks not listed or traded in the stock exchange. Q18: X, a realtor, sold a parcel of land in favor of Y for a consideration of P10M. The terms of the payment are as follows: down payment of P1M, and the balance, to be secured by a promissory note to be issued by Y, shall be paid in four equal annual installments, with a 10% interest per annum on the diminishing balance. A few months after receiving the promissory note from Y, X needed money badly; thus, he asked Z, a company specializing in collection cases, to discount the note. Z discounted the note for the amount of P8M. How will X report the income from the sale for income tax purposes? A. X should report the income on installment basis. Taxation Law/ Page 4 of 5

B. X may report the income on installment basis. C. X should report the income on a one-time basis during the year of the transaction. D. X should pay capital gains tax of 6% based on the selling price of Php10M, irrespective of the discounting made. Q19: The following may affect the computation of returnable gains and losses for income tax purposes, EXCEPT ________. A. nature of the Property B. period within which the property was held C. cost or Adjusted Basis of the Property D. status of the taxpayer Q20: X sold to Y a parcel of land classified as capital asset. In the Deed of Absolute Sale, it was expressly stipulated that Y shall shoulder whatever capital gains tax for which X shall be liable, and that it would be Y who shall pay the tax to the Bureau of Internal Revenue (BIR). Y paid the capital gains tax but after investigation, it was found out that there were deficiencies in the payment. The BIR thereafter demanded that X pay the tax. X counters that in the agreement, Y is the one responsible for the tax. Decide. A. X is liable because the stipulation is void for being contrary to law. B. X is liable because the stipulation, while valid between the parties, is not binding upon the government. C. X is not liable as the burden of the tax was effectively shifted by X to Y. D. X is not liable since the agreement is valid and binding; thus, the BIR should run after Y.

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