TAXATION 1 MIDTERMS 2ND 2022

A. Instructions: Violation of any requirement below will earn you a

zero score or a 5 or 10 points deduction from your total score; so
you’re forewarned!
1. DON’T use your cp to answer the exam and send it back. My
computer doesn’t accept cp emails. Use a computer to answer the
exam and to send it back to me. If my computer won’t receive your
answers it’s as if you didn’t take the exam, so ZERO score.
2. For your answers use WORD format also and the SAME FONTS and
FONT SIZE as the questions and make it BOLD as well. 5 points
deduction from total score if violated.
3. Don’t switch the numbers of the questions; when answering just
answer below the question concerned. If your answer refers to
another question instead, it’s as if you didn’t answer the proper
question, so ZERO score.
4. Submit by 8 p.m. today. Answers submitted beyond 15 minutes
from that time will get a minus 10 points from total score. THIS IS A 3-
HOUR ONLY EXAM.

B. THE VERY INTERESTING PROBLEMS (VIP):

1. Johnny Mabait borrowed from Oscar Mahiyain pesos 1 million.
Johnny Mabait had earlier lent pesos 500,000 to Sheila Maganda.
When Oscar found out about this, he told Johnny that he will forgive
Johnny’s debt to him if Johnny will also forgive Sheila’s debt. Oscar
did this because he had a secret crush on Sheila, who was a friend of
Johnny’s sister and Oscar wanted to get to know Sheila. Did anyone of
them earn any taxable income? Briefly but fully explain your answer.
10%
ANSWER: Yes. As stated in the Tax Code, A payment though
voluntary, if it is in return for services rendered, or proceeds from the
constraining force of any moral or legal duty or a benefit to the payer
is anticipated, is a taxable income to the payee even if characterized
as a 'gift' by the payor.
2. Chris Mautak is an IT specialist who studied abroad and worked
with IT companies in Silicon Valley, California. A Filipino IT
corporation wants to hire him as one of their R&D specialists to
design new apps for their clients. The corporation told him that if he
will sign up the employment contract within 2 weeks after his
interviews with the corporate officers, he can have an additional sign-
up bonus of his option: (a) cash amounting to pesos 300,000; or (b)
shares of stock of the corporation itself worth pesos 300,000. He
signed up with the corporation and chose option (b). When his wife
asked him why he chose option (b), he told her it’s not taxable
income.
QUESTION (1) What can you say about the reason he gave to his wife
why he chose option (b)? 5%
ANSWER: Under the Tax Code, if the shares of stock in consideration
of his services to the Corporation, the same shall constitute taxable
compensation income to the recipient because it is a compensation
for services rendered under the employer-employee relationship,
hence subject to income tax.
QUESTION (2) If you were Chris Mautak, would you choose option (a)
or (b)? Briefly but fully justify your choice. 10%
ANSWER: I will choose option A. Because under the tax code, the
performance-based incentives will automatically be subject to the
normal income tax rate.
QUESTION (3) If Chris decides to sell those shares of stock he received
after 2 years of working with the same corporation, would there be
any tax consequences? Briefly but fully explain your answer. 10%
ANSWER: The sale of shares of stock is exempt from income tax
subject to rate of 1% based on the gross selling price or gross value in
money of the shares of stock sold, bartered, exchanged or otherwise
disposed.
3. The Las Pinas City Mayor was concerned about the deteriorating
condition of the city’s escalators for pedestrians so he asked the city
engineer what could be done for their upkeep. The latter
recommended the imposition of a P100 annual user’s charge collected
from city residents whenever they apply for a cedula or CTC plus
increased fines for jaywalking to compel pedestrians to use the
escalators more, thereby increasing maintenance funds for their
upkeep. The mayor readily approved his recommendations and issued
the corresponding order to implement the same. When Chita
Dimayuga, resident of the city and doing business there applied for a
CTC, she was told to also pay the P100 user’s charge, she refused. She
was told by the city treasurer to justify her refusal in writing within
ten days; otherwise, she may face penalties for failure to pay the
user’s charge, so she asks for your help. What can you advise? 15%
ANSWER: The city mayor cannot implement the recommendation.
LGUs cannot imposed taxes in their territory without a law from
Congress. An LGU executive cannot enact a tax on its own without the
ordinance passed by Sangguniang Panlalawigan because taxation is
essentially legislative in nature.
4. Knowing you’re a lawyer, your dentist Dra. Juana Dimabunot,
wants to sell a piece of real property she owns in Quezon City and
consults you on possible income tax consequences. What would you
tell her? 10%
ANSWER: If the real property is not used in business therefore, it is
subject to capital gain tax of 6% but if the real property is used in
business it becomes part of her inventory and it is subject to
schedular income tax.
5. Helmut Benz, non-resident German engineer, is contracted to
extend consultancy to a domestic corporation, for the period
beginning February 15, 2023 and ending on August 31, 2023. He
consults you for legal advice on (a) what are the possible Philippine
income tax scenarios and liabilities he may be subject to and (b) how
he may minimize such, if at all possible. What advice would you give
him? 10%
ANSWER: Helmut Benz is a non-resident alien. I would tell him that
since it is just a consultancy he can work outside the Philippines or if
he wants to stay here he can stay here but not more than 180 days
during any calendar year to be exempted from income tax.
6. The Sisters of Santa Magdalena (SSM), a religious group of nuns,
own a piece of property in Quezon City where they operate a non-
stock, non-profit school where the nuns teach elementary and high
school students. The tuition and school fees support the convent, the
school and their charity work. This year, they just purchased another
piece of real property in Novaliches where they plan to build a shelter
and clinic for unwed pregnant teenagers until they give birth and find
support or livelihood for themselves and their newly born child.
Briefly discuss the tax consequences of SSM’s properties and
activities. 10%
ANSWER: SSM as a non-stock, non-profit institution is exempt for real
property tax as long as the property is actually, directly and
exclusively used by SSM for educational purposes.
However, the land is not subject to capital gains tax. Such land is
actually, directly, and exclusively used for charitable purpose. The
Charitable institution is helping the government to provide the needs
of the less fortunate citizens. Tax exemptions’ basis is public interest.
Therefore, these entities does not violate equal protection clause.
7. Jeremiah Jones, a Canadian while renting a condo unit in Makati,
travels throughout the country and started a You Tube vlog whose
content focuses on life in the Philippines and various travel sites in
the various Philippine islands. As a result of his vlogging, he has begun
earning income that enables him to be self-employed as a full-time
vlogger. His income comes from his share in You Tube's earnings from
advertisements placed on his You Tube channel by Jollibee and Cebu
Pacific, among other advertisers. Advertisers contract with You Tube's
US company directly for the placement of their ads and because
Jeremiah's channel subscribers have the customer profiles that cater
to the advertisers' products or services, You Tube places their ads on
Jeremiah's channel. You Tube then deposits Jeremiah's share from
You Tube's advertising fees it charges on the advertisers to his
Canadian bank account and this bank remits to its correspondent
Philippine bank from which Jeremiah can withdraw his earnings. His
concern is to determine his Philippine income tax liabilities, if there
are any, and what possible tax options he may have as well, if any, as
an individual taxpayer. He consults you, so what will you advise him?
10%
ANSWER:
8. Three sisters, all architects, were partners in 3-Sisters & Associates,
which designs upscale commercial centers. They inherited from their
parents a farmland, which their parents named 3-Sisters Farm, as well
as another lot with a commercial building which was named 3-Sisters
Tower. Since demand for rental office spaces by BPO’s was great, the
sisters decided, as architects to put their skills together to redesign
the interiors and exteriors of the commercial property to be able to
raise rents. To raise capital for such effort, they decided to sell 3-
Sisters Farm because they were not farmers anyway. The proceeds
from this sale plus a mortgage on the 3-Sisters Tower enabled them to
upgrade 3-Sisters Tower. Discuss the income tax consequences for
their actions with respect to 3-Sisters & Associates, 3-Sisters Farm and
3-Sisters Twin Towers. 10%
ANSWER: Since the sale of farm was used in business it will become
part of their inventory and subject to active income tax.
MERRY CHRISTMAS AND HAPPY NEW 2023!