PAGE 1

SOLUTIONS MANUAL FOR USE WITH

INCOME TAXATION 10e

EXERCISE 1-1 EXERCISE 1-3

D 11 K F 11 T 21 F 31 F
1. . 1. . . .
F, K 12 J F 12 T 22 T 32 F
2. . 2. . . .
I 13 A F 13 F 23 T 33 T
3. . 3. . . .
J F 14 F 24 T 34 T
4. 4. . . .
J F 15 F 25 T 35 T
5. 5. . . .
B F 16 F 26 T
6. 6. . .
E F 17 T 27 F
7. 7. . .
H F 18 T 28 F
8. 8. . .
C T 19 T 29 F
9. 9. . .
10 M 10 T 20 T 30 T
. . . .

EXERCISE 12
1. Excise 6. Lifeblood
2. Community 7. Toll
3. Due process 8. School
4. Donors tax 9. Revenue
5. Shifting 10. Tax amnesty

E L
S L L
H I O
I F C O M M U N I T Y
F E X R T
T B E X E S
I L A V E
N O T E N
G O S N M
D R U A
S C H O O L E X
N A
O T
D S S E C O R P E U D
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EXERCISE 1 4 EXERCISE 1 5
1. B 11. A 1. A 11 B 2 A 31 D
. 1. .
2. C 12. B 2. A 12 A 2 A 32 C
. 2. .
3. C 13. D 3. D 13 A 2 D 33 B
. 3. .
4. B 14. A 4. B 14 C 2 D 34 A
. 4. .
5. C 15. A 5. B 15 C 2 C 35 A
. 5. .
6. D 16. C 6. C 16 B 2 D
. 6.
7. A 17. C 7. B 17 D 2 C
. 7.
8. C 18. C 8. C 18 A 2 D
. 8.
9. C 19. D 9. B 19 C 2 B
. 9.
10. C 20. C 10 C 20 B 3 C
. . 0.

EXERCISE 16
The claim of the Commissioner should be denied.
Rule-making power must be confined to details for regulating the mode or proceedings in
order to carry into effect the law as has been enacted, and it cannot be extended nor can it expand
the statutory requirements or to embrace matters not covered by the statute.
Administrative regulations must always be in harmony with the provisions of the law because
any resulting discrepancy between the two will always be resolved in favor of the basic law.

EXERCISE 17
YES. Double taxation means taxing twice the same property twice when it should be taxed
only once; that is taxing the same person twice by the same jurisdiction for the same thing.
Otherwise described as direct duplicate taxation, the two taxes must be imposed on the same
subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction,
during the same taxing period; and the taxes must be of the same kind or character.

There is indeed double taxation if respondent is subjected to the taxes under both Sections 14
and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter
the privilege of doing business in the City of Manila; (2) for the same purpose to make persons
conducting business within the City of Manila to contribute to city revenues; (3) by the same taxing
 PAGE 3

authority the City of Manila; (4) within the same taxing jurisdiction within the territorial jurisdiction
of the City of Manila; (5) for the same taxing periods per calendar year; and (6) of the same kind or
character a local business tax imposed on gross sales or receipts of the business.

Moreover, Section 143(h) may be imposed only on businesses that are subject to excise tax,
VAT, or percentage tax under the NIRC, and that are not otherwise specified in preceding
paragraphs.

EXERCISE 1- 8
The law is constitutional. The tax is levied with a regulatory purpose to provide means for
the rehabilitation and stabilization of the threatened sugar industry. As the protection and promotion
of the sugar industry is a matter of public concern, the Legislature may determine within reasonable
bounds what is necessary for its protection and expedient for its promotion. Here, the legislative
discretion must be allowed full play, subject only to the test of reasonableness; and it is not contended
that the means provided in Section 6 of C.A. 567 bear no relation to the objective pursued or are
oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen
why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may
be made the implement of the States police power.

EXERCISE 21
1. The query should be addressed to the Commissioner of Internal Revenue because the power to
interpret the provisions of the National Internal Revenue Code (NIRC) and other tax laws is under
the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of
Finance.
Moreover, interpretation of officers, of laws which are entrusted to their administration, is
entitled to great respect and have in their favor a presumption of legality (Anscor Container
Corporation v. CTA, GR No. 38052, August 31, 1998).

2. I will inform him that a compromise is not allowed anymore because the case had already been
filed in the Regional Trial Court. The moment the case is filed in court, it cannot be subject to
compromise anymore.
3. Piolo is correct. Under RA 1405 the BIR Commissioners power to inquire into a taxpayers bank
deposit is not in conflict with the Bank Secrecy Law. Based on the provision of the NIRC, the
Commissioner is authorized to inquire into bank deposit:
a. To determine the gross estate of a decedent; and
b. When a taxpayer applies for a compromise of his tax liability by reason of financial incapacity.

4. I will request for a compromise of the assessed tax on ground that the financial position of the
taxpayer demonstrates clear inability to pay the assessed tax. Clearly, even if the case is decided
against the taxpayer, he will not have the money to pay the assessed tax. It is therefore an
exercise in futility to forego with the case against him.

5. The claim for refund should be denied on ground of prescription. Recovery of taxes erroneously
paid or illegally collected are allowed only when filed within the two-year prescriptive period. The
two-year period should be computed from the time of actual filing of the Adjustment Return and
final payment of the tax (Phil. Bank of Communications vs. CIR, 302 SCRA 241).
Thus, the two year prescriptive period lapsed on April 5, 2011.

6. The Commissioner may not grant the refund when there is a deficiency tax assessment against the
claimant-taxpayer. To award such refund despite the existence of the deficiency assessment is an
absurdity and a polarity in conceptual effects (Commissioner vs. CA and Citytrust Banking Corp,
234 SCRA 348).

7. Yes. Where a corporation paid quarterly corporate income taxes in any of the first three quarters
during the taxable year but incurs a net loss during the taxable year, the two-year period for the
 PAGE 4

filing of claim for refund or credit shall be counted from the date of the filing of the annual
corporate income tax return (Commissioner vs. TMX Sales, 205 SCRA 184).

8. a. The counting of the two (2) year period commences to run from the date of final payment.
Considering that the final payment was made on July 9, 2012, the prescriptive period will end
on July 9, 2014.
b. Augusto has thirty days from receipt of the decision of the CIR to file an appeal with the CTA.
Since it was received on May 15, 2014, he has until June 14, 2014 to file his appeal with the
CTA.
c. He is given 30 days from receipt of the CIRs decision but not exceeding 2 years from the date
of final payment. Hence, he has until July 9, 2014, or eight (8) days following the receipt of
the decision, to file an appeal with the CTA.

EXERCISE 2-2. MULTIPLE CHOICE

1. C

2. C
The Bureau of Immigration is under the Department of Justice.

3. A
The BIR is inferior to the Court of Tax Appeals in terms of tax cases. Thus, the BIR is not
empowered to review the decision of a superior court.

4. B

5. D

6. C
The power to decide tax cases is more of a power and duty of the Commissioner rather than
the Bureau of Internal Revenue.

7. B
The Community Tax is levied under the Local Government Code of 1991.
The Overseas Communication Tax and the Gross Receipts Tax are business taxes under
Section 120 and 121, respectively, of the National Internal Revenue Code.
The documentary stamp tax is levied under Title VII of the NIRC.

8. A
The power to interpret the provisions of the NIRC is under the exclusive original jurisdiction of
the Commissioner of Internal Revenue, subject to review by the Secretary of Finance.

9. D
Under RA 1125, as amended, the decisions of the Commissioner of Internal Revenue on cases
pertaining to disputed assessments, refunds of taxes, fees and other charges, penalties, etc. is
appealable only to the Court of Tax Appeals.

10. D
The limited power of the Commissioner does not conflict with RA 1405 because the provision
of the Tax Code granting this power is an exception to the Secrecy of Bank Deposits Law.
The Commissioner or his duly authorized representative may be allowed only to inquire into
 PAGE 5

the bank deposits of the taxpayer on the following cases:

a. To determine the gross estate of the decedent.
b. Where the taxpayer has filed an application for compromise of his tax liability by reason of
financial incapacity; and
c. When there is a waiver duly signed by the taxpayer.

11 C
Revenue Audit Memorandum Order, Revenue Special Order and Revenue Travel Assignment
Order are not exercises of legislative power.
Revenue Regulations are more detailed interpretation of the tax laws. It is issued by the
Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue.

12. D
The case cannot be compromised anymore if the case is filed already before the courts of
justice and if the case involves fraud.

13. B

14. B
Corporations are not allowed to be registered by the Securities and Exchange Commission for
the purpose of practice of public accountancy (RA 9298).

15. C
A withholding agent is a party in interest having sufficient legal interest to bring a suit for
refund of taxes illegally collected from him.
The claim for refund must be filed with the CIR before any suit in Court of Tax Appeals is
commenced.
The computation of the two-year period starts from the filing of the final adjustment return
because it was only then that it could be ascertained whether the taxpayer made profits or
incurred losses in its business operations.

EXERCISE 2-3
1. D
The last day to claim refund is June 30, 2013 or two (2) years from the date of final payment.

2. A
Taxpayers are given 30 days from receipt of BIR decision but within two (2) years from the
date of payment, to appeal the decision to the Court of Tax Appeals.

3. D
When the 2-year period is about to lapse, the suit or proceeding must be started in the Court
of Tax Appeals without awaiting for the decision of the Commissioner, or the 30-days
reglementary period from receipt of decision to appeal to the CTA.

4. C
The best action is to file an appeal with the Court of Tax Appeals before the lapse of the 2-
year prescriptive period, without waiting for the decision of the Commissioner of Internal
Revenue.

5. D
The counting of the 30 day prescriptive period for appeal starts from the date of receipt of the
decision because it would be unfair on the part of the taxpayer to include in the counting the
 PAGE 6

date while the decision is still in the table of the Commissioner or it is still in transit.

EXERCISE 24
The proper party to question, or seek a refund of an indirect tax is the statutory
taxpayer, the person on whom the tax is imposed by law and who paid the same
even if he shifts the burden thereof to another. Even if Petron passed on to Silkair
the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax
but part of the price which Silkair had to pay as a purchaser.
An excise tax is an indirect tax where the tax burden can be shifted to the
customer but the tax liability remains with the manufacturer or producer.
The excise taxes are collected from manufacturers or producers before removal
of the domestic products from the place of production. Although excise taxes can
be considered as taxes on production, they are really taxes on property as they are
imposed on certain specified goods.
When Petron removes its petroleum products from its refinery in Limay, Bataan,
it pays the excise taxes due on the petroleum products thus removed. Petron, as
manufacturer or producer, is the person liable for the payment of the excise tax as
shown in the Excise Tax Returns filed with the BIR. Stated otherwise, Petron is the
taxpayer that is primarily, directly and legally liable for the payment of the excise
taxes. However, since an excise tax is an indirect tax, Petron can transfer to its
customers the amount of the excise tax paid by treating it as part of the cost of the
goods and tacking it on to the selling price.
Silkair as the purchaser and end consumer, ultimately bears the tax burden, but
this does not transform petitioners status into a statutory taxpayer.
In the refund of indirect taxes, the statutory taxpayer is the proper party who
can claim the refund.
Petitioner should invoke its tax exemption to Petron before buying the aviation
jet fuel. Petron, however, remains the statutory taxpayer on those excise taxes.

EXERCISE 3-1
1. The partnership is not liable to pay income tax considering that no income was
earned during the year. The increase in the net assets was caused by the
additional contribution of P10,000 by the partners.

2. The contention of Judge Nitafan is wrong. Payment of income tax by judges is

not covered by the constitutional protection against diminution of their salaries
during their continuance in office. Income taxation for the members of the
judiciary give substance to the equality among the three branches of the
government consisting of the executive, legislative and the judiciary.

3. a. Face value P 100,000

Less: Discount (100,000 x 20%) 20,000
Income subject to tax/Fair discounted 80,000
value

b. Discount P 20,000
x Due in 2011 50%
 PAGE 7

Income subject to tax, 2011 10,000

c. Income reportable in 2012 ( 20,000 x P 10,000

50%)

4. Whenever a stockholder is indebted to the corporation and said creditor

corporation decides to condone the debt, such condonation has the effect of a
payment of dividend to the stockholder. Therefore, the condonation made by
Lux Corporation to Eduardo is in effect a payment of dividend by Lux
Corporation to Eduardo.

If Eduardo is the creditor while Lux Corporation is the debtor and the former
decides to condone the debt of the latter, the amount is considered as an
additional investment by Eduardo to the corporation.

5. Hilario is not required to report income on the condonation considering that the
condonation of debt was given without requiring him to render services. The
P50,000 constitutes more as a taxable gift rather than as a taxable income.

6. Yes the amount of P30,000 is in the nature of a remuneratory donation; it is

subject to income tax.

7. Under the tax benefit rule, whenever a bad debt is claimed as deduction from
gross income and it resulted to a reduction in its tax liability, the recovery of
such is subject to tax. Thus, when Pamco wrote off the accounts and claimed it
as deduction from gross income, there was a corresponding reduction in the tax
liability. It being the case, the recovery of such debt is taxable to PAMCO but
only up to P90,000, the amount that has been beneficial to PAMCO.

8. a. Value-added tax - not taxable

b. Real property tax - taxable
c. Income tax - not taxable
d. Stock transaction tax - not taxable
e. Special assessment - not taxable
f. Occupation tax - taxable
g. Estate tax - not taxable
h. Income tax paid to a foreign - taxable if claimed as deduction
country
i. Community tax - taxable
j. Excise tax - taxable

9. a. Yes, the dividends are subject to a final tax of 10%.

b. The dividends paid are in effect property dividends. They are subject to a
final tax of 10%
c. The dividends paid are actually stock dividends. They are not subject to tax.
d. Although some stockholders were paid stock dividends, since others were paid
cash, such declaration and payment resulted to a change in proportionate
interest. Thus, both the stockholders who were paid stocks and cash
dividends are subject to final tax.

10. a. Dividends received from domestic not taxable

 PAGE 8

b. Dividends received by resident foreign from - not taxable

domestic
c. Dividends received by nonresident foreign corporation from domestic 15%
final tax if the country in which the nonresident foreign corporation is
domiciled shall allow tax credit of 15% in its income tax payable in such
foreign country.

11. a Miss Supsup is entitled to 10% of the value of confiscated smuggled goods
. but not exceeding P1,000,000. Since 10% of the value of the smuggled goods
is P10,000,000 (P100,000,000 x 10%), Miss Supsup is entitled only to P1
million as tax informers reward.

b. The reward received by Miss Supsup is subject to a final withholding tax of

10%. Hence, the amount of tax to be withheld in favor of the government is
P100,000 (P1,000,000 x 10%).
12. a Under Outright Method, the lessor is required to report as income the fair
. market value of the improvement at the time of completion. Thus, she has
to report an income of P100,000 on the leasehold improvement and P48,000
(P4,000 x 12) on the rent, or a total amount of P148,000.

b. Rent (P4,000 x 12) P 48,000

Add: Income on leasehold improvement
Cost of improvement P 100,000
Less: Accumulated depreciation 74,00
(100,000/25 x 18.5) 0
Book value, end of lease 26,000
(26,000 / 18.5 x ) 703
48,703

c Rent ( 4,000 x 6) 24,000

.
Leasehold improvement:
Cost P 100,000
Less: Depreciation (7/1/09 6/30/10) 4,0
(100,000 / 25) 00
Book value upon termination 96,000
Less: Amount already reported as income 703 95,29
7
Income of lessor in 2013 119,29
7

EXERCISE 3 2

1 T 6 T 11 F
 PAGE 9

2 T 7 F 12 F

3 T 8 T 13 F

4 T 9 F 14 T

5 F 10 T 15 F

3-3. TAX BENEFIT RULE

3- ANSWER: B
3.1:
Case 1 P 40,000
Case 2 - 20,000
Case 3 - 40,000
Case 4 - 70,000 (85,000 15,000)

3- (1) ANSWER: D
3.2:
Gross profit 800,0
00
Add: Bad debts 30,00
recovered 0
Total 830,00
0
Less: Accounts written- P 50,000
off
Deductible 440,000 490,00
expenses 0
Net income before 340,00
income tax 0

3- (2) ANSWER: D
3.3:
Gross income before P
taxes 90,000
Less: Deductible taxes
Amusement tax P 80,000
Local business 40,000 120,00
taxes 0
Net loss ( 30,00
0)

ANSWER: B
Amusement tax 80,0
00
Local business taxes 8,500
 PAGE 10

Taxable income 88,500

EXERCISES 3 3.4. MULTIPLE CHOICE THEORY

1. ANSWER: C
This is an application of the tax benefit rule. Under this
principle, the recovery of bad debt previously deducted is taxable if at
the time it was claimed as deduction, there was a corresponding
reduction in the income tax liability of the taxpayer.

2. ANSWER: C
See the explanatory notes in No. 11 above on tax benefit rule.

3. ANSWER: D

The capital gains tax is an income tax, while the tax paid on inter
vivos donation is a donors tax. These taxes, including the value-
added tax, are not deductible from gross income from purposes of
computing the income tax. Thus, the refund received from these
taxes are not subject to tax.

The community tax paid by a corporation is a deductible item

from gross income. Hence, a refund received is taxable.

EXERCISE 3-4

3- LEASEHOLD
4.1: IMPROVEMENT

1. ANSWER: B
Cash received 120,000
Tax paid by lessee 3,000
Income to be reported in 2011 123,000

The lessor shall apply cash method on prepayment of rental even if it is

using accrual method of accounting.

2. ANSWER: D
Rent income (5,000 x 12) 60,000
Leasehold improvement 1,800,000
Tax paid by lessee 3,000
Income to be reported under outright 1,863,000
method

3. ANSWER: A
Rent income 60,000
Tax paid by lessee 3,000
Leasehold improvement:
 PAGE 11

Cost 1,800,0
00
Less: Accumulated depreciation
(1,800,000/30 x 17.5) 1,050,0
00
Book value, end of lease 750,00
0
(750,000/17.5) x 6/12 21,429
Income to be reported under spread-out 84,429
method

4. ANSWER: C
Effective January 1, 2014, the land and the building shall be exempt from
real estate tax because it is now being used actually, directly and exclusively
for educational purpose.
All assessments or reassessments made after the 1st day of January of
any year shall take effect on the 1st day of January of the succeeding year
(Sec. 221, Local Government Code of 1991).

5. ANSWER: B
Rent expense 60,000
Depreciation (1,800,000/17.5) 102,857
Deductible expense 162,857

6. ANSWER: B
Cash received 60,000
Leasehold improvement (750,000/17.5) 42,857
102,857
Note:
No real property tax will be shouldered by the lessee starting 2014
because the land and the building shall be exempt from real estate tax
considering that it is now being used actually, directly and exclusive for
educational purpose.

7. ANSWER: C
Cash received (5,000 x 3) 15,000
Leasehold improvement:
Cost 1,800,0
00
Less: Accumulated
depreciation
(1,800,000/30 x 3.75) 225,00
0
Book value upon 1,575,0
termination 00
Less: Amount declared as
income
2013 21,429
2014 42,857
2015 42,857
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2016 42,857 150,0 1,425,0

00 00
Total 1,440,0
00

EXERCISE 3-4.2:
1. ANSWER: A
Rent (2,000 x 12) 24,0
00
Leasehold improvement 1,000,0
00
Income using outright method 1,024,0
00

2. ANSWER: C
Rent (2,000 x 12) 24,00
0
Leasehold improvement:
Cost 1,000,0
00
Less: Depreciation for 9 years 450,0
(1,000,000/20 x 9) 00
Book value, end of lease 550,00
0
Annual income (550,000/ 9 years) 61,111
Income under spread-out method 85,111

3. ANSWER: C
Annual income reportable 61,11
1
x No. of years of reporting ____1
Loss incurred by Bryant 61,111
Note: It is presumed that Bryant had already reported his entire income on
leasehold improvement for the taxable year 2015 but not his income
from January to February 28, 2016.

EXERCISE 34.3:
ANSWER: B
Rent income 36,00
0
Income on leasehold improvement:
Cost of improvement 600,0
00
Less: Depreciation for 15 years 300,000
(600,000/30 x 15)
Book value, end of lease 300,000
Divide by remaining term of lease 15 20,000
(years)
 PAGE 13

Annual income to be reported 56,000

EXERCISE 34.4
1. ANSWER: A
The income from rent received by Vic is taxable to him, while the amount
given as loan is not because there was no gain realized by Vic in this
transaction. As a matter of fact, there was no gain realized whether as
payment for services, interest or profit from investment.

2. ANSWER: C
Cost of improvement P
2,000,00
0
Less: Depreciation for 8 years (2,000,000/50 x 320,00
8) 0
Book value, end of lease 1,680,00
0
Rent income P
10,000
Income from leasehold improvement 210,000
(1,680,000 / 8)
Total income using spread-out method 220,000

3. ANSWER: D

EXERCISE 3-5
EXERCISE 35.1:

1. ANSWER: D
Value of promissory note P
120,000
Less: Discount (120,000 x 20%) 24,000
Taxable income, 2011 96,000

2. ANSWER: D
Discount 24,000
Less: Income to be reported in 2012 (24,000 12,000
x 50%)
Taxable income, 2013 12,000

EXERCISE 35.2:
1. ANSWER: C
Value of promissory note P
50,000
Less: Discount (P50,000 x 25%) 12,500
Taxable income, 2013 37,500

2. ANSWER: B
 PAGE 14

Value of promissory note P

50,000
Less: Amount already declared as income 37,500
Taxable income, 2014 12,500

EXERCISE 35.3:
1. ANSWER: C
Payment for services rendered by promissory note which can be
discounted, is taxable to the payee at its fair discounted value.

EXERCISE 3-6. MULTIPLE CHOICE

1. ANSWER: B
A schedular system of taxation is a system employed where the income
tax treatment varies and is made to depend on the kind or category of taxable
income of the taxpayer. It is distinguished from global system in the sense that
the latter is employed where the tax system views indifferently the tax base
and generally treats in common all categories of taxable income of individual
(Tan vs. Del Rosario, 237 SCRA 324, 331).

2. ANSWER: C
Dividends received by a domestic and resident foreign from a domestic
corporation are not subject to income tax.
Dividends received by a resident citizen from a domestic corporation are
subject to a final tax of 10%.
Dividends received by a domestic corporation from a foreign corporation
are subject to ordinary income tax.

3. ANSWER: C
Winnings in lotto are tax exempt.

4. ANSWER: C
Value-added tax, other percentage taxes and excise tax on certain goods
are taxes found under Titles IV, V and VI, respectively of NIRC, which contain
the provisions on business taxation; whereas, income taxation is discussed in
Title II of the same code.

5. ANSWER: B
The amount of P3,000 raised by Mon is a gift which should be excluded
from gross income because when a financial aid is asked, that means that there
is no legally demandable obligation on the part of other people to give him
money.

6. ANSWER: D
Income refers to earnings, lawfully acquired, without consensual
recognition, express or implied of an obligation to repay and without restriction
as to their imposition (James vs. US, 366 US 213).
 PAGE 15

7. ANSWER: C
The amount received by Ceidi and Ador fall within the ambit of income
from whatever source derived because these are income not expressly
excluded or exempted from the class of taxable income.
The above phrase is so broad that it includes all income not expressly
excluded or exempted from the class of taxable income, irrespective of
voluntary or involuntary action of the taxpayer in producing the income
(Gutierrez vs. CIR, CTA Case No. 65).

8. ANSWER: D
The amount of indebtedness cancelled due to services rendered by the
debtor is considered as compensation income. It is just like paying an
employee by an amount equivalent to the services he had rendered to his
employer-creditor.

9. ANSWER: C
The money value of accumulated leave credits not exceeding 10 days is
not taxable to the employee.
Travelling expenses received by an employee who was sent on a business
trip are not taxable to the employees provided that these employees are
required to liquidate said expenses.
Tips received by waitresses directly from customers which are not
accounted for by the employer to the employer are considered taxable income.

1 ANSWER: D
0
If a corporation to which a stockholder is indebted forgives the debt, the
transaction has the effect of a payment of dividend (Sec. 5, Rev. Regs. No. 2).

1 ANSWER: B
1
The money given to Lazaro is a remuneratory donation. It is deemed an
income, subject to income tax.

1 ANSWER: C
2
Tips 5,00
0
Liability condoned after rendering service 25,000
Taxable income 30,000

1 ANSWER: A
3
Selling price (115 x 200) 23,000
Less: Cost (100 x 200) 20,000
Gain on sale 3,000
 PAGE 16

Date Shares Cost Total Cost

per share
1-24-2008 200 P P 20,000
100
2-05-2008 200 22,000
110
4-12-2008 (400 x 5%) 20 -- .
420 42,000
New cost per share (42,000/420)
P 100

1 ANSWER: D
4
Selling price (115 x 200) 23,00
0
Less: Cost (95.23 x 200) 19,046
Gain on sale 3,954
No. of Shares New Cost
Date Old New per Share
Cost
1-24-2008 200 210 P 95.23
P20,000
1 ANSWER: C
5
Market value of shares - Mina Company 120
x No. of Common shares 150
Property dividend 18,000

1 ANSWER: D
6
Market value of stocks dividends per 30
share
Stock dividend received by Rosa (1,000 x 20
20%x10%)
Dividend income 600

1 ANSWER: A
7
Selling price (30 x 25) 750
Less: Cost (5,000/125) x 25 1,000
Loss ( 250)
Amount
Number
Shares P 5,000
100
Dividend (100 x 25%) -
25
Total 5,000
125
 PAGE 17

1 ANSWER: D
8
Sale of dividends (P60 x 40) 2,40
0
Less: Cost
200 (200 x 11,0
P55) 00
20 (200 x -- .
20%)
220 11,00
0
(11,000/220) x P40 2,000
Gain on sale 400

1 ANSWER: A
9
Total sale (P400,000 + 50,000) 450,00
0
Less: Cost 240,00
0
Book value of farm equipment 35,0 275,00
00 0
Gain on sale 175,00
0
Add: Other income 12,50
0
Gross income 187,50
0

EXERCISE 3 -7.
Yes. It is part of Javiers gross income falling within the ambit of the income
from whatever source derived which includes all income not expressly excluded or
exempted from the class of taxable income, irrespective of the voluntary or
involuntary action of the taxpayer in producing the income.
The phrase includes also proceeds of stolen or embezzled property or gains
derived from illegal source. Thus, assuming that the Mellon Bank fails to recover
the money, it shall be taxable to Javier

EXERCISE 41. CROSSWORD PUZZLE

1 2 3
2 5 % D
4
Y T W E L V E
 PAGE 18

E M
5
R A N K & F I L E

R N
6
S G S I S
7
3 M
8
C L O T H I N G

0 S

EXERCISE 4 - 2

1 T 6 F 11 T

2 F 7 T 12 F

3 F 8 F 13 T

4 F 9 T 14 T

5 T 10 F 15 T

EXERCISE 4-3
1 a Interest on corporate bonds - Taxable
. .
b Salary - Taxable
.
c Tips - Taxable
.
d Winnings in lotto - Not taxable (expressly exempt under
. the law)
e Winnings in jueteng - Taxable (income from whatever source
. derived)
f. Money stolen from - Taxable (income from whatever source
mothers purse derived)
g Rice subsidy of P325 per - Not taxable (de minimis benefit)
. month

2 The value of the free meals and lodging is not taxable to Yaya. It is very
. clear that the couple required her to stay in their house for their own
benefit. Hence, the matter falls squarely within the convenience-of-the-
employer rule.
 PAGE 19

3 No. The equivalent value of the living quarter is not taxable to Kulas
. under the convenience-of-the-employer rule. The purpose of the piggery
farm in providing Kulas a room inside the premises is for the convenience
of Habang Bata Pa Piggery Farm.
4 The rice allowance is considered as a de minimis benefit which is exempt
. from income tax. Thus, it is neither subject to creditable withholding tax
nor to fringe benefit tax.

5 The free parking and courtesy discounts are subject to fringe benefit tax
. considering that Kareen Leon is a managerial employee of UB
Corporation.
The rice subsidy of P1,000 a month fall under the de minimis
benefits which are exempt from income tax.
The excess of the laundry allowance in the amount of P450 (P750-
300) is part of gross compensation income if such excess is beyond the
P30,000 ceiling for other benefits.
The rental value of the residential property is subject to fringe
benefits tax which is subject to final tax. Therefore, not part of the gross
income.

6 The cost of the educational assistance extended by De la Salle University

. to Prof. Ferdinand Romero is supposed to be treated as part of the
teachers gross compensation income considering that Prof. Romero is
neither classified as managerial nor supervisory employee; he is still
classified as a rank-and-file employee.
However, since there is a condition that he should remain in the
employ of the employer for at least ten years after graduation, the
expenditure shall be considered as granted for the convenience of the
employers trade or business.
Therefore, whether the granting of the benefit is extended through a
qualifying/competitive examination or not, it should not be part of the
gross compensation income of Prof. Romero.
The cost of the tuition fee is attributable to the operation and
conduct of business of the employer. Therefore, the same shall be
deducted from the gross income of the school.

EXERCISE 4 4

1. ANSWER: C
Fringe benefit expense 34,00
0
Fringe benefit tax expense 16,000
Deductible expense 50,000
 PAGE 20

2. ANSWER: C
Fringe benefit expense 34,0
00
Divide by 68%
Grossed-up monetary value 50,000

3. ANSWER: A
The fringe benefit tax is imposed only if the fringe benefit is given to
managerial or to supervisory employees.
Accounting clerks, janitors and the security guards are rank-and-file
employees. Only the companys general manager is a managerial or
supervisory employee. Therefore, the fringe benefit tax must have been
given to him.
4. ANSWER: B
The one sack of rice is not subject to fringe benefit tax on the first
P1,000 per employee per month; the excess maybe also be exempt if
forming part of the other benefits not exceeding P30,000.
A corporation, though exempt from tax, is not exempt from the payment
of fringe benefit tax.
The equivalent value of free lodging given to a driver of an obstetrician
falls under convenience of the employer rule which is not subject to
fringe benefit tax.
The employers share in the GSIS contribution is not subject to income
tax.

EXERCISE 4-5

1. ANSWER: B
Fees in civic club 5,000
Life insurance premium 15,400
Monetary value 20,400
Divide by 68%
Grossed-up monetary value 30,000
Rate of tax 32%
Fringe benefit tax 9,600

2. ANSWER: B
To rank and file employees:
Christmas bonus 32,000
Loan benefits [96,000 x (12%-8%) 3,840
Medical allowance 16,000
Uniform allowance 12,000 63,840
To the supervisor:
 PAGE 21

Christmas bonus 4,000

Fees in civic club 5,000
Life insurance premium 15,400
Uniform allowance 3,000 27,400
Fringe benefit expense 91,240
Fringe benefit tax expense 9,60
0
Total deductions 100,84
0

3. ANSWER: D
Rank and file:
Christmas bonus (max: P 5,000 / employee 32,000
p.a.)
Medical allowance (max: 125 per employee 12,000
p.m.)
Uniform allowance (max: 3,000 / employee 12,000
p.a.)
Supervisor:
Christmas bonus 4,000
Uniform allowance 3,000
Total de minimis benefits 63,000

4. ANSWER: A
EXERCISE 4-6

1. ANSWER: C
As a general rule, free meals and lodging furnished by the
employer to the employees are taxable to the latter. However,
allowances furnished for and as a necessary incident to the property
performance of his duties are not taxable because they fall under the
convenience of the employer rule.

2. ANSWER: C
Tonys gross income is P9,500 because his employers residence is
not the place of business where the employer conduct a significant
portion of his business.
On the other hand, Berts gross income should not include the
monthly value of his free meals and living quarters because the
provision enables Cristy to avail of the services of Bert at her
convenience (RAMO 1-87).

3. ANSWER: D
The free meals are given by the employer to provide sanitary meals
 PAGE 22

to its employees, while the free lodging are provided because they do
not want the workers to find difficulty in looking for boarding houses.
These benefits are obviously furnished for the benefit of the employees
and not to the advantage of the employer.
It is therefore, apparent that the allowances furnished are in the
form of fringe benefits. However, since they are given to ordinary
workers which fall within the classification of rank-and-file employees,
the benefits are taxable to them and are includible in the computation
of their respective gross income.

4. ANSWER: D
The grossed-up monetary value includes the monetary value of the
fringe benefit received by the employee from his employer and the
amount of fringe benefits tax due thereon which was paid by the
employer.

5. ANSWER: D
The use of aircraft owned and maintained by the employer shall be
treated as business use and not subject to fringe benefits tax.

6. ANSWER: D
Jaguar is a rank-and-file employee. All fringe benefits given by his
employer are not subject to fringe benefits tax.
The free meals and lodging given to Col. General is specifically
exempt from fringe benefits tax. Moreover, it is also furnished for the
convenience of the employer (the Philippine Government) so that the
military officer shall be readily available when his services are required.
The uniform allowance falls under de minimis benefits which are exempt
from the fringe benefits tax.

7. ANSWER: B
De minimis benefits are of relatively small value that they are
exempt from the payment of fringe benefits tax and ordinary income
tax.

8. ANSWER: B
Fringe benefits given to rank and file employees are exempt from
fringe benefits tax. However, there are benefits which are subject to
regular income tax depending upon the nature of benefits the
employees have received from their employer.

9. ANSWER: D
A residential property owned by the employer and assigned to an
 PAGE 23

employer for use as his residence is subject to fringe benefits tax based
on the 5% of the fair market value of the land and improvements.

10 ANSWER: D
.
Unlike other individual taxpayers, nonresident aliens not engaged in
trade or business are subject to fringe benefits tax at a rate of 25% of
the grossed-up monetary value.

EXERCISE 4-7
1. ANSWER: C
Purchase of groceries 10,50
0
Divide by 68%
Grossed-up monetary value 15,441
Rate of tax 32%
Fringe benefit tax 4,941
The medical benefits is a de minimis benefit up to the ceiling of
P10,000, the excess of P7,500 is hereby presumed to be included as
part of Other Benefits.

2. ANSWER: A
Monthly salary 4,00
0
Free meals and living quarters (P1,500 + 2,500
1,000)
Monthly gross compensation income 6,500

3. ANSWER: B
Salary 4,000

4. ANSWER: D
Cost of first class ticket $
2,500
Rate subject to fringe benefit tax 30
%
Fringe benefit 750
Exchange value in Philippine currency 43
Fringe benefit subject to fringe benefit 32,250
tax
Divide by 68%
Grossed-up monetary value 47,426.
47
Rate 32
 PAGE 24

%
Fringe benefit tax 15,176.
47
5. ANSWER: D
Monetary value (P800,000/5) x 50% 80,00
0
Divide by 68%
Grossed-up monetary value 117,64
7
Rate of tax 32%
Fringe benefit tax 37,647

6. ANSWER: B
Monetary value (P10,000 x 50%) 5,00
0
Divide by 68%
Grossed-up monetary value 7,352
Rate of tax 32%
Fringe benefit tax 2,353

7. ANSWER: C
Interest at benchmark rate (P100,000 x 8,000
12% x 8/12)
Less: Interest at special rate (P100,000 x 6,000
9% x 8/12)
Interest foregone/value of benefit 2,000
Divide by 68%
Grossed-up monetary value 2,941.1
8
Rate of tax 32%
Fringe benefit tax 941.18

8. ANSWER: A
Total expenses incurred 16,00
0
Divide by 68%
Grossed-up monetary value 23,529
Rate of tax 32%
Fringe benefit tax 7,529

9. ANSWER: D
Salary of driver and housemaid (P4,000 + 6,00
2,000) 0
Membership fees and dues (P75,000/12) 6,250
 PAGE 25

Monetary value of benefit 12,250

Divide by 68%
Grossed-up monetary value 18,015
Rate of tax 32%
Fringe benefit tax 5,765

10. ANSWER: A
Fair market value (higher) 2,500,00
0
Divide by 68
%
Grossed-up monetary value 3,676,4
71
Rate of tax 32
%
Fringe benefit tax 1,176,4
71

11. ANSWER: D
Monetary value (3,400 x 50%) 1,70
0
Divide by 68%
Grossed-up monetary value 2,500
Rate 32%
Fringe benefit tax on rental 800
Add: Monthly rental 3,400
Fringe benefit to clerk 3,000
Deductible expense 7,200

12. ANSWER: D
Fringe benefit to supervisory employees 170,000
Divide by 68%
Grossed-up monetary value 250,000
Rate 32%
Fringe benefit tax 80,000