2005 BAR EXAMINATION

I.
[a] Describe the power of taxation. May a
legislative body enact laws to rise revenues in the
absence of a constitutional provision granting said
body the power of tax? Explain.
[b] Nay taxes be the subject if set-off or
compensation? Explain
[c] Can an assessment for a local tax be the subject
of set-off or compensation against a final judgment
for a sum of money obtained by the taxpayer against
the local government that made the assessment?
Explain.
[d] Is a deficiency tax assessment a bar to a claim
for tax refund or tax credit? Explain.
[e] Is the approval of the court, sitting as probate or
estate settlement court, required in the
enforcement and collection of estate tax? Explain.
(10%)
Suggested Answer:
(a) The power of taxation is inherent in the State
being an attribute of sovereignty. As an incident of
sovereignty, the power to tax has been described as
unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse is
to be found only in the responsibility of the
legislature which imposes the tax on the
constituency who are to pay it.[Mactan Cebu
International Airport Authority v. Marcos, 261 SCRA
667, (1996)

Being an inherent power, the legislature can enact

laws to raise revenues even without the grant of said
power in the Constitution. It must be noted that
Constitutional provisions relating to the power of
taxation do not operate as grants of the power of
taxation to the Government, but instead merely
constitute limitations upon a power which would
otherwise be practically without limit .[Cooley,
Constitutional Limitations, 1927 8th Ed., p.787)
(b) No. Taxes cannot be the subject of set-off or
compensation for the following reasons: (1) taxes
are off distinct kind , essence and nature, and these
 impositions cannot be classed in merely the same
category as ordinary obligations; (2) the applicable
laws and principles governing each are peculiar, not
necessarily common, to each; and (3) public policy is
better sub served if the integrity and independence
of taxes are maintained, (Republic v. Mambulao
Lumber Company, 4 SCRA 622 (1962)),
However, if the obligation to pay taxes and the
taxpayer’s claim against the government are both
overdue, demandable, as well as fully liquidated,
compensation taxes place by operation of law and both
obligations are extinguished to their concurrent
amounts. (Domingo v. Garlitos, 8 SCRA 443 (1963).
c) No. Taxes and debts are of different nature and
character; hence, no set-off or compensation
between these two different classes of obligations is
allowed. The taxes assessed are the obligations of
the taxpayer arising from law, while the money
judgment against the government is an obligation
arising from contract,whether express or implied. In
as much that taxes are not debts, it follows that the
two obligations are not susceptible to set-off or legal
 compensation. [Francia v. Intermediate Appellate
Court, 162 SCRA 753 (1988).
It is only when the local tax assessment and the final
judgment are both overdue, demandable, as well fully
liquidated may set-off or compensation be allowed.
(Domingo v. Garlitos, 8 SCRA 443, (1963)
d) No. As a general rule, a deficiency tax assessment is
not a bar to claim for tax refund or tax credit. It is
logically appropriate; however, that if the deficiency
tax assessment is already final, the Commissioner
should not grant the claim unless the taxpayer pays
the deficiency. Likewise, no tax refund or tax credit
will be granted as long as there is pending a
deficiency tax assessment for the same taxable
period. To award a tax refund or tax credit will be
granted as long as there is pending a deficiency tax
assessment for the same taxable period. To award a
tax refund or tax credit despite the existence of
deficiency assessment for the same taxable period is
an absurdity and a polarity in conceptual effects. A
taxpayer cannot be entitled to a refund and at the
same time be liable for a tax deficiency assessment.
 In order to avoid multiplicity of suits, it is logically
necessary and legally appropriate that the issue of
deficiency tax assessment be resolved jointly with
the taxpayer’s claim for tax refund, to determine
once and for all in a single proceeding the true and
correct amount of tax due or refundable. [CIR v. CA.
Citytrust Banking Corp. and CTA.234 SCRA 348
(19940
e) No. The approval of the court, sitting in probate, is
not a mandatory requirement in the collection of
estate tax. On the contrary, under Section 94 of the
NIRC, it is the probate or settlement court which is
forbidden to authorize the executor or judicial
administrator of the decedent’s estate, to deliver
any distributive share to any party interested in the
estate, unless a certification from the Commissioner
of Internal Revenue that the estate tax has been
paid is shown.( Marcos II v. Court of Appeals, 273
SCRA 47 (1997)

II
 (1) Explain briefly whether the following items are
taxable or non-taxable:
a) Income from jueteng;
b) Gain arising from expropriation of property;
c) Taxes paid and subsequently refunded;
d) Recovery of bad debts previously charged off;
e) Gain on the sale of a car used for personal
purposes, (5%)

Suggested Answer:
1. a) It is taxable. The law imposes a tax on income
from any source whatever which means that it
includes income whether legal or illegal. (Sec. 32 (A),
NIRC).
b) Taxable. There is a material gain, not excluded by
law, realized out of a closed and completed
transaction. Gains from dealings in property are part of
gross income. (Sec. 32 (A) (3), NIRC).
c) It depends. Taxes paid which are allowed as
deduction from gross income are taxable when
subsequently refunded but only to the extent of the
income tax benefit of said deduction. (Sec