ch13 - Tax

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)
CHAPTER 13
INCOME TAXES OF PARTNERSHIPS,

ESTATES & TRUSTS
Problem 13 1 TRUE OR FALSE
1. False not all partnership, only commercial partnership.
2. False tax exempt, but required to file.
3. False the tax withheld in creditable.
4. True starting on the 4th year of operation.
5. True
6. True
7. True because it is withheld with final tax.
8. True
9. False trading business income will make the partnership a
commercial partnership.
10.False still subject to final tax of 10%.
11.True if created through gratuitous transfer, not more than 10 years
and no contribution is made by the co-owners.
12.True
13.True
Problem 13 2 TRUE OR FALSE
1. True
2. False It shall be in writing either as trust inter-vivos or through a will.
3. False A trustor is the person who establishes the trust, not the
trustee.
4. True
5. True
6. True
7. True
8. False P50,000.
9. True
10.True
11.False the personal exemption is P50,000.
12.True
Problem 13 3
1. A
2. B
3. C
4. C
5. B
6. C
7. B
Problem 13 4
1. A
2. A
3. B
4. A
5. C
6. A
7. B

8. B
9. B
10. A
8. D
9. B
10. A
11. C
Problem 13 5 A
Net profit from trading business of the partnership
Less: Income tax (P400,000 x 30%)
Income after tax
Interest income, net of final withholding tax
Dividend income
Total income for distribution to partners
Divide by profit and loss ratio
Share of each partner
Multiply by dividend tax rate
Income tax on the distributive share of Mitzi Baguingan
Problem 13 6
(1 C
)
Net income (P400,000 P160,000)
Multiplied by applicable income tax rate
Income tax of the partnership
(2
)
P400,000
120,000
P280,000
4,000
10,000
P294,000
2
P147,000
10%
P 14,700
P240,000
30%
P 72,000
A
Partnerships income after tax (P240,000 P72,000)
Divided by profit and loss ratio
Share of A
Less: Final tax (P84,000) x 10%
As share, net of final tax
Problem 13 7
1. A
J, Opting itemized deduction:
Share of J in the Partnership (325,000-175,000) x
70%
Other business income
Total business income
Less: Itemized deductions (excluding
contribution)
Net income before contribution
Less: Contribution
Actual, P1,750 + (15,000 x 70%)
=P12,250
P168,000
1/2
P 84,000
8,400
P 75,600
P105,000
85,000
P190,000
35,000
P155,000
12,250
P142,750

Limit, P155,000 x 10% or P15,500
Allowed
Net taxable before personal exemption
Less: Personal exemption (P50,000 + 25,000)
Net taxable income of J
2. D
R, opting for standard optional deduction:
Share in the partnership, gross (P325,000 x 30%)
Other business income
Total business income
Less: Optional standard deduction (P162,500 x 40%)
Net income before personal exemption
Less: Personal exemption - single
Net taxable income
Problem 13 8
Net income from trading business of the partnership
Divided by profit and loss ratio
Share of each partner
Add: Compensation income
Total income before personal exemption
Less: Personal exemption
Net taxable income
75,000
P 67,750
P
97,500
65,00
0
P162,500
65,00
0
P
97,500
50,00
0
P
47,
500
P400,000
2
P200,000
240,000
P440,000
50,000
P390,000
Note: Interest income and dividend income have been subjected to final tax,
hence, not to be included anymore in an annual taxable income.
Problem 13 9
1. D
None. The objective of co-ownership is to preserve the co-ownership
property, therefore, not subject to tax.
2. B
The co-owners in an exempt co-ownership are liable for the tax in the
income they received from the co-ownership. They should file the return
and pay the corresponding tax based on their separate and individual
capacity.

The net taxable income of Robert is computed as follows:
Share from the income of co-ownership
Less: Personal exemption single
Net taxable income
P1,000,000
50,000
P 950,000
Income received by the co-owners is already net of itemized deductions of

the co-ownership, therefore, the co-owners in their individual capacity is not
anymore entitled to optional standard deduction. Inasmuch as the related
expenses have been deducted before the distribution of income to the coowners, (Sec. 34 L).
Supreme Court Ruling - Deductions and exemptions are highly disfavored in
law. They must be construed strictly against the taxpayer, (Commissioner of
Internal Revenue vs. P. J. Kiener Company, LTD., 65 SCRA 143).
Problem 13 10 D
Income after expenses but before distribution to
heir
Less: Gross amount distributed to heir
(P85,000/85%)
Exemption
P400,00
0
P100,000
50,000
Net taxable income

Problem 13 11
1. B
Income of the grantor
Income of trust A - revocable
Total income of the grantor
Less: Total expenses
Grantor business expense
Trust A business expense
Grantors income before personal exemptions
P400,00
0
200,00
0
150,00
0
P250,00
0
P1,000,0
00
500,0
00
P1,500,0
00
600,0
00
P
2. D
Income of trust B irrevocable
trust
Less: Expenses of irrevocable trust
B
P200,000
100,000
P100,000
50,000

Net income before exemption
Net taxable income of all the trust
3. Not in the choices
Income of beneficiary (P100,000 P40,000)
Add: Share from trust
Net taxable income before personal exemption
P 50,000
P
50,00
0
P110,00
50,00
Net income
Note: Unless the taxpayer signifies in his ITR his intention to elect the OSD,
he shall be considered as having availed himself of the itemized deductions.
(Sec. 34(L), NIRC)
Alternative solution of 3: If beneficiary opted to use OSD
4. Not in the choices
Income of beneficiary
Add: Share from trust
Total gross income
Less: OSD (P150,000 x 40%)
P100,00
50,00
0
P150,00
60,00

P
50,00
Net income
Problem 13 12
1. The partnership is a general professional partnership, therefore, tax
exempt.
2. and 3. Computation of tax liabilities of partners A and B.
Net income of the partnership (P1,200,000 P100,0000)
P1,100,000
Partner A =
Partner B =

Partners salary
Distribution of balance
Total
Less Personal exemption
Net taxable income
Tax on P250,000
Tax on excess (P240,000 x 30%)
Income tax due and payable
60%
P240,000
300,000
P540,000
50,000
P490,000
P
50,000
72,000
40%
P360,000
200,000
P560,000
100,000
P460,000
Total
P 600,000
500,00
0
P1,100,000
P 50,000
63,000
.
P122,00
0
P113,000
Problem 13 13
Gross income merchandising
Dividend received from nonresident foreign corporation
Ordinary and necessary expenses merchandising
Net income before income tax
Less: Provision for income tax (P380,000 x 30%)
Net income
P575,00
0
60,000
(255,00
0)
P380,00
0
114,0
00
P266,00
0
Note: Dividends received from domestic corporation by a general copartnership is tax exempt.
Computation of partnership share considered as dividends:
M - 40%
Net income (P266,000)
Dividends from domestic corporation (P40,000)
Interest income, net of final tax of 20%, (P8,000)
Distributive partners share on general copartneship
Multiply by final tax rate
Final tax on share on partnership income
P
106,400
16,000
3,20
0
P
125,600
10
%
P
12,5
60
W
60%
P
159,600
24,000
4,8
00
P
188,400
1
0%
P
18,
84
0

Note: In a general co-partnership, the share of individual partner is
considered as dividend income.
Problem 13 14
1. BIR Ruling (August 18, 1959) provides that the co-ownership shall be
taxed as a corporation if the property was not divided for more than ten
(10) years. Therefore, the tax on the income of the co-ownership would
be:
Income of co-ownership
Multiply by corporate normal tax rate
Income tax as corporation
2.
3.
P5,000,000
30%
P1,500,000
Final tax on dividend of Marjorie Sison:

Amount received from co-ownership
Multiply by final tax rate on dividend
Final tax on dividend income tax withheld
P1,000,0
00
1
0%
P
10
0,
00
0
The amount received by Grace Ann Subala shall no longer be subjected to

normal tabular tax because it has been subjected to final tax on dividend.
Problem 13 15
1. Answer
Conjugal gross income from estate
Less: Business expense (P5,000,000 x 40%)
Income distributed to beneficiaries
Conjugal net income
P2,000,00
0
600,00
0
200x income tax due from the estate of Mr. Baguingan:

Share of Mr. Baguingan from the net income of the conjugal
estate
(P2,400,000 x 50%)
Less: Personal exemptions (P50,000 + P25,000)
Taxable income
Tax on P500,000
Tax on excess (P625,000) x 32%)
P5,000,00
0
2,600,00
0
P2,400,00
0
P1,200,0
00
75,0
00
P1,125,0
00

Income tax due
P
125,000
200,0
00
P
325,
000
Mr. Baguingans income from estate shall claim the total amount of
P75,000 personal exemptions (RA 9504) because Sec. 35C of the NIRC
provides that if the taxpayer dies during the taxable year, his estate may
claim the corresponding additional exemptions for himself and his
dependent(s) as if he died at the close of such year. Hence, the
applicability of the exemption of the income from estate amounting to
P50,000 shall take effect only in the succeeding years after the decedents
death.
2. Answer
Compensation income
Add: Income received from trust
Total income before personal exemption
Less: Personal exemptions (P50,000 + P100,000)
Net taxable income
P250,000
200,000
P450,000
150,000
P300,000
Tax on P250,000
Income tax due
P50,000
15,000
P65,000
(Sec. 34(L), NIRC)
Alternative solution: If beneficiary opted to use OSD
Compensation income
Add: Income received from trust, net of OSD
(P200,000 x 60%)
Total income before exemption
Less: Personal exemptions:
Basic
Additional (P25,000 x 4)
Taxable income of Mrs. Diana Nievera
Tax on P140,000
Income tax due
P
50,000
100,0
00
P250,0
00
120,0
00
P370,0
00
150,0
00
P220,0
00

P
22,500
24,0
00
P
46,500
3. Answer
Total amount received by the children
Multiply by withholding tax rate
Total withholding taxes
P600,000
15%
P 90,000
Problem 13 16
Correction: Second paragraph should beA year following the death of
Naty Poc.
Tax savings:
Income tax when no income of estate was distributed (Case 1
+ Case 3)
(P122,000 + P8,500)
Less: Income tax when P150,000 of estates income was
distributed
(Case 2 + Case 4) = (P77,000 + P42,500)
Tax savings
P130,500
119,500
P 11,000
Supporting computations:
Gross income
Business deductions:
Itemized deductions
Distributed income of the
estate
Net income before personal
exemption
Personal exemption
Net taxable income
Income tax for first bracket
Income tax on excess
Case 1: (490,000 250,000)
x 30%
Case 2: (340,000 250,000)
x 30%
Case 4: (220,000 140,000)
x 25%
Total income taxes
Case 1
Case 2
Case 3
Case 4
800,000
800,000
300,000
300,000
(260,000)
.
(260,000)
(150,000)
(180,000)
.
(180,000)
150,000
540,000
390,000
120,000
270,000
(50,000)
490,000
(50,000)
340,000
(50,000)
70,000
(50,000)
220,000
50,000
50,000
8,500
22,500
72,000
27,000
.
122,000
.
77,000
.
8,500
20,000
42,500

Problem 13 17
1. Income tax payable by the trust in 200x:
Income from house and lot
Income from hollow block business (P10,000 x
12)
Income from farm
Total gross income from trust
Less: Related expenses (P250,000 x 30%)
Amount distributed to the beneficiary
Less: Exemption
Net taxable income
Tax on P70,000
Total income tax payable
P 75,000
50,000
P
80,000
120,000
50,0
00
P
250,000
125,0
00
P
125,000
50,0
00
P
7
5
,
0
0
0
P
8,500
1,00
0
P
9
,
5
0
0
2. Income tax payable from the beneficiary in 200x:

Gross income received from income of trust
Net taxable income
P 50,000
50,00
0
P 0 .

P
(Sec. 34(L), NIRC)
Alternative solution if Trust and beneficiary opted to use OSD

1.
Total gross income trust

Less: OSD (P250,000 x 40%)
Amount distributed to the beneficiary
Net taxable income
P250,000
P100,000
50,000
150,000
P100,000
50,000
P 50,000
Tax on P30,000
2.
P2,500
3,000
P5,500
Gross income received from income of trust

Less: Optional standard deduction (P50,000 x
40%)
Net taxable income
P50,000
20,000
P30,000
50,000
(P30,000)
Problem 13 18A
Correction: The requirement should be stated as: How much is the income
tax due and payable of the two trusts?
Total income of trusts (P50,000 + P1,000,000)
Less: Distribution to beneficiary (P10,000 +
P20,000)
Exemption
Net taxable income
Tax on P500,000
Income tax due and payable
P 30,000
50,000
P1,050,00
0
80,00
0
P
9
7
0,
0
0
0
P125,000
150,400
P275,400

Problem 13 18B
Note: Since the topic is tax planning and the requirement is tax savings,
OSD can automatically assumed to be used to determine the lower tax.
1.
Gross receipts 2009
P300,00
0
120,00
0
P180,00
0
50,00
0
P130,00
0
Less: OSD (P300,000 x 40%)

Less: Personal exemption basic
Net income subject to income tax
2.
Income tax when no income of estate was distributed

(Case 1 + Case 3)
(P50,000 + P8,500)
P
58,500
Less: Income tax when P150,000 of estates income was

distributed
(Case 2 + Case 4) = (P27,500 +
P27,500)
55,00
0
P
3,500
Tax savings
Supporting computations:
Gross business receipts
Distribution to the beneficiary
Balance
OSD 40%
Net income before personal
exemption
Personal exemption
Net taxable income
Income tax for first bracket
Income tax on excess
Case 2 & 3: (160,000
140,000) x 25%
Total income taxes
Case 1
Case 2
Case 3
Case 4
500,000
500,000
(150,000)
200,000
.
200,000
150,000
350,000
(140,000)
200,000
(80,000)
350,000
(140,000)
210,000
120,000
210,000
(50,000)
250,000
(50,000)
160,000
(50,000)
70,000
(50,000)
160,000
50,000
22,500
8,500
22,500
5,000
5,000
50,000
27,500
8,500
27,500
.
500,000
(200,00
0)
300,000
Problem 13 19
1. To minimize income tax, Dokling can do the following:
a. Put his business under irrevocable trust

b. Use OSD instead of itemized deduction because the OSD is
greater than the itemized deduction, and
c. Claim his childs allowance as share from the income of the
trust.
2.
Tax exposure before the creation of

trust:
Gross income
P400,00
0
160,00
0
P240,00
0
50,00
0
P190,00
0
Less: OSD (P400,000 x 40%)

Net taxable income
Tax on P140,000
P22,500
12,50
0
P35,000
Income tax due

Note: The allowance is not deductible because the child is
not established as beneficiary of the trust. Furthermore, the
business is not in trust.
50% of the business is created as
trust:
Grantor:
Income tax if 50% is held in trust
(irrevocable)
Gross income (50%)
Less: OSD (P200,000 x 40%)
Net taxable income
P200,000
80,00
0
P120,000
50,00
0
P
70,000
Tax on P70,000
Trust:
Income tax if 50% is held in trust
(irrevocable)
Gross income (50%)
( 8,500)
P200,000

Less: OSD (P200,000 x 40%)
Distribution to beneficiary
Net taxable income
Beneficiary:
Share from the income of trust
Less: OSD (P100,000 x 40%)
Net taxable income
P
80,000
100,000 P180,000
P
20,000
50,00
0
(P
30,000)
P100,000
40,00
0
P
60,000
50,00
0
P
10,000
Tax on P10,000
500
)
Tax savings
P26,000
Problem 13 20
Note: Since the topic is tax planning, the taxpayer should use OSD instead of
itemized deduction because using OSD can give a greater tax savings based
on the given data of this case.
1
.
2
.
Rent income
P 800,000
Less: OSD (P800,000 x 40%)

Net income
320,000
P 480,000
50,000
P 430,000
Tax on P250,000
Add: Tax on excess (P180,000 x 30%)
Income tax due
P 50,000
54,000
P104,000
Rent income Property 2

Less: OSD (P300,000 x 40%)
P
300,000
120,00
0

Net income
Tax on P70,000
Add: Tax on excess (P60,000 x 20%)
P
180,000
50,00
0
P
130,000
P
8,500
12,00
0
Income tax due
( 20,500
)
Less: Income tax in No. 1

2
.
Rent income Property 1

Less: OSD (P500,000 x 40%)
Net income
P
500,000
200,00
0
P
300,000
50,00
0
P
250,000
Tax on P250,000
( 50,000
)
Tax savings
P 33,500
Problem 13 21
1 Not a government project
.
a. Contract price, excluding VAT
(P112,000,000/1.12)
Less: Cost of construction, net of VAT
(P72,800,000/1.12)
Gross income
Less: Operating expenses
Net income
Multiplied by corporate income tax rate
P100,000,00
0
65,000,00
0
P
35,000,000
15,000,00
0
P
20,000,000
30
%

Income tax due
b.
2
.
P
6,000,000
The share of joint venture partners X Co and Y

Co is not
subject to income tax under inter-corporate
dividend rule.
Government project (consortium)

a.
b.
Tax-exempt
Share of co-venturers in the net income
(P20M x 50%)
Income tax due
X
Co.
P10,000,0
00
30
%
P
3,000,000
Y
Co.
P10,000,0
00
30
%
P
3,000,000
Note: OSD is not applicable to co-ventures because their respective shares

are already net of expense.
Problem 13 22
1 Not a government project
.
a. Contract price, excluding VAT
(P89,600,000/1.12)
(P56,000,000/1.12)
Gross income
Less: Operating expenses
Net income
Income tax due
b.

Co is not
dividend rule.
P80,000,000
50,000,000
P30,000,000
10,000,00
0
P
20,000,000
30
%
P
6,000,000

.
a.
b.
Tax-exempt
(P20M x 50%)
Income tax due
X
Co.
P10,000,0
00
30
%
P
3,000,000
Y
Co.
P10,000,0
00
30
%
P
3,000,000
Alternative solution using OSD:

Note: If the joint venture opted to use OSD, it will have a lower income tax
obligation, computed as follows:
1.
Not a government project

a Contract price, excluding VAT
. (P89,600,000/1.12)
(P56,000,000/1.12)
Gross income
Less: OSD (P30,000,000 x 40%)
Net income
Income tax due
b
.
2.
P80,000,000
50,000,000
P30,000,000
12,000,000
P18,000,000
30%
P 5,400,000

Co is not
dividend rule.

a Tax-exempt
.
b
.

(P20M x 50%)
Income tax due
X
Co.
P9,000,00
0
30
%
P
2,700,000
Y
Co.
P9,000,00
0
30
%
P
2,700,000

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

INCOME TAXES OF PARTNERSHIPS,

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Income received by the co-owners is already net of itemized deductions of

Net taxable income

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Less: Personal exemption

Less: OSD (P150,000 x 40%)

Net income before personal exemption

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Final tax on dividend of Marjorie Sison:

The amount received by Grace Ann Subala shall no longer be subjected to

200x income tax due from the estate of Mr. Baguingan:

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

2. Income tax payable from the beneficiary in 200x:

Total income tax payable

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Alternative solution if Trust and beneficiary opted to use OSD

Total gross income trust

Gross income received from income of trust

Total income tax payable

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Gross receipts 2009

Less: OSD (P300,000 x 40%)

Income tax when no income of estate was distributed

Less: Income tax when P150,000 of estates income was

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Tax exposure before the creation of

Less: OSD (P400,000 x 40%)

Income tax due

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Less: OSD (P800,000 x 40%)

Rent income Property 2

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Income tax due

Less: Income tax in No. 1

Rent income Property 1

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

The share of joint venture partners X Co and Y

Government project (consortium)

Note: OSD is not applicable to co-ventures because their respective shares

The share of joint venture partners X Co and Y

Government project (consortium)

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS)

Alternative solution using OSD:

Not a government project

The share of joint venture partners X Co and Y

Government project (consortium)

Share of co-venturers in the net income

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