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

95

Chapter 13: Income Taxes of Partnerships, Estates & Trusts

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 8. B 9. B 10. A Problem 13 4 1. A 2. A 3. B 4. A 5. C 6. A 7. B 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%)

P400,000 120,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
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 ) 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 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 P280,000 4,000 10,000 P294,000 2 P147,000 10% P 14,700

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Chapter 13: Income Taxes of Partnerships, Estates & Trusts

P240,000 30% P 72,000

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 75,000 P 67,750

P 97,500 65,000 P162,500 65,000 P 97,500 50,000 P 47,500

Problem 13 8 Net income from trading business of the partnership Divided by profit and loss ratio

P400,000 2

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Share of each partner Add: Compensation income Total income before personal exemption Less: Personal exemption Net taxable income

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Chapter 13: Income Taxes of Partnerships, Estates & Trusts

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 co-owners, (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 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 2. D Income of trust B irrevocable trust Less: Expenses of irrevocable trust B Net income before exemption Less: Personal exemption Net taxable income of all the trust P400,000 P100,000 50,000 150,000 P250,000

P1,000,000 500,000 P1,500,000 P400,000 200,000 600,000 P 900,000 P200,000 100,000 P100,000 50,000 P 50,000

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

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Chapter 13: Income Taxes of Partnerships, Estates & Trusts

3.

Not in the choices Income of beneficiary (P100,000 P40,000) Add: Share from trust Net taxable income before personal exemption Less: Personal exemption Net income

P 60,000 50,000 P110,000 50,000 P 60,000

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%) Net income before personal exemption Less: Personal exemption Net income P100,000 50,000 P150,000 60,000 P 90,000 50,000 P 40,000

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) Partner A = 60% P240,000 300,000 P540,000 50,000 P490,000 P 50,000 72,000 . P122,000 Partner B = 40% P360,000 200,000 P560,000 100,000 P460,000 P 50,000 63,000 P113,000 P575,000 60,000 (255,000) P380,000 114,000 P266,000 P1,100,000 Tota l P 600,000 500,000 P1,100,000

Partners salary Distribution of balance Total Less Personal exemption Net taxable income Tax on P250,000 Tax on excess (P240,000 x 30%) Tax on excess (P210,000 x 30%) Income tax due and payable

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

Note: Dividends received from domestic corporation by a general co-partnership is tax exempt. Computation of partnership share considered as dividends: M - 40% W 60%

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
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 co-partneship Multiply by final tax rate Final tax on share on partnership income P P P 106,400 16,000 3,200 125,600 10% 12,560

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Chapter 13: Income Taxes of Partnerships, Estates & Trusts

P 159,600 24,000 4,800 P 188,400 10% P 18,840

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 P5,000,000 30% P1,500,000 P1,000,000 10% P 100,000

2.

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

3.

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

P5,000,000 P2,000,000 600,000 2,600,000 P2,400,000

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%) Income tax due

P1,200,000 75,000 P1,125,000 P 125,000 200,000 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 P250,000 200,000 P450,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Less: Personal exemptions (P50,000 + P100,000) Net taxable income Tax on P250,000 Tax on excess (P50,000 x 30%) Income tax due

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Chapter 13: Income Taxes of Partnerships, Estates & Trusts

150,000 P300,000 P50,000 15,000 P65,000

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: 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 Tax on excess (P80,000 x 30%) Income tax due P250,000 120,00 0 P370,000 P 50,000 100,00 0 150,00 0 P220,000 P 22,500 24,00 0 P 46,500 P600,000 15% P 90,000

3.

Answer Total amount received by the children Multiply by withholding tax rate Total withholding taxes

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 Supporting computations: Case 1
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% 800,000 (260,000) . 540,000 (50,000) 490,000 50,000 72,000 .

P130,500 119,500 P 11,000 Case 4

300,000 (180,000) 150,000 270,000 (50,000) 220,000 22,500

Case 2
800,000 (260,000) (150,000) 390,000 (50,000) 340,000 50,000 27,000 .

Case 3
300,000 (180,000) . 120,000 (50,000) 70,000 8,500

20,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Total income taxes 122,000 77,000 8,500

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Chapter 13: Income Taxes of Partnerships, Estates & Trusts 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 Net income before exemption Less: Exemption Net taxable income Tax on P70,000 Tax on excess (P5,000 x 20%) Total income tax payable

P 80,000 120,000 50,000 P 250,000 P 75,000 50,000 125,000 P 125,000 50,000 P 75,000 P P 8,500 1,000 9,500

2.

Income tax payable from the beneficiary in 200x: Gross income received from income of trust Less: Personal exemption Net taxable income Total income tax payable

P 50,000 50,000 P 0 . P 0 .

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 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 income before personal exemption Less: Personal exemption Net taxable income Tax on P30,000 Tax on excess (P20,000 x 15%) Total income tax payable 2. Gross income received from income of trust Less: Optional standard deduction (P50,000 x 40%) Net income before exemption Less: Personal exemption Net taxable income Total income tax payable Problem 13 18A Correction: The requirement should be stated as: How much is the income tax due and payable of the two trusts? P250,000 P100,000 50,000 150,000 P100,000 50,000 P 50,000 P2,500 3,000 P5,500 P50,000 20,000 P30,000 50,000 (P30,000) P 0 .

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
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 Tax on excess (P470,000 x 32%) Income tax due and payable 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 Less: OSD (P300,000 x 40%) Net income before personal exemption Less: Personal exemption basic Net income subject to income tax Income tax when no income of estate was distributed (Case 1 + Case 3) (P50,000 + P8,500) Less: Income tax when P150,000 of estates income was distributed (Case 2 + Case 4) = (P27,500 + P27,500)

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Chapter 13: Income Taxes of Partnerships, Estates & Trusts

P1,050,000 P 30,000 50,000 80,000 P 970,000 P125,000 150,400 P275,400

P300,000 120,000 P180,000 50,000 P130,000

2.

P 58,500 55,000 P 3,500 Case 4

200,000 150,000 350,000 (140,000) 210,000 (50,000) 160,000 22,500 5,000 27,500

Tax savings

Supporting computations: Case 1

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 500,000 . 500,000 (200,000) 300,000 (50,000) 250,000 50,000 . 50,000

Case 2
500,000 (150,000) 350,000 (140,000) 210,000 (50,000) 160,000 22,500 5,000 27,500

Case 3
200,000 . 200,000 (80,000) 120,000 (50,000) 70,000 8,500 . 8,500

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 Less: OSD (P400,000 x 40%) Net income before personal exemption Less: Personal exemption Net taxable income Tax on P140,000 P400,000 160,000 P240,000 50,000 P190,000 P22,500

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Tax on excess (P50,000 x 25%) 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 income before personal exemption Less: Personal exemption Net taxable income Tax on P70,000 Trust: Income tax if 50% is held in trust (irrevocable) Gross income (50%) Less: OSD (P200,000 x 40%) Distribution to beneficiary Net income before personal exemption Less: Personal exemption Net taxable income Beneficiary: Share from the income of trust Less: OSD (P100,000 x 40%) Net income before personal exemption Less: Personal exemption Net taxable income Tax on P10,000 Tax savings Problem 13 20

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Chapter 13: Income Taxes of Partnerships, Estates & Trusts

12,500 P35,000

P200,000 80,000 P120,000 50,000 P 70,000 ( 8,500)

P200,000 P 80,000 100,000 P180,000 P 20,000 50,000 (P 30,000) P100,000 40,000 P 60,000 50,000 P 10,000 ( 500) P26,000

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. Rent income Less: OSD (P800,000 x 40%) Net income before personal exemption Less: Personal exemption Net income Tax on P250,000 Add: Tax on excess (P180,000 x 30%) Income tax due 2. Rent income Property 2 Less: OSD (P300,000 x 40%) Net income before personal exemption P 300,000 120,000 P 180,000 P 800,000 320,000 P 480,000 50,000 P 430,000 P 50,000 54,000 P104,000

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Less: Personal exemption Net income Tax on P70,000 Add: Tax on excess (P60,000 x 20%) Income tax due Less: Income tax in No. 1 2. Rent income Property 1 Less: OSD (P500,000 x 40%) Net income before personal exemption Less: Personal exemption Net income Tax on P250,000 Tax savings 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 Income tax due b. The share of joint venture partners X Co and Y Co is not subject to income tax under inter-corporate dividend rule. 50,000 P 130,000 P 8,500 12,000

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Chapter 13: Income Taxes of Partnerships, Estates & Trusts

( 20,500) P 500,000 200,000 P 300,000 50,000 P 250,000 ( 50,000) P 33,500

P100,000,000 65,000,000 P 35,000,000 15,000,000 P 20,000,000 30% P 6,000,000

2 .

Government project (consortium) a. b. Tax-exempt Share of co-venturers in the net income (P20M x 50%) Multiplied by corporate income tax rate Income tax due X Co. P10,000,000 30% P 3,000,000 Y Co. P10,000,000 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) Less: Cost of construction, net of VAT (P56,000,000/1.12) Gross income Less: Operating expenses Net income Multiplied by corporate income tax rate Income tax due

P80,000,000 50,000,000 P30,000,000 10,000,000 P 20,000,000 30% P 6,000,000

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

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Chapter 13: Income Taxes of Partnerships, Estates & Trusts

b.

The share of joint venture partners X Co and Y Co is not subject to income tax under inter-corporate dividend rule.

2 .

Government project (consortium) a. b. Tax-exempt Share of co-venturers in the net income (P20M x 50%) Multiplied by corporate income tax rate Income tax due X Co. P10,000,000 30% P 3,000,000 Y Co. P10,000,000 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) Less: Cost of construction, net of VAT (P56,000,000/1.12) Gross income Less: OSD (P30,000,000 x 40%) Net income Multiplied by corporate income tax rate Income tax due b . The share of joint venture partners X Co and Y Co is not subject to income tax under inter-corporate dividend rule. 2. Government project (consortium) a. Tax-exempt b . Share of co-venturers in the net income (P20M x 50%) Multiplied by corporate income tax rate Income tax due X Co. P9,000,000 30% P 2,700,000 Y Co. P9,000,000 30% P 2,700,000 P80,000,000 50,000,000 P30,000,000 12,000,000 P18,000,000 30% P 5,400,000