INCOME

TAXATION
Chapter 5: Taxation of Estates and Trusts
Chapter 6: Taxation of Partnerships and Partners

Group 3
Leader: Alberto Burgos
Members: Joenil Oliveros
Elijah Vindua
Robert Etio
CHAPTER 5
INCOME TAXATION: ESTATES AND TRUSTS

Definition of Terms
Estates or Inheritance – refers to all the properties, rights and obligations of a person which are
not extinguished by his death and also those which have accrued thereto since the opening of the
succession.
Trust – is an agreement created by will or an agreement under which title to property is passed to
another for conversion or investment with the income therefrom and ultimately the corpus or
principal to be distributed in accordance with the directives of the creator as expressed in the
governing instrument.
Trustor or grantor – is the person who establishes a trust.
Beneficiaries – is the person for whose benefit the trust has been created. A beneficiary has
equitable title to the property transferred to the trust, including, generally, the profession and use
of the property.
Fiduciary – is the general term which applies to all persons or corporations that occupy positions
of peculiar confidence towards others, such as trustees, executors, guardians, or administrators,
receivers, or conservators. For income tax purposes, a fiduciary is any person or corporation that
holds in trust an estate of another person or persons.

Taxable Estates
Estates – are legal entities that exist for the purpose of managing and distributing the deceased
person’s property to the heirs. While this is in the estate, the property might earn some income.
The income will be taxed to the estate.
Taxable estate – are estates of deceased person under judicial settlement. Taxation of an estate
begins from the time of death. Any income received after the death shall form part of the income
of the estate.
- Income of estates not under judicial settlement are not taxable to the estate. In this case, a
co-ownership is created and the co-owners, after actual or constructive receipt of the
income are the ones liable to income tax in their individual capacities.
Taxable Trusts
Trust – is a legal arrangement in which an individual could transfer the property to a trustee in
order to have the trustee manage the property for the benefit of the son or daughter. The son and
daughter would be called the beneficiaries of the trust.
 - Trust are a unique form of legal entity, being neither pure taxpayer nor pure conduit.
For a trust to be taxable, it must be irrevocable, meaning it cannot be changed by recall or
cancellation, both as to corpus or principal and income.
In a revocable trust where title to income may be revested in the grantor, the trust itself is not
subject to income tax. It is the grantor who is taxable. In case of trust where the income may be
held or distributed for the benefit of the grantor, such income is likewise taxable directly to the
grantor.

Gross Income
The items of gross income of estates and trusts are the same items of gross income of individuals
as provided in the Tax Code. They Include:
1. Income accumulated in trust for the benefit of unborn or unascertained person or persons
with contingent interest, and income accumulated or held for future distribution under the
terms of the will or trust.
2. Income which is to be distributed currently by the fiduciary to the beneficiaries, and income
collected by a guardian of an infant which is to be held or distributed under as the court
may direct
3. Income received by estates of deceased persons during the period of administration or
settlement of the estate.
4. Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.

Allowable Deductions
Estate or trust is allowed a personal exemption of P20,000. This is regardless of the number of
trusts a beneficiary may receive income from. Aside from the personal exemption of P20,000
allowed, income or trust or estate may be deductible.

Consolidation of Income of Two or more Trusts

When two or more trusts are created by the same grantor and the beneficiary in both trusts is the
same, the taxable income of all the trusts shall be consolidated and the tax computed on such
consolidated income.
Pro Forma:

Consolidated Gross Income xx

Less: Consolidated Deductions xx
Consolidated Taxable Income xx
Less: Personal Exemption xx
Taxable Income xx
Multiply by: Tax rate is Sec. 24(A) x%
Amount of Income Tax on
Consolidated Taxable Income xx

Each trustee shall compute his share of the income tax on the consolidated taxable income based
on the formula:
Taxable income of a trust
before exemption Income tax on Income tax
Consolidated taxable x consolidated taxable = payable by each
income of all trusts income trustee
before exemption
CHAPTER 6
INCOME TAXATION: TAXATION OF PARTNERSHIP AND PARTNERS

Classification of General Partnerships in Taxation

1. General professional partnership. One formed by persons for the sole purpose of exercising
their common profession, no part of the income of which is derived from engaging in any
trade of business.
2. General co-partnership (compania colectiva). A general partnership in which is not a
general professional paratnership.

General Professional Partnership (GPP)

The general professional partnership shall not be subject to the income tax but is required to file
annual income tax return/annual information return for the purpose of furnishing information as to
the items of gross income, deductions, and the names, TINs, addresses and share of each of the
partners
Partners in a general professional partnership shall be liable for income tax in their separate and
individual capacities.
Sec 26 of the NIRC provides that – “For the purposes of computing the distributive share of the
partners, the net income of the GPP shall be computed in the same manner as a corporation.”
- A GPP may claim either the allowed itemized deductions or the optional standard
deduction (OSD) allowed to corporations in claiming the deductions in an amount not
exceeding forty percent (40%) of its gross income.
- Net income determined by either claiming the itemized deduction or OSD from the GPP’s
gross income is the distributable net income from which the share of each partner is to be
determined.

Determination of the Optional Standard Deduction for GPPs and Partners of GPPs Per Rev.
Reg. 8-2018 Implementing TRAIN
- GPP may avail of the OSD only once, either by the GPP or the partners comprising the
partnership.
In computing taxable income defined under Section 31 of the Tax Code, as amended the
following may be allowed as deductions:
a. Itemized expenses which are ordinary and necessary, incurred or paid for the practice of
profession
b. Optional Standard Deduction (OSD)
If the partner also derives other income from trade, business or practice of profession apart and
distinct from the share in the net income of the GPP, the deduction that can be claimed from the
other income would either be itemized deductions or OSD.

Itemized Deductions or Optional Standard deductions for GPPs

Section 2 of Revenue Regulations 2-2010 amended Section 6 of Revenue Regulations 16-2008
with regard to the determination of the optional standard deduction for general professional
partnership and partners of GPPs.
The following rules shall govern the claim of the partners of deductions from their share in the net
income of the partnership:
1. If the GPP availed of the itemized deduction in computing its net income, the partners may
still claim itemized deductions from said share, provided, that, in claiming itemized
deductions, the partner is precluded from claiming the same expenses already claimed by
the GPP.
Hence, if the GPP availed itemized deductions, the partners are not allowed to claim the
OSD from their share in the next income because the OSD is a proxy for all the items of
deductions allowed in arriving at taxable income.
2. If the GPP avails OSD in computing its net income, the partners comprising it can no longer
claim further deduction from their share in the said net income for the following:
i. The partners’ distributive share in the GPP is treated as his gross income not his
gross sales/receipts and the 40% OSD allowed to individuals is specially mandated
to be deducted not from his gross income but from his gross sales/receipts.
ii. The OSD being in lieu of the itemized deductions allowed in computing taxable
income as defined under Section 31 of the Tax Code, it will answer for both the
items of deduction allowed to the GPP and its partners.
3. The type of deduction chosen by the GPP must be the same type of deduction that can be
availed of by the partners.
4. If the partner also derives other gross income from trade, business r practice of profession
apart and distinct from his share in the net income of the GPP, the deduction that he can
claim from his other gross income would follow the same deduction availed of from his
partnership income as explained in the foregoing rules. Provided, however, that if the GPP
opts for the OSD, the individual partner may still claim 40% of its gross income (the R.A.
9504 specially states that for individuals, the basic of the 40% OSD shall be gross sales or
gross receipts) from trade, business and practice of profession but not to include his share
from the net of the GPP.

General Co-Partnerships
Partnerships (other than GPPs), whether registered or not, are considered as corporations and are
therefore taxed as corporations. Consequently, the partners are considered as stockholders and,
therefore, profits distributed to them by the partnership are considered as dividends. The share of
an individual partner in a taxable partnership is subject to a final tax of 6% in 1998, 8% in 1999
and 10% in 2000.
The distributive share of a partner in the net income of the partnership is equal to each partner’s
distributive share of the net income declared by the partnership for a taxable year after deducting
the corresponding corporate income tax.

Co-ownership
A co-ownership shall not be subject to income tax if the activities of the co-owners are limited to
the preservation of the property and the collection of the income therefrom. Such being the case,
it is the co-owners who are taxed individually on their distributive share in the income of the
partnership.
However, should the co-owners invest the income in the business for profit, they would be
constituting themselves into a partnership and as such shall be taxable as a corporation.