Income taxation by valencia chapter 13 (income taxes on partnerships, estates trusts)

95

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

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
1. True
2. False
3. False
4. True

5. True
6. True
7. True
8. False
9. True
10. True
11. False
12. True

– 2 TRUE OR FALSE
– It shall be in writing either as trust inter-vivos or through a will.
– A trustor is the person who establishes the trust, not the trustee.

– P50,000.
– the personal exemption is P50,000.

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%)
Income after tax

P400,000
120,000
P280,000


96

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

Chapter 13: Income Taxes of Partnerships, Estates & Trusts

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
)

P240,000
30%
P 72,000

A
Partnership’s income after tax (P240,000 – P72,000)
Divided by profit and loss ratio
Share of A
Less: Final tax (P84,000) x 10%
A’s 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.

4,000
10,000
P294,000
2
P147,000
10%
P 14,700

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

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

P400,000
2
P200,000


97

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

Chapter 13: Income Taxes of Partnerships, Estates & Trusts

Add: Compensation income
Total income before personal exemption
Less: Personal exemption
Net taxable income

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
Grantor’s 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


98

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

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’s 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

Partner A =
60%
P240,000
300,000
P540,000
50,000
P490,000
P 50,000
72,000
.
P122,000

P1,100,000
Partner B = 40%
P360,000
200,000
P560,000
100,000
P460,000

Total
P 600,000
500,000

P1,100,000

P 50,000
63,000
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

P575,000
60,000
(255,000)
P380,000
114,000
P266,000

Note: Dividends received from domestic corporation by a general co-partnership is tax
exempt.
Computation of partnership share considered as dividends:
Net income (P266,000)

P

M - 40%
106,400

W – 60%
P 159,600


99

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

Chapter 13: Income Taxes of Partnerships, Estates & Trusts

Dividends from domestic corporation (P40,000)
Interest income, net of final tax of 20%, (P8,000)
Distributive partner’s share on general co-partneship
Multiply by final tax rate
Final tax on share on partnership income

P
P

16,000
3,200
125,600
10%
12,560

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:

2.

3.

Income of co-ownership
Multiply by corporate normal tax rate
Income tax as corporation

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

P1,000,000
10%

P 100,000

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

P1,200,000
75,000
P1,125,000

Tax on P500,000

Tax on excess (P625,000) x 32%)
Income tax due

P 125,000
200,000
P 325,000

Mr. Baguingan’s 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 decedent’s death.
2.

Answer
Compensation income
Add: Income received from trust
Total income before personal exemption
Less: Personal exemptions (P50,000 + P100,000)

P250,000
200,000
P450,000
150,000


100

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

SUGGESTED ANSWERS

Chapter 13: Income Taxes of Partnerships, Estates & Trusts

Net taxable income

P300,000

Tax on P250,000
Tax on excess (P50,000 x 30%)
Income tax due

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

3.

P250,000

120,000
P370,000
P 50,000
100,000

150,000
P220,000

Tax on P140,000
Tax on excess (P80,000 x 30%)
Income tax due

P 22,500
24,000
P 46,500

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 be…”A 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 estate’s 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)
.
540,000
(50,000)
490,000

(260,000)
(150,000)
390,000
(50,000)
340,000

(180,000)
.
120,000
(50,000)
70,000

(180,000)
150,000
270,000

(50,000)
220,000

50,000

50,000

8,500

22,500

27,000
.
77,000

.
8,500

20,000
42,500

72,000
.
122,000

Problem 13 – 17
1. Income tax payable by the trust in 200x:


101

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

Chapter 13: Income Taxes of Partnerships, Estates & Trusts

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

P 80,000
120,000
50,000
P 250,000
P 75,000
50,000

Tax on P70,000
Tax on excess (P5,000 x 20%)
Total income tax payable
2.

125,000
P 125,000

50,000
P 75,000
P

8,500
1,000
9,500

P

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

P 50,000
50,000
P 0 .

Total income tax payable

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

P250,000
P100,000
50,000

150,000
P100,000
50,000
P 50,000

Tax on P30,000
Tax on excess (P20,000 x 15%)
Total income tax payable
2.

P2,500
3,000
P5,500

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

P50,000
20,000
P30,000
50,000
(P30,000)

Total income tax payable

P

0

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

P1,050,000
P 30,000
50,000

80,000
P 970,000

.


102

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

Chapter 13: Income Taxes of Partnerships, Estates & Trusts

Tax on P500,000
Tax on excess (P470,000 x 32%)
Income tax due and payable

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
Less: OSD (P300,000 x 40%)
Net income before personal exemption
Less: Personal exemption – basic
Net income subject to income tax

P300,000

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

2.

Income tax when no income of estate was distributed (Case 1 + Case
3)
(P50,000 + P8,500)
Less: Income tax when P150,000 of estate’s income was distributed
(Case 2 + Case 4) = (P27,500 + P27,500)

Tax savings

P 58,500
55,000
P 3,500

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

500,000
(150,000)
350,000
(140,000)
210,000
(50,000)
160,000

200,000
.
200,000
(80,000)

120,000
(50,000)
70,000

200,000
150,000
350,000
(140,000)
210,000
(50,000)
160,000

50,000

22,500

8,500

22,500

.
50,000

5,000
27,500

.
8,500

5,000

27,500

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 child’s 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
Tax on excess (P50,000 x 25%)
Income tax due

P400,000
160,000
P240,000
50,000
P190,000
P22,500
12,500
P35,000

103

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

Chapter 13: Income Taxes of Partnerships, Estates & Trusts

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

P200,000
80,000
P120,000
50,000
P 70,000

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

( 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

Tax on P10,000

(

Tax savings

500)
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
Less: OSD (P800,000 x 40%)
Net income before personal exemption
Less: Personal exemption
Net income

P 800,000
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%)
Net income before personal exemption
Less: Personal exemption
Net income

P 300,000
120,000
P 180,000
50,000
P 130,000


104

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

Chapter 13: Income Taxes of Partnerships, Estates & Trusts

2.

Tax on P70,000
Add: Tax on excess (P60,000 x 20%)
Income tax due

Less: Income tax in No. 1

P

8,500
12,000

Rent income – Property 1
Less: OSD (P500,000 x 40%)
Net income before personal exemption
Less: Personal exemption
Net income

P 500,000
200,000
P 300,000
50,000
P 250,000

( 20,500)

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
Income tax due
b.

2
.

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

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.
P10,000,000

Y Co.
P10,000,000

30%
P 3,000,000

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
b.

The share of joint venture partners X Co and Y Co is not

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


105

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

Chapter 13: Income Taxes of Partnerships, Estates & Trusts

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.
P10,000,000

Y Co.
P10,000,000

30%
P 3,000,000

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
.

P80,000,000
50,000,000
P30,000,000
12,000,000
P18,000,000
30%
P 5,400,000

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

Y Co.
P9,000,000

30%
P 2,700,000

30%
P 2,700,000