Chapter 13 (Income Taxes on Partnerships, Estates Trusts)

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

Chapter 13: Income Taxes of Partnerships, Estates & Trusts

CHAPTER 13

INCOME TAXES OF PARTNERSHIPS, ESTATES & TRUSTSProblem 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. True6. True7. True – because it is withheld with final tax.8. True9. 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. True13. True

Problem 13 – 2 TRUE OR FALSE1. True2. 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. True5. True6. True7. True8. False – P50,000.9. True10. True11. False – the personal exemption is P50,000.12. True

Problem 13 – 3 Problem 13 – 4 1. A 1. A2. B 2. A3. C 3. B4. C 4. A5. B 5. C6. C 6. A7. B 7. B8. B 8. D9. B 9. B10. A 10. A

11. C

Problem 13 – 5 ANet profit from trading business of the partnershipLess: Income tax (P400,000 x 30%)

P400,000 120,000

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Income after taxInterest income, net of final withholding taxDividend incomeTotal income for distribution to partnersDivide by profit and loss ratioShare of each partnerMultiply by dividend tax rateIncome tax on the distributive share of Mitzi Baguingan

P280,0004,000

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

Problem 13 – 6(1)

C

Net income (P400,000 – P160,000) P240,000Multiplied by applicable income tax rate 30% Income tax of the partnership P 72,000

(2)

A

Partnership’s income after tax (P240,000 – P72,000) P168,000Divided by profit and loss ratio 1/2 Share of A P 84,000Less: Final tax (P84,000) x 10% 8,400 A’s share, net of final tax P 75,600

Problem 13 – 7 1. A

J, Opting itemized deduction:Share of J in the Partnership (325,000-175,000) x 70%Other business incomeTotal business incomeLess: Itemized deductions (excluding contribution)Net income before contributionLess: Contribution Actual, P1,750 + (15,000 x 70%) =P12,250 Limit, P155,000 x 10% or P15,500 AllowedNet taxable before personal exemptionLess: Personal exemption (P50,000 + 25,000)Net taxable income of J

P105,000 85,000 P190,000

35,000 P155,000

12,250 P142,750

75,000 P 67,750

2. DR, opting for standard optional deduction:Share in the partnership, gross (P325,000 x 30%)Other business incomeTotal business incomeLess: Optional standard deduction (P162,500 x 40%)Net income before personal exemptionLess: Personal exemption - singleNet taxable income

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 P400,000Divided by profit and loss ratio 2

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Share of each partner P200,000Add: Compensation income 240,000 Total income before personal exemption P440,000Less: Personal exemption 50,000 Net taxable income 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. BThe 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-ownershipLess: Personal exemption – singleNet 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 DIncome after expenses but before distribution to heir P400,000Less: Gross amount distributed to heir (P85,000/85%) P100,000 Exemption 50,000 150,000 Net taxable income P250,000

Problem 13 – 111. B

Income of the grantorIncome of trust A - revocableTotal income of the grantorLess: Total expenses Grantor – business expense Trust A – business expenseGrantor’s income before personal exemptions

P400,000 200,000

P1,000,000 500,000 P1,500,000

600,000 P 900,000

2. DIncome of trust B – irrevocable trustLess: Expenses of irrevocable trust – BNet income before exemptionLess: Personal exemption Net taxable income of all the trust

P200,000 100,000 P100,000 50,000 P 50,000

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3. Not in the choicesIncome of beneficiary (P100,000 – P40,000)Add: Share from trustNet taxable income before personal exemption

P 60,000 50,000 P110,000

Less: Personal exemption 50,000 Net income 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 choicesIncome of beneficiary Add: Share from trustTotal gross income

P100,000 50,000 P150,000

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

Problem 13 – 121. 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 = 60%

Partner B = 40% Total

Partner’s salaryDistribution of balanceTotalLess Personal exemptionNet taxable income

P240,000 300,000 P540,000 50,000 P490,000

P360,000 200,000 P560,000 100,000 P460,000

P 600,000 500,000 P1,100,000

Tax on P250,000 P 50,000 P 50,000Tax on excess (P240,000 x 30%) 72,000Tax on excess (P210,000 x 30%) . 63,000 Income tax due and payable P122,000 P113,000

Problem 13 – 13Gross income – merchandisingDividend received from nonresident foreign corporationOrdinary and necessary expenses – merchandisingNet income before income taxLess: Provision for income tax (P380,000 x 30%)Net income

P575,00060,000

(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: M - 40% W – 60%

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Net income (P266,000)Dividends from domestic corporation (P40,000)Interest income, net of final tax of 20%, (P8,000)Distributive partner’s share on general co-partneshipMultiply by final tax rateFinal tax on share on partnership income

P 106,40016,000

3,200 P 125,600 10% P 12,560

P 159,60024,000

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 – 141. 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 rateIncome tax as corporation

P5,000,000 30% P1,500,000

2. Final tax on dividend of Marjorie Sison:Amount received from co-ownershipMultiply by final tax rate on dividendFinal tax on dividend – income tax withheld

P1,000,000 10% P 100,000

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 – 151. Answer

Conjugal gross income from estateLess: Business expense (P5,000,000 x 40%) Income distributed to beneficiariesConjugal net income

P2,000,000 600,000

P5,000,000

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. 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 P250,000Add: Income received from trust 200,000 Total income before personal exemption P450,000

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Less: Personal exemptions (P50,000 + P100,000) 150,000 Net taxable income P300,000

Tax on P250,000 P50,000Tax on excess (P50,000 x 30%) 15,000 Income tax due P65,000


Alternative solution: If beneficiary opted to use OSD

Compensation incomeAdd: Income received from trust, net of OSD (P200,000 x 60%)Total income before exemptionLess: Personal exemptions: Basic Additional (P25,000 x 4)Taxable income of Mrs. Diana Nievera

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

P 50,000 100,000

P250,000 120,000 P370,000

150,000 P220,000

P 22,500 24,000 P 46,500

3. Answer Total amount received by the childrenMultiply by withholding tax rateTotal withholding taxes

P600,000 15% P 90,000

Problem 13 – 16Correction: 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) P130,500Less: Income tax when P150,000 of estate’s income was distributed (Case 2 + Case 4) = (P77,000 + P42,500) 119,500 Tax savings P 11,000

Supporting computations: Case 1 Case 2 Case 3 Case 4

Gross income 800,000 800,000 300,000 300,000Business deductions: Itemized deductions (260,000) (260,000) (180,000) (180,000) Distributed income of the estate . (150,000) . 150,000Net income before personal exemption 540,000 390,000 120,000 270,000Personal exemption (50,000) (50,000) (50,000) (50,000)Net taxable income 490,000 340,000 70,000 220,000

Income tax for first bracket 50,000 50,000 8,500 22,500Income tax on excess Case 1: (490,000 – 250,000) x 30% 72,000 Case 2: (340,000 – 250,000) x 30% 27,000 Case 4: (220,000 – 140,000) x 25% . . . 20,000 Total income taxes 122,000 77,000 8,500 42,500

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Problem 13 – 171. Income tax payable by the trust in 200x:

Income from house and lotIncome from hollow block business (P10,000 x 12)Income from farmTotal gross income from trust Less: Related expenses (P250,000 x 30%) Amount distributed to the beneficiaryNet income before exemptionLess: ExemptionNet taxable income

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

P 75,000 50,000

P 80,000120,000

50,000 P 250,000

125,000 P 125,000

50,000 P 75,000

P 8,500 1,000 P 9,500

2. Income tax payable from the beneficiary in 200x:Gross income received from income of trustLess: Personal exemptionNet taxable income

Total income tax payable

P 50,000 50,000

P 0 .

P 0 .


Alternative solution – if Trust and beneficiary opted to use OSD

1. Total gross income – trust P250,000Less: OSD (P250,000 x 40%) P100,000 Amount distributed to the beneficiary 50,000 150,000 Net income before personal exemption P100,000Less: Personal exemption 50,000 Net taxable income P 50,000

Tax on P30,000 P2,500Tax on excess (P20,000 x 15%) 3,000 Total income tax payable P5,500

2. Gross income received from income of trust P50,000Less: Optional standard deduction (P50,000 x 40%) 20,000 Net income before exemption P30,000Less: Personal exemption 50,000 Net taxable income (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) P 30,000

P1,050,000

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ExemptionNet taxable income

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

50,000 80,000 P 970,000

P125,000 150,400 P275,400

Problem 13 – 18BNote: 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 P300,000Less: OSD (P300,000 x 40%) 120,000 Net income before personal exemption P180,000Less: Personal exemption – basic 50,000 Net income subject to income tax P130,000

2. Income tax when no income of estate was distributed (Case 1 + Case 3) (P50,000 + P8,500) P 58,500Less: Income tax when P150,000 of estate’s income was distributed (Case 2 + Case 4) = (P27,500 + P27,500) 55,000 Tax savings P 3,500

Supporting computations: Case 1 Case 2 Case 3 Case 4

Gross business receipts 500,000 500,000 200,000 200,000Distribution to the beneficiary . (150,000) . 150,000Balance 500,000 350,000 200,000 350,000OSD – 40% (200,000) (140,000) (80,000) (140,000)Net income before personal exemption 300,000 210,000 120,000 210,000Personal exemption (50,000) (50,000) (50,000) (50,000)Net taxable income 250,000 160,000 70,000 160,000

Income tax for first bracket 50,000 22,500 8,500 22,500Income tax on excess Case 2 & 3: (160,000 – 140,000) x 25% . 5,000 . 5,000 Total income taxes 50,000 27,500 8,500 27,500

Problem 13 – 191. 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, andc. Claim his child’s allowance as share from the income of the trust.

2. Tax exposure before the creation of trust:Gross income P400,000Less: OSD (P400,000 x 40%) 160,000 Net income before personal exemption P240,000Less: Personal exemption 50,000 Net taxable income P190,000

Tax on P140,000 P22,500Tax on excess (P50,000 x 25%) 12,500 Income tax due P35,000

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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%) P200,000Less: OSD (P200,000 x 40%) 80,000 Net income before personal exemption P120,000Less: Personal exemption 50,000 Net taxable income P 70,000

Tax on P70,000 ( 8,500)

Trust:Income tax if 50% is held in trust (irrevocable)Gross income (50%) P200,000Less: OSD (P200,000 x 40%) P 80,000 Distribution to beneficiary 100,000 P180,000Net income before personal exemption P 20,000Less: Personal exemption 50,000 Net taxable income (P 30,000)

Beneficiary:Share from the income of trust P100,000Less: OSD (P100,000 x 40%) 40,000 Net income before personal exemption P 60,000Less: Personal exemption 50,000 Net taxable income 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. Rent income P 800,000Less: OSD (P800,000 x 40%) 320,000 Net income before personal exemption P 480,000Less: Personal exemption 50,000 Net income P 430,000

Tax on P250,000 P 50,000Add: Tax on excess (P180,000 x 30%) 54,000 Income tax due P104,000

2. Rent income – Property 2 P 300,000Less: OSD (P300,000 x 40%) 120,000 Net income before personal exemption P 180,000Less: Personal exemption 50,000 Net income P 130,000

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Tax on P70,000 P 8,500Add: Tax on excess (P60,000 x 20%) 12,000 Income tax due ( 20,500)Less: Income tax in No. 1

2. Rent income – Property 1 P 500,000Less: OSD (P500,000 x 40%) 200,000 Net income before personal exemption P 300,000Less: Personal exemption 50,000 Net income P 250,000

Tax on P250,000 ( 50,000)

Tax savings P 33,500

Problem 13 – 211.

Not a government project

a. Contract price, excluding VAT (P112,000,000/1.12) P100,000,000Less: Cost of construction, net of VAT (P72,800,000/1.12) 65,000,000 Gross income P 35,000,000Less: Operating expenses 15,000,000 Net income P 20,000,000Multiplied by corporate income tax rate 30% Income tax due P 6,000,000

b. The share of joint venture partners X Co and Y Co is notsubject to income tax under inter-corporate dividend rule.

2.

Government project (consortium)

a. Tax-exempt X Co. Y Co.

b. Share of co-venturers in the net income (P20M x 50%)

P10,000,000 P10,000,000

Multiplied by corporate income tax rate 30% 30% Income tax due P 3,000,000 P 3,000,000

Note: OSD is not applicable to co-ventures because their respective shares are already net of expense.

Problem 13 – 221.

Not a government project

a. Contract price, excluding VAT (P89,600,000/1.12) P80,000,000Less: Cost of construction, net of VAT (P56,000,000/1.12) 50,000,000 Gross income P30,000,000Less: Operating expenses 10,000,000 Net income P 20,000,000Multiplied by corporate income tax rate 30% Income tax due P 6,000,000

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

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subject to income tax under inter-corporate dividend rule.

2.

Government project (consortium)

a. Tax-exempt X Co. Y Co.

b. Share of co-venturers in the net income (P20M x 50%)

P10,000,000 P10,000,000


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 projecta. Contract price, excluding VAT (P89,600,000/1.12) P80,000,000

Less: Cost of construction, net of VAT (P56,000,000/1.12) 50,000,000 Gross income P30,000,000Less: OSD (P30,000,000 x 40%) 12,000,000 Net income P18,000,000Multiplied by corporate income tax rate 30% Income tax due P 5,400,000

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

X Co. Y Co. b.

Share of co-venturers in the net income (P20M x 50%)

P9,000,000 P9,000,000


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Chapter 13 (Income Taxes on Partnerships, Estates Trusts)

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Transcript of Chapter 13 (Income Taxes on Partnerships, Estates Trusts)