Chapt 13 Income Taxes Partnerships Estates Amp Trusts

INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 95
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 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 Problem 13 4
1. A 1. A
2. B 2. A
3. C 3. B
4. C 4. A
5. B 5. C
6. C 6. A
7. B 7. B
8. B 8. D
9. B 9. B
10. A 10. A
SUGGESTED ANSWERS
11. C
Problem 13 5 A
Net profit from trading business of the partnership P400,000
Less: Income tax (P400,000 x 30%) 120,000
Income after tax P280,000
Interest income, net of final withholding tax 4,000
Dividend income 10,000
Total income for distribution to partners P294,000
Divide by profit and loss ratio 2
Share of each partner P147,000
Multiply by dividend tax rate 10%
Income tax on the distributive share of Mitzi Baguingan P 14,700
Problem 13 6
(1) C
Net income (P400,000 P160,000) P240,000
Multiplied by applicable income tax rate 30%
Income tax of the partnership P 72,000
(2) A
Partnerships income after tax (P240,000 P72,000) P168,000
Divided by profit and loss ratio 1/2
Share of A P 84,000
Less: Final tax (P84,000) x 10% 8,400
As 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% P105,000
Other business income 85,000
Total business income P190,000
Less: Itemized deductions (excluding contribution) 35,000
Net income before contribution P155,000
Less: Contribution
Actual, P1,750 + (15,000 x 70%) =P12,250
Limit, P155,000 x 10% or P15,500
Allowed 12,250
Net taxable before personal exemption P142,750
Less: Personal exemption (P50,000 + 25,000) 75,000
Net taxable income of J P 67,750
2. D
R, opting for standard optional deduction:
Share in the partnership, gross (P325,000 x 30%) P 97,500
SUGGESTED ANSWERS
Other business income 65,000

Total business income P162,500
Less: Optional standard deduction (P162,500 x 40%) 65,000
Net income before personal exemption P 97,500
Less: Personal exemption - single 50,000
Net taxable income P 47,500
Problem 13 8
Net income from trading business of the partnership P400,000
Divided by profit and loss ratio 2
Share of each partner P200,000
Add: Compensation income 240,000
Total income before personal exemption P440,000
Less: 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. 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 P1,000,000
Less: Personal exemption single 50,000
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 P400,000
SUGGESTED ANSWERS
Less: Gross amount distributed to heir (P85,000/85%) P100,000

Exemption 50,000 150,000
Problem 13 11
1. B
Income of the grantor P1,000,000
Income of trust A - revocable 500,000
Total income of the grantor P1,500,000
Less: Total expenses
Grantor business expense P400,000
Trust A business expense 200,000 600,000
Grantors income before personal exemptions P 900,000
2. D
Income of trust B irrevocable trust P200,000
Less: Expenses of irrevocable trust B 100,000
Net income before exemption P100,000
Net taxable income of all the trust P 50,000
3. Not in the choices

Income of beneficiary (P100,000 P40,000) P 60,000
Add: Share from trust 50,000
Net taxable income before personal exemption P110,000
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 choices

Income of beneficiary P100,000
Add: Share from trust 50,000
Total gross income P150,000
Less: OSD (P150,000 x 40%) 60,000
Net income 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.

SUGGESTED ANSWERS
Net income of the partnership (P1,200,000 P100,0000) P1,100,000
Partner A = 60% Partner B = 40% Total

Partners salary P240,000 P360,000 P 600,000
Distribution of balance 300,000 200,000 500,000
Total P540,000 P560,000 P1,100,000
Less Personal exemption 50,000 100,000
Net taxable income P490,000 P460,000
Tax on P250,000 P 50,000 P 50,000

Tax on excess (P240,000 x 30%) 72,000
Tax on excess (P210,000 x 30%) . 63,000
Income tax due and payable P122,000 P113,000
Problem 13 13
Gross income merchandising P575,000
Dividend received from nonresident foreign corporation 60,000
Ordinary and necessary expenses merchandising (255,000)
Net income before income tax P380,000
Less: Provision for income tax (P380,000 x 30%) 114,000
Net income 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%
Net income (P266,000) P 106,400 P 159,600
Dividends from domestic corporation (P40,000) 16,000 24,000
Interest income, net of final tax of 20%, (P8,000) 3,200 4,800
Distributive partners share on general co-partneship P 125,600 P 188,400
Multiply by final tax rate 10% 10%
Final tax on share on partnership income P 12,560 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 P5,000,000

Multiply by corporate normal tax rate 30%
Income tax as corporation P1,500,000
2. Final tax on dividend of Marjorie Sison:

Amount received from co-ownership P1,000,000
SUGGESTED ANSWERS
Multiply by final tax rate on dividend 10%

Final tax on dividend income tax withheld 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 15
1. Answer
Conjugal gross income from estate P5,000,000
Less: Business expense (P5,000,000 x 40%) P2,000,000
Income distributed to beneficiaries 600,000 2,600,000
Conjugal net income 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%) P1,200,000
Less: Personal exemptions (P50,000 + P25,000) 75,000
Taxable income P1,125,000
Tax on P500,000 P 125,000

Tax on excess (P625,000) x 32%) 200,000
Income tax due 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 P250,000
Add: Income received from trust 200,000
Total income before personal exemption P450,000
Less: Personal exemptions (P50,000 + P100,000) 150,000
Tax on P250,000 P50,000

Tax on excess (P50,000 x 30%) 15,000
Income tax due P65,000
Alternative solution: If beneficiary opted to use OSD
Compensation income P250,000

SUGGESTED ANSWERS
Add: Income received from trust, net of OSD (P200,000 x 60%) 120,000
Total income before exemption P370,000
Less: Personal exemptions:
Basic P 50,000
Additional (P25,000 x 4) 100,000 150,000
Taxable income of Mrs. Diana Nievera P220,000
Tax on P140,000 P 22,500

Tax on excess (P80,000 x 30%) 24,000
Income tax due P 46,500
3. Answer
Total amount received by the children P600,000
Multiply by withholding tax rate 15%
Total withholding taxes 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) P130,500
Less: Income tax when P150,000 of estates 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 800,000 800,000 300,000 300,000
Business deductions:
Itemized deductions (260,000) (260,000) (180,000) (180,000)
Distributed income of the estate . (150,000) . 150,000
Net income before personal exemption 540,000 390,000 120,000 270,000
Personal 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 22,500

Income 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
Problem 13 17
1. Income tax payable by the trust in 200x:
Income from house and lot P 80,000
Income from hollow block business (P10,000 x 12) 120,000
Income from farm 50,000
Total gross income from trust P 250,000
SUGGESTED ANSWERS
Less: Related expenses (P250,000 x 30%) P 75,000

Amount distributed to the beneficiary 50,000 125,000
Net income before exemption P 125,000
Less: Exemption 50,000
Tax on P70,000 P 8,500

Tax on excess (P5,000 x 20%) 1,000
Total income tax payable P 9,500
2. Income tax payable from the beneficiary in 200x:

Gross income received from income of trust P 50,000
Net taxable income P 0 .
Total income tax payable P 0 .
Alternative solution if Trust and beneficiary opted to use OSD
1. Total gross income trust P250,000

Less: OSD (P250,000 x 40%) P100,000
Amount distributed to the beneficiary 50,000 150,000
Net income before personal exemption P100,000
Tax on P30,000 P2,500

Tax on excess (P20,000 x 15%) 3,000
Total income tax payable P5,500
2. Gross income received from income of trust P50,000

Less: Optional standard deduction (P50,000 x 40%) 20,000
Net income before exemption P30,000
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?
SUGGESTED ANSWERS
Total income of trusts (P50,000 + P1,000,000) P1,050,000

Less: Distribution to beneficiary (P10,000 + P20,000) P 30,000
Exemption 50,000 80,000
Tax on P500,000 P125,000

Tax on excess (P470,000 x 32%) 150,400
Income tax due and payable 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 P300,000

Less: OSD (P300,000 x 40%) 120,000
Less: 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 58,500
Less: Income tax when P150,000 of estates 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 500,000 500,000 200,000 200,000
Distribution to the beneficiary . (150,000) . 150,000
Balance 500,000 350,000 200,000 350,000
OSD 40% (200,000) (140,000) (80,000) (140,000)
Net income before personal exemption 300,000 210,000 120,000 210,000
Personal 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 22,500

Income 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 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:

SUGGESTED ANSWERS
Gross income P400,000

Less: OSD (P400,000 x 40%) 160,000
Tax on P140,000 P22,500

Tax on excess (P50,000 x 25%) 12,500
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%) P200,000
Less: OSD (P200,000 x 40%) 80,000
Tax on P70,000 ( 8,500)
Trust:
Income tax if 50% is held in trust (irrevocable)
Gross income (50%) P200,000
Less: OSD (P200,000 x 40%) P 80,000
Distribution to beneficiary 100,000 P180,000
Net taxable income (P 30,000)
Beneficiary:
Share from the income of trust P100,000
Less: OSD (P100,000 x 40%) 40,000
Tax on P10,000 ( 500)
Tax savings P26,000
Problem 13 20
SUGGESTED ANSWERS
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 800,000

Less: OSD (P800,000 x 40%) 320,000
Net income P 430,000
Tax on P250,000 P 50,000

Add: Tax on excess (P180,000 x 30%) 54,000
2. Rent income Property 2 P 300,000

Less: OSD (P300,000 x 40%) 120,000
Tax on P70,000 P 8,500

Add: 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 500,000

Less: OSD (P500,000 x 40%) 200,000
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) P100,000,000
Less: Cost of construction, net of VAT (P72,800,000/1.12) 65,000,000
Gross income P 35,000,000
Less: Operating expenses 15,000,000
Net income P 20,000,000
Multiplied 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

subject to income tax under inter-corporate dividend rule.
SUGGESTED ANSWERS
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 22
1 Not a government project
.
Gross income P30,000,000
Less: Operating expenses 10,000,000
Net income P 20,000,000
b. The share of joint venture partners X Co and Y Co is not

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
Income tax due P 3,000,000 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

Gross income P30,000,000
Less: OSD (P30,000,000 x 40%) 12,000,000
Net income P18,000,000
SUGGESTED ANSWERS

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

.
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
.
Income tax due P 2,700,000 P 2,700,000

Chapt 13 Income Taxes Partnerships Estates Amp Trusts

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Chapt 13 Income Taxes Partnerships Estates Amp Trusts

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) 95

Problem 13 2 TRUE OR FALSE

Other business income 65,000

The net taxable income of Robert is computed as follows:

Less: Gross amount distributed to heir (P85,000/85%) P100,000

3. Not in the choices

Alternative solution of 3: If beneficiary opted to use OSD

4. Not in the choices

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

Tax on P250,000 P 50,000 P 50,000

Computation of partnership share considered as dividends:

Note: In a general co-partnership, the share of individual partner is considered as dividend

Income of co-ownership P5,000,000

2. Final tax on dividend of Marjorie Sison:

Multiply by final tax rate on dividend 10%

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

Tax on P500,000 P 125,000

Tax on P250,000 P50,000

Alternative solution: If beneficiary opted to use OSD

Compensation income P250,000

Tax on P140,000 P 22,500

Income tax for first bracket 50,000 50,000 8,500 22,500

Less: Related expenses (P250,000 x 30%) P 75,000

Tax on P70,000 P 8,500

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

Total income tax payable P 0 .

Alternative solution if Trust and beneficiary opted to use OSD

1. Total gross income trust P250,000

Tax on P30,000 P2,500

2. Gross income received from income of trust P50,000

Total income tax payable P 0 .

Total income of trusts (P50,000 + P1,000,000) P1,050,000

Tax on P500,000 P125,000

1. Gross receipts 2009 P300,000

2. Income tax when no income of estate was distributed (Case 1 + Case 3)

Income tax for first bracket 50,000 22,500 8,500 22,500

2. Tax exposure before the creation of trust:

Gross income P400,000

Tax on P140,000 P22,500

50% of the business is created as trust:

Tax on P70,000 ( 8,500)

Tax on P10,000 ( 500)

Tax savings P26,000

1. Rent income P 800,000

Tax on P250,000 P 50,000

2. Rent income Property 2 P 300,000

Tax on P70,000 P 8,500

2. Rent income Property 1 P 500,000

Tax on P250,000 ( 50,000)

Tax savings P 33,500

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

2 Government project (consortium)

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

2 Government project (consortium)

Alternative solution using OSD:

1. Not a government project

Multiplied by corporate income tax rate 30%

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

2. Government project (consortium)

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