(nena Pale QI astsatt cep, eTreOO as Ea TAXATION TAX.2310-Capital Gains & Losses CPA REVIEW SIA/TABAG OCTOBER 2017 LECTURE NOTES. A. CLASSIFICATION OF ASSETS 1) Ordinary 2) Capital B. ORDINARY ASSETS. ‘The following are classified as ordinary assets: 1) Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer; 2) Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; 3) Property used in the trade or business, of a character which is subject to allowance for depreciation; or 4) Real property used in trade or business of the taxpayer, The sale of the above assets will result either to gain or loss. The gain is subject to basic tax while the loss is fully deductible in arriving at the taxable income. D. C. CAPITAL ASSETS All assets not classifiable under ordinary shall be classified as capital assets. Net Capital Gain ~ means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges. Net Capital Loss means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges. PERCENTAGE TAKEN INTO ACCOUNT In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net ‘capital gain, net capital loss, and net income: 1) One hundred percent (100%) if the capital asset has been held for not more than twelve (12) ‘months;, and Fifty percent (50%) if the capital asset has been held for more tran twelve (12) months. 2) MITATION ON CAPITAL LOSSES GENERAL RULE: Losses from sales or exchanges of Capital assets shall be allowed only to the extent of the gains from such sales or exchanges. EXCEPTION: The limitation on capital losses will not apply, provided: 1). The seller is a domestic bank or trust company; 2) A substantial part of whose business is the receipt of deposit; 3) The asset sold is: a. Bond b._Debenture Page 1 of 3 e c Note d. Certificate; or €. Other evidence of indebtedness NETCAPITAL LOSS CARRY-OVER If any taxpayer, other than a corporation, sustains In any taxable year a net capital loss, such loss (in an ‘amount not in excess of the net “taxable income” for such year) shall be treated In the succeeding ‘taxable year as a loss from the sale or exchange of @ capital asset held for not more than twelve (12) months. GAINS & LOSSES FROM SHORT SALES ETC, The following shall be considered capital gains or losses: 1). Gains or losses from short sales; and 2), Gains or losses attributable to the failure to exercise privileges or options to buy or sell property, DETERMINATION OF AMOUNT AND RECOGNIZTION OF GAIN OR LOSS. COMPUTATION OF GAIN OR LOSS Money received PXXX FMV of property received OK Amount Realized PXXX Basis or Adjusted Basis on) Gain (Loss) PXXK BASIS FOR DETERMINING GAIN OR LOSS ‘The basis of property shall be ~ MANNER OF ACOUISTIION BASIS 1) Purchase _ 2) Inheritance Cost Fair Market Value at the time of inheritance [BY Donation | or tne Nast | preceding excerrion Fa Woe value at te Semting Rees | a) WF acquired for tess than an adequate and full consideration in | transferee | money or money's | worth J Amount paid by EXCHANGE OF PROPERTY TAX 2210| St EI, GENERAL RULE: Upon the sale or exchange of property, the entire amount of the gain or loss shall be taxable. EXCEPTION: No gain or loss shall be recognized if: 1) In pursuance of a plan or merger or consolidation a. A corporation, which is @ party to the merger of consolidation, exclianges property solely for stock in a corporation, which Is @ party to the merger or consolidation; or b. A. shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or {A security holder of a corporation, which is a party to the merger or consolidation, Exchanges his securities in such corporation, solely for stock or securities in another Corporation, a party to the merger or consolidation, 2) If property is transferred to a corporation by a person in. exchange for stock or unit of participation in such a corporation of which as a Fesult of such exchange said person, alone or together with others, not exceeding four (4), gains ccontral of said corporation. ‘The term “capital assets” includes a. Stock in trade or other property included in the taxpayer's inventory. b. Real property not used in the trade or business of, taxpayer, ‘c. Property primarily for sale to customers in the ordinary course of trade or business. d, Property used in the trade or business of the taxpayer and subject to depreciation. Under Section 39 (b) of the Tax Code, how much shall be taken into account in computing net income, if a ‘gaia is realized by an individual taxpayer from the sale or exchange of capital assets (other than real properties and shares of stocks) held for more than 12 months? 2, 40% of the net capital gain 1b. 50% of the net capital gain €. 60% of the net capital gain. 4. 100% of the net capital gain, Lots _being sold are classified as a, Capital assets bb. Liquid assets rented when subsequently ¢. Ordinary assets d. Fixed assets The following rules shall be observed when a capital gain or capital loss is sustained by a corporation, except 3. Capital gains and losses are recognized to the extent of its full amount. b. Capital losses are deductible only to the extent of capital gains co Net capital losses are not deductible from ordinary ‘gain or income but ordinary losses are deductible from capital gains. 6, There is a holding period ‘The following taxpayers consider holding period in determiaing ‘the taxable capltal gain or deductible capital loss and carry-over net copital loss the folloviing year, except ~ 10. a4 a. Individual b. Estates «. Corporation di Trusts Rules on capital gains and losses of corporations, except: a. Capital gains and losses are recognized to the extent of 100% regardless of the holding period. b. The net capital loss carry over is not applicable. €. Capital losses are deductible only to the extent of capital gains. 4d, There is a final tax of 5% on real property sold. Which of the following statements is incorrect? a. Capital losses are deductible only to the extent of capital gains b. Ordinary losses are deductible only to the extent of ‘ordinary gains. c. Ordinary gains are alvays subject to basic tax. d. Capital gains may be subject to basic tax. In computing gain. or loss from the sale or other disposition of property acquired as gift or donation, the basis of cost shall be: 2, The fair market value as of the date of acquisition. b. The purchase price plus expenses of acquisition. The latest inventory value. G. ‘The same as it would be in the hands of the donor. Juan received as gift from his mother property purchased ten years ago for 100,000. At the time of donation, the property had a fair market value of 2,000,000. After owning the property for 3 years, juan sold them for P2,500,000. Which of the following statements is correct? @. The gain on the sale was a capital gain of 2,400,000. b. The gain on the sale was an ordinary gain of 2,400,000, c. The holding period of the asset is immaterial d. The gain on the sale going into the net taxable income was ®2,400,000. Andres inherited a piece of lend from his father (purchased by the father at P5,000,000) with a fair market value of 3,000,000 when inherited. He transferred this property to 2 corporation where he is the majority stockholder, Omega’ Corporation, . and received for it newly issued shares of stocks with’ a par value of 4,500,000 and fair market value of 5,000,000. Which of the following is wrong? 2. The gain to Andres on the transfer is P2,000,000, b. The gain to Omega Corporation on the transfer is Po. The basis of the shares in the hands of Omega is 5,000,000. 4. There is no gain from any and all transactions. Manuel transferred his commercial land with 2 cost of 500,000 but with a fair market value of ®750,000 to MHD’ Corporation in exchange of the stocks ‘of the corporation with par value of P1,000,000. As a result Gf the transfer, he became the major stockholder of the corporation, As a result of the transfer: 2. The recognized gain is the difference between the fair market value of the shares of stocks and the cost of the land, b. The recognized galn Is the difference between the par value of the stocks and the fair market value of land. c. No recognized gain because the land was in ‘exchange of purely stocks and Menuel became the majority stockholder. No recognized gain because the land was in exchange of stocks of the corporation.12. Emilio was a stockholder of EAC Co. He owned shares Of stock which he acquired five years ago at a cost of 100,000. EAC was dissolved. He received a liquidating dividend of P140,000. The gain subject to. income tax is - a. An ordinary gain to consider is P40,000. b. A capital gain to consider is P40,000. A ccapital gain to consider is P20,000. d._No gain to consider. 13. Apol_ owns 51% of J) Corporation valued at 25,000,000, Due to bankruptcy, 13 was liquidated. Apel received P20,000,000 as liquidating dividend Was the loss deductible? "3. No, because Apol and J) are considered related parties, b. Yes, the loss is classified as capital loss and could be deducted from capital gain, if any. No, because the amount received by Apol was subject to capital gains tax. i. Yes, because lasses as a rule are deductible. 14, Apolinario generated net income from trade amounting to 400,000. His capital asset transactions during the year are summarized as follows: Holding Period Amount Capital gain S months ——-_-P50,000 Capital gain 2 years, 45,000 Capital loss 12: months 23,000 Capital loss 10 years, 28,000 How much is Apalinario’s taxable income? 2. P484,000 ¢, P435,500 b. 444,000 d. 385,500 15, Based on the above problem, assuming the taxpayer is ‘a corporation, how much is the taxable income? a. P4Bd,000 c. P435,500 b. 444,000 . P385,500 ‘The Next four (4) questions are based on the following information: Emilio, married, with 2 minor children, had the following data: 2014 2015, Business Income pi06,700 Pp 110,800 Interest. on time deposit 2,000 3,000 with BPI ‘Short-term capital gairr 10,000 90,500 Long-term capital gain 20,600 80,200 Short-term capital loss 90,000 20,900 Long-term capital loss 80,400 46. How much is the taxable income of Emilio for year 2014? a: 6,700 fc. P106,700 b, 56,700 d. nil 17. How much Is the taxable income of Emilio for the year 2015? a. 113,800 cc, P13,800 b, 110,800 d. 9260,600 18. If the taxpayer is @ corporation, how much is the taxable income for the year 2012? a. P6,700) ¢. P106,700 b. P56,700 4. ail 49, if the taxpayer is a! corporation, how much is the taxable income for the year 20137 a. P113,800 b. 110,800 c. P13,800 d. 260,600 20. Jose has the following information in 2015: Gross profit from sale of inventories held 50,000 for 2 years Loss on two (2) weeks option contract 5,000 Gain on sale of bonds (holding period: 6 6,000 months) Gain on sale of delivery truck held for 3% . 40,000 years Gain on sale of personal car held for 5 16,000 years Capital gain on direct sale to buyers of | 4,000 shares of stocks held for 4 years Sale of 2-year old residential house (Cost: $50,000 540,000) In 2014, Jose had a net taxable income of °5,000 and 2 capital loss of 7,500. How much is the taxable income? a. P94,000 . P41,500 b. P44,000 ¢, P49,000 21. How much is the capital gains tax? a, P33,200 . P16,600 b, 8200 d. 733,000 °