INCOME TAX ON ESTATES AND TRUSTS

A. TAXABILITY OF ESTATES

An estate pertains to all the property, rights and obligations of a deceased person, including those that accrue since the opening of succession.

Taxability: An estate is taxable DURING judicial settlement, that is, during the time the estate is the subject of judicial testamentary or intestate proceedings.

Estates are taxed similar to an individual, so the rules on taxable income, those subject to final tax, capital gains tax, the deductions and the rates are similar,
EXCEPT:
1. An estate is required to obtain its own Tax Identification Number (TIN).
2. Distribution of the INCOME to the heirs shall be deductible for purposes of computing taxable income. Such distribution shall be subject to a 15%
withholding tax and will be reported by the heir as part of his personal taxable income.

Personal Exemption: of 20,000 provided under Sec. 62 has been repealed under the TRAIN.

Period to start: The estate is taxed only on its income from the death of the decedent. Any income for the year which was earned prior to death is reported
separately in the individual’s income tax return for the year.

Not under JUDICIAL settlement: An estate NOT under judicial settlement shall be treated as a co-ownership for tax purposes or if the heirs actively participated
in its management or invested additional capital thereto, it may be considered a partnership, taxable as such.

Liability to pay the income tax: the administrator or executor will be liable to pay the income tax liability of the estate.

B. TAXABILITY OF TRUSTS

A trust is the arrangement created by will or an arrangement under which title to property is passed to another for consideration or investment with the income
therefrom and ultimately the corpus to be distributed in accordance with the directions of the creator as expressed in the governing instrument.

Parties to a trust include the trustor, the one who establishes the trust; the trustee, the one in whom confidence is reposed as regards the property for the
benefit of another person; and the beneficiary, for whose benefit the trust has been established.

Kinds of trust:
1. Revocable – one where at any time the power to revest (return) in the grantor title to any art of the corpus of the trust is vested; the trust is not considered
a separate taxable entity and the income from the corpus forms part of the taxable income of the grantor.
2. Irrevocable – where no such right exists or cannot be exercised after an agreed period; Here, the trust itself is considered a separate taxable entity from
the grantor, and is taxed similar to an estate under judicial settlement and similarly entitled to a P20,000 basic personal exemption.

Rules on Taxability:
1. If the income is distributed regularly, such will form part of the taxable income of the beneficiary.
2. If the trust is revocable, the income of the trust forms part of the taxable income of the trustor.
3. Only when the trust is irrevocable and the income is kept in the trust, would there be a need to compute for the income tax liability of the Trust.
4. If the Trust is treated as a separate taxable unit, the rules on individuals are the same, except that the Distribution of INCOME to the beneficiary
shall be deductible for purposes of computing the taxable income of the Trust subject to 15% withholding tax, and the amount distributed (gross of the
withholding tax) will form part of the beneficiary’s taxable income.

Personal Exemption: of 20,000 provided under Sec. 62 has been repealed under the TRAIN.

ILLUSTRATION: G transferred property to F, in trust, and under the terms of the transfer, F should accumulate the income for the benefit of B until the latter
reaches the age of majority. During 2016, the property earned P1,000,000 and incurred expenses of P350,000. P50,000 of the income was distributed to B.
How much is income tax?

Gross Income P1,000,000

Less: Deductions for:
Expenses 350,000
Distribution of income to beneficiary 50,000
Exemption 0 400,000
Taxable Income 600,000
Income Tax P 80,000

1. In the above illustration, G is known as the Grantor, F is known as the Fiduciary, B is known as the Beneficiary.
2. Income distribution to the beneficiary and income set aside or applied for his benefit shall be deductible for the computation of the taxable income of the
trust. (similar to an Estate)
3. The income distributed is subject to a 15% creditable withholding tax. Accordingly, B will receive P42,500 cash, net of the related withholding tax of P7,500
(P50,000 * 15%). The amount to be included in B’s taxable income is still P50,000 with a tax credit of P7,500. (similar to an Estate)
4. The Fiduciary is the one liable to file the income tax return for trusts held.
5. Note that Estates and Trusts are no longer entitled to the P20,000 exemption.

Two or more Trusts: In the event that a Fiduciary holds two or more trusts from the same grantor with the same beneficiary, the income tax shall be consolidated
for such trusts. Accordingly, the gross income and deductions are consolidated as if they are from one property.

INCOME TAX ON PARTNERSHIPS, JOINT VENTURES and CO-OWNERSHIPS

TAXABILITY OF PARTNERSHIPS AND PARTNERS:

KINDS OF PARTNERSHIPS
1. General Professional Partnerships are formed by persons for sole purpose of exercising their common profession, no part of the income of which is
derived from engaging in any trade or business.
2. Taxable Partnerships are those formed by persons for purposes of profits.

A general professional partnership is exempt from income tax; while a taxable partnership is taxed similar to a corporation.

GENERAL PROFESSIONAL PARTNERSHIPS

Sec. 26 of the Tax Code provides:

“Sec. 26. Tax Liability of Members of General Professional Partnerships. - a general professional partnership as such shall not be subject to
the income tax imposed under Chapter III. Persons engaged in business as partners in a general professional partnership shall be liable for income
tax only in their separate and individual capacities.

For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a
corporation.

Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.”

In relation thereto, Sec. 2.57.5(4) of RR No. 2-98, as amended, provides that GPPs are exempt from the Expanded Withholding Tax (EWT). However, Sec.
2.57.2(H) of the same Regulations provide that the income payments made periodically or at the end of the taxable year by a GPP to the partners, such as
drawings, advances, sharings and allowances, stipends, etc. shall be subject to 15% EWT if the income payments to the partner for the current year exceeds
P720,000; and 10%, if otherwise.

Every general professional partnership shall file, in duplicate, a return of its income, except income exempt under the Tax Code, setting forth the items of gross
income and deductions and the names, TIN, Address and Shares of each partner.

ILLUSTRATION: Arthur, married to Guinevere, has two dependent minor brothers. He is a partner of a general professional partnership. He also has a trading
business of his own. The following are data pertaining to taxable year 2016:

Gross Income, trading business P500,000

Expenses, trading business 100,000
Interest Income, Maybank 20,000
Salaries as part-time teacher, gross of withholding tax 100,000

The general professional partnership had a gross income of P1,000,000 and expenses of P100,000. Arthur has a 1/3 share in the profits.

How much is Arthur’s Taxable Income?

Gross Income, trading business 500,000

Expenses, trading business (100,000)
Salaries as part-time teacher, gross of withholding tax 100,000
Share in the Net Income of GPP:
(1,000,000-100,000) x 1/3 300,000
Taxable Income 800,000

NOTE:
1. Net income or distributable net income of a General Professional Partnership (GPP) shall be computed in the same manner as that of a Corporation, as
such, it may claim itemized deductions or optional standard deduction.

However, the partners’ distributive share from GPP income can no longer be subject to further deduction under RR No. 8-2018.

Note also, that individual partners are not allowed to claim the 8% Flat Tax Rate on their distributive share from the GPP since the same is already net of
applicable deductions.

But, 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 the itemized deductions or OSD.

2. A GPP is exempt from tax, thus, the net income of P900,000 (P1M – P100,000) is already the distributable income to the partners, 1/3 (P300,000) of which
is the share of Arthur.
3. The share of a partner in a GPP’s net income shall be considered part of its taxable income subject to Income Tax in their individual capacities.
4. The computation of the taxable income of a partner is just the same as in Taxation of Individuals with just the inclusion of the share in the net income of
GPP.
5. All other income, from trade, other business, rentals, etc. which are not subject to final tax or capital gains tax are considered part of the computation of
taxable income of a partner (individual).
6. The Final Tax rates applicable to individuals (for resident citizens, non-resident citizens, etc.) are also applicable to the partners.
7. The computation of the Income Tax is also the same for individuals, and the graduated income tax table shall apply.
8. Accordingly, Income Tax of Arthur would be P130,000, computed as follows:

First P400,000 30,000

Excess over P500,000: (P800,000 – 500,000) * 25% 100,000
Total 130,000

9. The share of a partner in the net income of GPP is subject to 10% creditable withholding tax; or 15% if the gross income for the year exceeds P720,000
10. In the above illustration, the P300,000 share of Arthur in the income of GPP is subject to 10% withholding tax. If the withholding tax on the salaries as a
part-time teacher amounted to P10,000, the income tax payable of Arthur would be computed as follows:
 Income Tax 130,000
Withholding Tax on Share in the Net Income of GPP
(P300,000 * 10%) (30,000)
Withholding Tax on Salary (10,000)
Income Tax Payable P 90,000

TAXABLE PARTNERSHIPS: for tax purposes, taxable partnerships are taxed, in all respects, similar to a corporation.

Accordingly, it may claim itemized and optional standard deductions subject to the same applicable rules for corporations.

They are also subject to the rules on Final Tax, Capital Gains Tax and Minimum Corporate Income Tax EXCEPT Improperly Accumulated Earnings Tax. (see
discussion under Tax on Corporations)

ILLUSTRATION: A business partnership organized by partners Tom and Jerry, equal partners, has the following data for the calendar year ended 2016:

Gross business income P1,000,000

Deductible expenses 300,000
Yield from deposit substitutes 62,500
Withdrawals on the share in the net income of the partners, net of
withholding tax 150,000
Rent income 300,000
Quarterly payments of income tax 120,000

NOTES:
1. Taxable income, Income Tax and Distributable Income is computed as follows:

Gross business income P1,000,000

Deductible expenses (300,000)
Rent income 300,000
Taxable Income 1,000,000
Income Tax (30%) (300,000)
Distributable Income 700,000

2. The Income Tax of P300,000 is 30% of the taxable income (P1,000,000), the regular corporate income tax rate.
3. Distributable Income will be the net income (taxable income), after tax.
4. The distributable income shall be distributed to the partners based on their profit sharing agreement. Here, Tom and Jerry will each get P350,000 as their
share in the income of the partnership.
5. The share in the net income of the taxable partnership shall be subject to a final tax of 10%, similar to dividends. (see Final Tax under Tax on Individuals)
Thus, the share of a partner in the net income of a taxable partnership is no longer included in the computation of the individual income tax of the partner.
6. Accordingly, Tom and Jerry would each receive cash of P315,000, their share in the profit of the partnership (P350,000) less 10% final tax (P35,000) which
is remitted by the partnership to the BIR; if the partner is a non-resident alien engaged in trade or business in the Philippines, it is subject to 20% final
tax.

Since the partnership is taxed similar to a corporation, the share of the partners from its income is treated similar to dividends.
7. The withdrawals of the partners would not affect the amount of distributable income, ONLY the CASH remittance.
8. A share in the profit of a partnership is deemed received by the partner even if no ACTUAL payment was made, under the principle of constructive
receipt.

TAXABILITY OF JOINT VENTURES

JOINT VENTURES: similar to a taxable partnership, taxable joint ventures are taxed similar to a corporation and the rules on deductions, as well as Capital
Gains Tax, Final Tax and Minimum Corporate Income Tax are likewise applicable.

On the other hand, if the joint venture is considered as exempt, its taxation is similar to a general professional partnership.

Exempt Joint Ventures:

a. If it formed for the purpose of undertaking construction projects;

However, under RR No. 10-2012, the following are the requisites for a joint venture undertaking construction projects to be exempt from income tax:
1. it must be for the undertaking of a construction project; and
2. Should involve joining or pooling of resources by licensed local contracts; that is, licensed as general contractor by the Philippine Contractors
Accreditation Board (PCAB) of the Department of Trade and Industry (DTI);
3. These local contractors are engaged in construction business; and
4. The Joint Venture itself must likewise be duly licensed as such by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade
and Industry (DTI)

Previously, a joint venture between an individual lot-owner and a contractor, who will spend on the construction and development costs, for the purpose
of a construction project, were treated as tax-exempt, under several BIR Rulings. With the above RR, this set-up will no longer be considered as exempt
joint ventures since the individual lot-owner is not a local contractor engaged in the construction business licensed by PCAB.

b. Engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the
government.

ILLUSTRATION: San Miguel Construction and Asia Construction formed a joint venture to undertake a construction project. Profits are to be shared equally. The
following information relate to the individual operations of SMC and AC, as well as the operations of the Joint Venture:
 Asia Construction San Miguel Construction Joint Venture
Gross Income P20,000,000 P30,000,000 P150,000,000
Expenses 5,000,000 10,000,000 50,000,000

NOTE:
1. In the above illustration, if all the requisites of RR No. 10-2012 are present, the Joint Venture shall be treated as tax-exempt and the taxability is similar to
a GPP.
2. Accordingly, the Net Income of P100M (P150,000,000 – 50,000,000) is exempt from tax and is therefore the distributable income to the joint venture
parties.
3. SMC and AC, sharing equally the profits, would receive P50M each.
4. Since the joint venture is exempt from income tax, the share in the distributable income of SMC and AC shall form part of the parties to the joint venture’s
computation of taxable income. Accordingly, taxable income of the companies are as follows:
Asia San Miguel
Construction Construction
Gross Income P20,000,000 P30,000,000
Share in the exempt Joint 50,000,000 50,000,000
Venture
Expenses (5,000,000) (10,000,000)
Taxable Income 65,000,000 70,000,000

5. If, however, the joint venture entered into is for a purpose other than those which are exempt, then the joint venture shall be taxable as a corporation,
and is therefore liable for P30M Income Tax ([P150M – 50M) *30%]
6. The share of AC and SMC in the net income of the joint venture shall be based on the distributable income, after tax, that is, P70,000,000 (P100M taxable
income less P30M tax), or P35M each.
7. The share of AC and SMC from the income of the TAXABLE joint venture shall be treated as inter-corporate dividends, and is therefore exempt from income
tax and final tax (see discussion of Final Tax under Tax on Corporations). Accordingly, it is not included in their separate taxable income, as computed
below:

Asia San Miguel

Construction Construction
Gross Income P20,000,000 P30,000,000
Share in the exempt Joint Venture - -
Expenses (5,000,000) (10,000,000)
Taxable Income 15,000,000 20,000,000

8. In the case however of individual co-venturers, the share in the net income of a taxable joint venture shall be subject to a 10% final tax, similar to that of
dividends received by partners in a taxable partnership.

TAXABILITY OF CO-OWNERSHIPS

There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. (Art. 484, Civil Code)

Taxability: Co-ownerships are generally not taxable because the activities of the co-owners are usually limited to the preservation of the property owned in
common and collection of the income therefrom.

The income of the property owned in common is divided among the co-owners who shall then report in their respective income tax returns their shares of the
income of the co-ownership.

When treated as a partnership: there must be unmistakable intention to form a partnership.

The mere sharing of gross returns does not in itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest
in any property from the returns are divided. (Art. 1769[3], Civil Code)

However, when the income of the co-ownership is invested by the co-owners in business or other income producing properties, the co-ownership becomes
taxable as a corporation because the co-owners have constituted a partnership.