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Chapter 7: Dealings in Property

CHAPTER 7
DEALINGS IN PROPERTY
Problem 7 – 1 TRUE OR FALSE
1. True
2. False – Ordinary assets
3. False – its real properties shall continue to be treated as ordinary assets.
4. True
5. False – the basis is the same as the cost of the donor or the FMV at the time of donation
whichever is lower.
6. True
7. False – Regardless of gain or loss, a tax should be paid when the shares of stock are sold
in the stock market because the basis of tax is the selling price.
8. False – real property classified as ordinary assets are subject to normal tax.
9. True
10. False – Loss on sale of debt securities sustained by bank can either be classified as
capital loss or ordinary loss. Capital loss if owned by bank as investments but ordinary
loss if acquired for clients’ loan settlements.
11. True
12. False – For ordinary loss, the same; but for capital loss not the same because there is no
capital loss carry over and not holding period for corporation.

Problem 7 – 2 TRUE OR FALSE

1. True
2. False – No, because the 6% final tax is based on the higher of the selling price or zonal
value. If there is loss on sale, the normal tax rate if preferable.
3. False – Not subject to creditable withholding tax.
4. False – … whichever is lower
5. False – equipment used in business operations is an ordinary asset.
6. True
7. False – The basis is the fair market value at the date of donation.
8. True
9. True
10. False – There should be no capital loss because there is an exercise of the option.
11. True
12. True

Problem 7 – 3 TRUE OR FALSE

1. True
2. True
3. True
4. False – Losses from wash sales are not deductible.
5. False – No wash sales if the classes of shares of stocks are different.
6. True
7. True
8. False – Not subject to capital gains tax because the issuance is original and the shares of
stock is owned by the corporation.
9. True
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Chapter 7: Dealings in Property

10. False – subject to either stock transaction tax (traded-in stock market) or capital gains
tax of 5% to 10% based on capital gains (not traded-in the stock market).
11. True
12. False – additional assessments by a corporation from its shareholders are not income;
hence, not taxable income.

Problem 7 – 4
1. False – subject to capital gains tax of 6%.
2. True
3. False - … the speculator sells securities which he does not own.
4. True
5. False – this refers to patent.
6. True
7. True
8. False – if the land is ordinary asset, subject to normal tax.
9. True
10. False – not dealers of securities
11. True
12. True

Problem 7 – 5 Problem 7 – 6
1. C 1. A
2. B 2. D
3. D 3. D
4. C 4. A
5. C 5. C
6. A 6. B
7. B 7. D
8. A 8. D
9. C 9. D
10. C 10. A
11. A
12. D

Problem 7 – 7 D
Real property inventories P10,000,000
Land and building used in business 3,000,000
Vacation house of the executives 1,500,000
Acquired undeveloped properties 500,000
Abandoned properties 600,000
Total amount of ordinary assets P15,600,000

All properties acquired by real estate dealers/developers are ordinary assets. Ordinary assets of
realty companies that were later abandoned and become idle continue to be considered as
ordinary assets. (Rev. Reg. No. 7 – 03)

Problem 7 – 8 C
Interest in partnership P1,000,000
Idle raw lands 100,000
Proceeds of expropriated real property 2,000,000
Capital assets P3,100,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 57
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Chapter 7: Dealings in Property

The transfer of property through expropriation with just compensation is basically a

sale or exchange of property subject to capital gains tax of 6%. (Blas Gutierrez, and
Maria Morales vs. CTA, and CIR, G.R. Nos. L-9738 and L-9771, May 31, 1957)

Problem 7 – 9
1. Letter D
Selling price per 200 sq. meters P 100,000
Multiplied by number of 200 s.m. sold (9,000 – 1,000)/200 40
Total sales P4,000,000
Less: Cost of sales (P2,000,000 x 90%) 1,800,000
Ordinary gain from sale of land P2,200,000

2. Letter A
There is no remaining capital asset of B because the remaining 10% of one hectare is also
used into business as a warehouse.

Problem 7 – 10 B
Fair market value P190,000
Less: Book value of car 150,000
Gain on exchange P 40,000

Problem 7 – 11 C
There is capital loss if the property given away has fair value higher than P200,000 when it was
inherited.

Problem 7 – 12 A
There is no taxable amount in the above transaction because the transaction is an
exchange solely in kind and Mr. A gained control of Veniz Corporation acquiring more
than 50% of the outstanding shares (15/25 = 60%).

Problem 7 – 13 D
Acquisition cost (P200,000 + P20,000) P220,000
Agent’s commission (P500,000 x 10%) 50,000
Deductible cost and expenses P270,000

Problem 7 – 14 A
Sales price P2,000,000
Less: Fair market value at the time of his father’s death 500,000
Gain on sale of farm land P1,500,000

The basis of the property shall be the fair market price or value at the date of acquisition, if the
same was acquired by inheritance. [Sec. 40 (B) (2), NIRC] The value at the date of acquisition
prevails over the fair market value because such is the lower amount.

Problem 7 – 15 A
Sales price P150,000
Cost or basis to the donee (the lower of donor’s cost or
the fair market value when the gift was made ( 50,000)
Capital gain P100,000

No holding period because the seller is a corporation.

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Chapter 7: Dealings in Property

Problem 7 – 16 B
Sales price P700,000
Less: Book value of the car
Acquisition cost P1,000,000
Less: Accum. depn. (P1,000,000/5) x 2 400,000 600,000
Capital gain P100,000
Multiplied by percent of holding period 50%
Reportable capital gain P 50,000

Problem 7 – 17 D
Sales price P200,000
Less: Cost or market whichever is lower) 100,000
Capital gain P100,000

No holding period is allowed for taxpayer other individuals.

Problem 7 – 18 B
Year 1 Year 2
Operating income P200,000 P300,000
Capital asset transactions:
Capital gain – long-term (50%) P 25,000 P 20,000
Capital loss – short-term (100%) ( 40,000) ( 10,000)
Net capital gain (loss) (P15,000) P 10,000
Net capital loss carry-over, limit ( 10,000)
Taxable income P200,000 P300,000

The net capital loss carry-over is limited to only P10,000 instead of P15,000 because the
net capital gains in year 2 is only P10,000.

Problem 7 – 19
1. Letter C
Ordinary gain P50,000
Capital asset transactions:
Short-term capital gain P20,000
Long-term capital gain (P30,000 x 50%) 15,000
Long-term capital loss (P10,000 x 50%) ( 5,000) 30,000
Taxable income before personal exemption P80,000

2. Letter B
Ordinary gain P50,000
Capital asset transactions:
Short-term capital gain P20,000
Long-term capital gain (P30,000) 30,000
Long-term capital loss ( 10,000) 40,000
Taxable income before personal exemption P90,000

Problem 7 – 20
1. Letter C Year 1 Year 2
Ordinary taxable income P 60,000 P180,000
Short-term capital gain (loss) (P400,000) P200,000
Long-term capital gain (loss) (P600,000 x 50%): (P100,000 x 50%) 300,000 (50,000)
NCLCO – applicable in year 2 is P60,000 (P100,000) (60,000)
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Chapter 7: Dealings in Property

Net capital gain P 90,000

Taxable income before personal exemption P 60,000) P270,000

2. Letter B
Ordinary taxable income P180,000
Short-term capital gain P200,000
Long-term capital (loss) (100,000)
Net capital gain P100,000
Taxable income before personal exemption P280,000

Problem 7 – 21 A
Selling Price Cost & Expenses Net Capital Gain
Jewelry P 80,000 P 11,000 P 69,000
M. Benz Car – long term (50%) 400,000 370,000 15,000
Refrigerator 6,000 5,000 1,000
Ford Car 12,000 20,500 (8,500)
P76,500
Problem 7 – 22 A
Zero. If BPI is a dealer of debt and equity securities, the transactions related to securities are not
capital asset transactions but ordinary transactions, hence there is no net capital gain.

Problem 7 – 23 C
First P100,000 (P95,000/95%) x 5% P 5,000
Over P100,000 [(P207,500 – P95,000)/90%] x 10% 12,500
Total final tax P 17,500

Problem 7 – 24 A
Capital gains of November sales (P150,000 – P120,000) P30,000
Multiplied by capital gains tax rate 5%
Capital gains tax P 1,500

Problem 7 – 25
1. Letter A
Sales P1,000,000
Less: Cost of equity securities P900,000
Brokerage fee 40,000 940,000
Net income P 60,000
Multiplied by corporate income tax 30%
Income tax due P 18,000

The dealers in securities are not liable to the stock transaction tax of ½ of 1%
based on the selling price or fair market value, whichever is higher. (Sec. 4 &
5, Rev. Regs. No. 6 – 2008)

2. Letter B
Stock transaction tax (P1,000,000 x 0.005) P5,000

3. Letter C
Sales P1,000,000
Less: Cost of equity securities P900,000
Brokerage fee 40,000 940,000
Capital gains P 60,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 60
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Chapter 7: Dealings in Property

Multiplied by tax rate applicable 5%

Capital gains tax P 3,000

Problem 7 – 26 C
Sold thru Sold direct to
stock market the buyer
Sales price (P140 x 1,000 shares) P140,000 P140,000
Less: Cost of sales 90,000 90,000
Gross profit P 50,000 P 50,000
Broker’s fee (P140,000 x 1%) ( 1,400)
Percentage tax (P140,000 x 0.005) ( 700)
Capital gains tax (P50,000 x 5%) . ( 2,500)
Profit P 47,900 P 47,500
Less: Profit if sold through the stock market 47,900
Decrease in profit (P 400)

Problem 7 – 27 D
Capital gain (P150 – P125) x 100 shares P2,500

Problem 7 – 28
1. Letter D
Sale – March (P120 x 500 shares) P 60,000
Less: Cost (P120,000/1,200 shares) x 500 shares 50,000
Capital gain P10,000

2. Letter C
Sales – May (P90 x 500) P45,000
Less: Cost of sales (P70,000 x 500/700) 50,000
Loss P 5,000

Nondeductible loss (P5,000 x 300/500) P 3,000

3. Letter A
Proceeds of liquidation (P130 x 500) P65,000
Less: Cost – Beginning: (P120,000/1,200) x 200 shares P20,000
- April: (P150 x 300 shares) + P3,000 48,000 68,000
Capital loss (P3,000)

Problem 7 – 29
1. Letter C
Sales proceeds P240,000
Less: Cost of equity investments sold
April 20 (1,650 shares) P161,700
March 20 (P92* x 350 shares) 32,200 193,900
Gain on sale P 46,100

2. Letter C
Cost per share batch March 10 P 92
Number of shares remaining [(800 x 110%) – 350] 530
Cost of remaining shares P48,760

*Computation of cost per share and total amount:

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Chapter 7: Dealings in Property

Total
Cost/share Amount
Mar. 10 (P80,960/880 shares) P92.00 P80,960
April 20 (P161,700/1,650 shares) P98.00 161,700

The shares of stock are increased by the 10% stock dividend.

If the shares of stock sold are properly identified, the identified cost shall first be
deducted.

Problem 7 – 30
1. Letter D
No capital gain on original issuance of company’s own stock P - 0 -
even if issued above par

2. Letter C
Capital gain on reissued shares (P23 – P21) x 2,000) P4,000

Problem 7 – 31 D
Share premium – treasury shares [(P140 – P120) x 900] P18,000
Less: Loss on treasury shares retirement
(P100 – P120) x 100 shares 2,000
Net taxable gain P16,000

Correction: should be: “the remaining one hundred (100) shares were retired.”

There is no taxable gain or deductible loss in the original issuance of shares of stock.
(Sec. 55, Reg. No. 2)

Problem 7 – 32 B
Sales (P180 x 1,000) P 180,000
Cost (P120 x 1,000) (120,000)
Gross profit P 60,000
Multiplied by applicable capital gains tax rate 5%
Capital gains tax P 3,000

Percent of initial payment (P60,000/P180,000) 20.00%

200D capital gains tax due [P3,000 x (P48,000/P180,000)] P 800

The initial payment does not exceed 25%, therefore, installment payment of the capital
gains tax will be allowed. The installment payment per year is P48,000 or [(P180,000 –
P36,000)/3].

Problem 7 – 33
1. Letter C
Liquidating dividend P120,000
Less: Cost of stock investment (P10 x 10,000) 100,000
Reportable capital gain – corporation P 20,000

2. Letter D
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 62
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Chapter 7: Dealings in Property

Liquidating dividend P120,000

Less: Cost of stock investment (P10 x 10,000) 100,000
Capital gains P 20,000
Multiplied by percent to report due to holding period 50%
Reportable capital gain – individual P 10,000

If the shareholder is a corporation, the capital gain is taxable in full. If the shareholder is an
individual and the stocks were held for more than 12 months, the capital gain is taxable only to
the extent of 50% thereof, [Sec. 39 (B), NIRC].

The authors believe that the rule on holding period on shares of stock is applicable in case of
liquidating dividend. However if the shares of stock is sold through the stock market or the direct
to the buyer, the holding period does not apply because the sales are subject to percentage tax or
capital gains tax which are final taxes in nature. [Sec. 6 (c, 3), Rev. Regs. No. 2-82]

Problem 7 – 34
1. Letter C
Cost of the new family home (P2,500,000/P4,000,000) x P2,000,000 P1,250,000

2. Letter B
Sales proceeds P4,000,000
Less: Amount used to acquire new family home 2,500,000
Unutilized sales proceeds P1,500,000
Multiplied by capital gains tax rate 6%
Capital gains tax to be paid P 90,000

Problem 7 – 35 D
Basis of new residence P9,000,000

Capital gains tax (P5,000,000 x 6%) P300,000

Since there was no tax exemption, the entire amount of acquiring the new house and lot shall be
its cost.

Problem 7 – 36 D
Zonal value (P700 x 500) – higher P350,000
Multiplied by capital gains tax rate 6%
Capital gains tax P 21,000

Holding period is not applicable because the property is a real property subject to final tax.

Problem 7 – 37 B
Cost of original residence P6,000,000
Add: Excess of new acquisition cost over sales price
(P15,000,000 – P12,000,000) 3,000,000
Basis of new principal residence P9,000,000

Problem 7 – 38
1. Letter C
Final tax (P1,200,000 x 6%) P72,000

2. Not in the choices

Creditable withholding tax (P500,000 x 1.5%) P7,500
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Chapter 7: Dealings in Property

Problem 7 – 39
1. Letter D
Capital gains tax (P2,500,000 x 6%) – SP, higher P150,000
Add: Documentary stamp tax (P2,500,000 x 1.5%) 37,500
Total tax to the BIR P187,500

2. Letter C
Gross income (P2,500,000 – P1,500,000) P1,000,000
Less: OSD (P1,000,000 x 40%) 400,000
Net taxable income P 600,000
Multiplied by corporate normal tax rate 30%
Income tax due P 180,000
Add: Documentary stamp tax (P2,500,000 x 1.5%) 37,500
Total tax due to the BIR P217,500

The transaction above is VAT-exempt because the selling price (SP) is P2,500,000 and
the real property is for residential dwelling.

Problem 7 – 40 D
Creditable withholding tax:
(P500,000 x 1.5%) x 4 houses P 30,000
(P3,000,000 x 5%) x 2 300,000
P330,000
Income tax still due and payable:
Total revenue (P500,000 x 4) + (P3,000,000 x 2) P8,000,000
Total costs (P200,000 x 4) + (P1,200,000 x 2) (3,200,000)
Gross profit P4,800,000
Operating expenses (2,800,000)
Net income P2,000,000
Multiplied by normal corporate income tax rate 30%
Income tax due P 600,000
Creditable withholding tax ( 330,000)
Income tax still due and payable P 270,000

Problem 7 – 41
1. Letter A
None. No withholding tax because Goldrich Realty Corporation is the buyer not a seller.

2 Letter A
None. No income tax is to be collected from sale of land by the government.

Problem 7 – 42
1. Letter A
Fair market value of V Co.’s share received
(P30 x 250,000) P 7,500,000
Less: Book value of the net asset of E Co. 9,000,000
Loss of E Co. – not recognized (P2,500,000)

2. Letter B
E Co.’s cost or basis is the same as the book value of net
asset it transferred to acquire V Co.’s equity P9,000,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 64
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Chapter 7: Dealings in Property

3. Letter D
Fair value of E Co.’s net asset received P8,000,000
Less: Par value of shares issued (P25 x 250,000) 6,250,000
Nontaxable gain of V Co. P1,750,000
Taxable gain of V Co. P - 0 -

There is no taxable gain because the merger is solely in kind.

4. Letter C
Portion of FMV of V Co.’s shares received
(P7,500,000 x 20/300) P 500,000
Less: Cost of investment 700,000
Loss – not recognized (P200,000)

5. Letter A
Sales price [P30 x (20,000 x 20%)] P120,000
Less: Cost of sale (P700,000 x 20%) 140,000
Loss on sale (P 20,000)

Problem 7 – 43
1. Creditable withholding tax:
b. (P1,000,000 x 30 x 3%) P 900,000
c. (P2,500,000 x 40 x 5%) 5,000,000
Total creditable withholding tax P5,900,000

Note: Sale of socialized housing of a realtor that is a member of

HLURB is not subject to CWT if the sales price is P150,000 per house.

2. Gross profit:
(20 x P150,000 x 25%) P 750,000
(30 x P1,000,000 x 30%) 9,000,000
(40 x P2,500,000 x 35%) 35,000,000 P44,750,000
Less: Optional standard deduction (P44,750,000 x 40%) 17,900,000
Net taxable income P26,850,000
Multiplied by corporate tax rate 30%
Income tax due P 8,055,000
Less: Creditable withholding tax 5,900,000
Income tax still due and payable P 2,155,000

Problem 7 – 44
1. Letter D
Sales in the regular course of business P500,000
Add: Sales of ordinary asset (lot used as warehouse) 200,000
Total sales of ordinary assets P700,000
Less: Cost of sales P300,000
Cost of lot 150,000 450,000
Ordinary gains / income P250,000

2. Letter B
Sales of residential house and lot P1,000,000
Proceeds applied for the acquisition of new residential
house and lot 800,000
Amount subject to final withholding tax P 200,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 65
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Chapter 7: Dealings in Property

Final tax rate 6%

Final tax P 12,000

Problem 7 – 45
Not-traded in Local Stock Exchange:
1. FIFO Method:
Sales proceeds (P200 x 350) P 70,000.00
Less: Cost of shares sold:
December 200A purchased (P86.96 x 100) P 8,696.00
February 200B purchased (P104.35 x 250) 26,087.50 34,783.50
Gain on sale on investment on stock P 35,216.50
Multiplied by percentage of tax 5%
Tax due and payable P 1,760.83

Note: The new cost per share due to 15% stock dividends is computed as follows:

December 200A purchase (P10,000/115) P 86.96

February 200B purchase (P36,000/345) P104.35

2. Moving Average Method:

Sales proceeds (P200 x 350) P 70,000
Less: Cost of shares sold (350 x P100) 35,000
Gain on sale of investment in stock P 35,000
Multiplied by percentage of tax 5%
Tax due and payable P 1,750

*Computation of the new cost per share would be:

Investment in common stocks:
No. of Shares Cost/ share Amount
December 15, 200A 100 P100 P10,000
February 24, 200B 300 P120 36,000
Totals 400 P46,000
Add: 15% stock dividends 60 .
Basis of cost per share 460 P46,000
Divide by number of share 460
New cost per share P 100

Problem 7 – 46
Sales (P150 x 1,000) P150,000
Cost (P80 x 1,000) ( 80,000)
Gross profit P 70,000
Gross profit rate (P70,000/P150,000) 47.667%
Percent of initial payment (P30,000/P150,000) 20.00%

200A (P30,000 x 46.667%) x 5% P700.00

200B (P40,000 x 46.667%) x 5% P933.34
200C (P40,000 x 46.667%) x 5% P933.34
200D (P40,000 x 46.667%) x 5% P933.34
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Chapter 7: Dealings in Property

Problem 7 – 47
Loss Gain
Option money – not exercise P 5,000
Gain on retirement of bonds [(P1,000,000 x 120%)-P1,000,000] P200,000
Shares becoming worthless 20,000 .
P25,000 P200,000
Net gain (P200,000 – P25,000) P175,000

Note: The gain or loss on transaction letter c is zero. In the absence of cost, the fair market value
is assumed as the cost.

Problem 7 – 48
Trinidad is correct. There is a tax savings of P100,000 for opting to pay final taxes.
Final tax (P3,000,000 x 6%) P 180,000
Normal tax (P3,000,000 – P2,200,000) x 30% ( 240,000)
Tax savings ( P60,000)

Problem 7 – 49
No, because the Loakan Corporation is not an individual taxpayer.

Problem 7 – 50
1. Individual taxpayer Year 1 Year 2 Year 3 Year 4
Operating gain (loss) (P100,000) P50,000 P30,000 P80,000
NOLCO (80,000) (20,000)

Capital gain (loss) 20,000 10,000 (40,000) 50,000

NCLCO . (10,000)
Taxable income before p.e. ( P80,000) (P20,000) P10,000 P120,000

The net capital loss of P40,000 in year 3 could not be deducted in its full amount in year 4
because the taxable income in year 3 is only P10,000.

2. Corporate taxpayer
Operating gain (loss) (P100,000) P50,000 P30,000 P80,000
NOLCO (80,000) (20,000)

Capital gain (loss) 20,000 10,000 (40,000) 50,000

.
Taxable income before p.e. ( P80,000) (P20,000) P10,000 P130,000

No NCLCO shall be made if the taxpayer is a corporation.

Problem 7 – 51
Short-term gain - sale of car (P105,000 – P95,000) x 100% P10,000
Long-term gain - sale of jewelry (P80,000 – P50,000) x 50% 15,000
Long-term loss - sale of refrigerator (P4,000 – P8,000) x 50% ( 2,000)
Net capital gains P23,000

Sale of real property classified as capital asset is subject to final tax; hence, not to be
reported in the ITR, [Sec. 24 (D)(1), NIRC]. Related party losses are not deductible. [Sec.
36 (B), NIRC]
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Chapter 7: Dealings in Property

Problem 7 – 52
1. Taxpayer is individual.
Year 4 Year 5 Year 6 Year 7 Year 8
Business income 300,000 400,000 500,000 600,000 700,000
Business expenses 340,000 380,000 450,000 570,000 650,000
Net income before NOLCO ( 40,000) 20,000 50,000 30,000 50,000
NOLCO ( 10,000)
Net income (loss)
from operation ( 40,000) 10,000 50,000 30,000 50,000
Capital gain (loss)
Short-term (100%) 50,000 (40,000) 30,000 30,000 (40,000)
Long term (50%) (20,000) 5,000 (50,000) 5,000 35,000
NCLCO (20,000)
Net capital gain (loss) 30,000 (35,000) (20,000) 15,000 ( 5,000)

Net income (loss) ( 10,000) 10,000 50,000 45,000 50,000

2. Taxpayer is a corporation.
Year 4 Year 5 Year 6 Year 7 Year 8
Business income 300,000 400,000 500,000 600,000 700,000
Business expenses 340,000 380,000 450,000 570,000 650,000
( 40,000) 20,000 50,000 30,000 50,000
NOLCO (20,000) (10,000)
Net income (loss)
from operation ( 40,000) 0 40,000 30,000 50,000
Capital gain (loss)
Short-term 50,000 (40,000) 30,000 30,000 (40,000)
Long term (40,000) 10,000 (100,000) 10,000 70,000
10,000 (30,000) (70,000) 40,000 30,000

Net income (loss) ( 30,000) (30,000) 40,000 70,000 80,000

Problem 7 – 53
1. Sales price P5,000,000
Less: Cost of sale 4,000,000
Gross income P1,000,000
Multiplied by percent of collection (P2,000,000 + P500,000)/5,000,000 50%
Reportable gross income in 200A P 500,000

2. Collection (P2,500,000/5) P500,000

Multiplied by percent of gross income (P1,000,000/P5,000,000) 20%
Reportable gross income in 200B P100,000

3. Sales price P5,000,000

Less: Cost of sale 4,000,000
Gross income P1,000,000

Note: The 25% initial payment rule does not apply for the regular installment sale of personal
property (inventory). The 25% initial payment rule applies only to the casual sale of personal
property classified as capital asset and sale of real property.

Problem 7 – 54
Gain on retirement of bonds [(P500,000 x 120%) – P500,000] P100,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 68
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Chapter 7: Dealings in Property

Gain on short sales [P50,000 – (P2.25 x 20,000)] 5,000

Total capital gains P105,000
Less: Shares becoming worthless at Philippine Airlines 50,000
Net capital gains P 55,000

There is no capital loss in the option money because the taxpayer exercised his option rights.

Problem 7 – 55
1. Capital gains tax (P3,000,000 – P2,000,000) x 6% P 60,000

2. Basis of the new residential home (P1,200,000 x 2/3) P800,000

3. Capital gains tax (P3,000,000 x 6%) P180,000

4. Basis of the new residential home P2,000,000

Problem 7 – 56
1. Deductible loss – Feb. 14, 200x P- 0-

2. Sales P320,000
Less: Cost of sales (P450,000 x 8/9) 400,000
Nondeductible loss – Feb. 14, 200x P 80,000

3. P294,444

4. P215,556
Jan. 20 Feb. 10
Original cost P250,000 P180,000
Add: Nondeductible loss
Jan. 20: (P80,000 x 5/9) 44,444
Feb. 10:: (P80,000 x 4/9) . 35,556
New cost P294,444 P215,556

5. Sales (P60 x 4,000) P240,000

Less: Cost of sales:
Jan. 10: (P50 x 1,000) P 50,000
Jan. 20: (P294,444 x 3/5) 176,667 226,667
Capital gain P 13,333

Problem 7 – 57
1. FMV of ordinary shares (P30 x 25,000) P 750,000
FMV of preference shares (P50 x 5,000) 250,000
Total FMV of shares of stock received P1,000,000
Less: Cost of investment in A Co. transferred (P9 x 100,000) 900,000
Nontaxable gain P 100,000

2. Basis of new shares – allocated Ordinary Preference

Basis of ordinary shares (P900,000 x 75/100) P675,000
Basis of preference shares (P900,000 x 25/100) P225,000

3. Selling price – ordinary shares (P25 x 25,000) P625,000

Less: Cost – ordinary shares - allocated 675,000 (P50,000)
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 69
SUGGESTED ANSWERS
Chapter 7: Dealings in Property

Selling price – preference shares (P60 x 5,000) P300,000

Less: Cost – preference shares – allocated 225,000 75,000
Net gain P 25,000

4. Total sales price (P625,000 + P300,000) P925,000

Multiplied by percentage tax 0.005
Percentage tax P 4,625

5. Capital gains tax (P25,000 x 5%) P 1,250

6. Tax advantage of 5 transaction over 4 (P4,625 – P1,250) P 3,375

Problem 7 – 58
1. B Co. ordinary shares with FMV of P200,000
Land with FMV of 100,000
Cash 50,000
Total P350,000
Less: Cost of A Co.’s shares transferred 180,000
Total gain P170,000

Taxable gain (is limited to the FMV of land and cash) P100,000

2. Cost of A Co.’s shares transferred P200,000

Less: Cash received P50,000
FMV of land received 100,000 150,000
Balance P 50,000
Add: Gain recognized in the exchange 100,000
Basis of B Co. shares received P150,000

3. Basis of land received – FMV of land P100,000

4. Capital gains tax of land (P300,000 x 6%) P 18,000

5. Sales price P250,000

Less: Cost 180,000
Taxable gain P 70,000