-Co-ownership, Estates and Tn.

1sts
• . I

.,. .

CO-OWNERSHIP

Article 484 of the Civil Code provides that there is co-ownership

, whenever-the ownership of an undivided thing or right belongs to different
persons. The portions belonging to the co-owners in the co-ownership
_ snail be presumed·equal, unless the contrary is proved [Art. 485 (CC)] .

.For taxation purposes, 'there is co-ownership when two or more

heirs or bern~ficiaries inherit ari undivided property from . a decedent, or
. when a donor . makes a gift of an undivided property in fav~x of two or
more donees. inheritance is subject to "Estate Tax" yvhile_· Do_nation is
subj~ct_to "Donor's Tax". ~o~h taxes are not inc9me taxes but classified
as "Transfer Taxes" which _are discussed in Volume 2 (Transfer and
Business T~xatiori). None~hele~s, incomes from such prop·erties_·are
subject to _income tax.

Co-owners are taxed individually_on their distributive share in the

income of the co·-ownership. Meaning,. co-ownership itself is not taxable
for the reason that the -attiviti~s of co-owners.hip-are generally limited to
the preservation of_the common property a~d the colle,ction of the income
therefrom. Should ~he co-owners.invest the income in busines,s for profit,
they would be constitufing themselves into a partnership and such shall be
taxable as a Qorporation- as -discussed ·in Chapter 6 - Income Tax of a
Partnership. · 1

191
 Ctf'-{ffffeter.s'fo E.st«tes vu/7:-Mf:s
. When inherited property remained un~i~ide~ for more than ten
· ( 1O) years and no attempt was ever mad~ ~o d.1~1de the sa~e among the
- -heirs nor was the property under adm1rnstrat1on proceedings nor held
~o trust, 'the property should be considered a~ owned by an unregistered
partnership, con·sequently,· taxable as corpora.t1on.

ILLUSTRATION 1:·.

CASE A:
Ana, Lorna and Fe "bo~ght" a pa,rcel of land for the purpose of improving the
same before leasing it out to interested tenants. -

a
Question: Was co-ownership created?
❖ Answer: No.
~ . Though the property m~y be undivided, it was acquired by the owners
not through gratuitous transfer (inheritance or donation) but by
purchase. Ana,· Lorna and Fe formed a partnership, instead of co-
ownership. Partnership is generally taxable . as a corporation.
Consequently, Ana, Lorna and Fe s~a/1 be considered "shareholders" for
income tax purposes. Income tax of a partnership as well as the
.partners are discussed in Chapter 6.

CASE 8:
On .January 1, 2021, Noy, a resident citizen taxpayer died leaving an undivided
parcel of land to his·heirs Allan, Mar and Pacquito valued at P60,000,000. The
property is an income producing property primarily through renta·Is. In 2021 , the
property earned gross rentals amounting to P15,000,000" while expenditures·
·n~cessary to carry out the operations was P3,000,000. ·

On the other hand, the heirs, ~ho are all engaged in businesses in .their own
individual capacity, provided the following data for 2021 taxable year:

Allan Mar Pacquito

Gross business income P6,000,000 PS,000,000 8,000,000
.Business expenses . 3,000,000· 2,500,000 6,000,000
Income.subject to fi~al taxes (net) ·200,000 320,000 500,000
Question 1: Was a co-ownership created?
❖ Answer: Yes.
• Since the property is undivided, the heirs are considered co.owners.
• · The estate of Noy valued at P60M is not subject to income tax but to estate
tax (a transfer tax discussed in Volume 2).

192
 I '

_. CtJ,-{Hffele.rsf Es&de.s vv£Tr«sf:s

Quest!on 2: As_suming Noy was able to s~cure a partition and three peparate
·land_t1tles were issued by the government before his death, n·aming his heirs as
the rightful owners in his last will and testament, was a. co-ownership created?
I

❖ Answer: No.
The property involved is not an undivide.d prop·erty.

Question 3: · Wh~t ·is the applicable tax for the gratuitous transfer·(inheritance)
of the property .from Noy to his heirs?

❖ Answer: Estate Tax

Estate-tax and Donor's tax (transfer taxes) are discussed in volume 2.

Question 3: How mucn is the taxable income of the co-ownership?

❖ Answer: none
• I
A co-ownership is not a taxable person or entity. Its income, however, is
distributed or shwed by the heirs/donees, thus, taxable to them in their individual
capacity. ·

Question 4: How much is the taxable income of Allan in 2021?

❖ . Answer: P7,000,000
Solution:
Gross income of Allan . P6,000,000
Allowable business expenses of Allan (3,000,000)
Share in n~t income of the co-ownership 4,000,000
[(P15M-3M) /3f .
Taxable income- P7,000,000
'
Question 5: How much is the inco~e ta~ payable of }\Han rn 20217,

❖ Answer: P2,090,000
Solution:
Taxable income . P.7 000 000
I I

TAX DUE (using the graduated tax rates):

1st P2,000,000 , P490,000
In excess of P2M; (P5M x 32%) 1,600,000
Income Tax Payable P.2,090,000
I.

193
 ....~~~~~~---lll'r.~~~
Ctf'-~r'fo EsW:u ~rz;/;66
Income tax. of an estate refers to the tax
on incortle r~ceived by the estate d~ring ·th£, A transfer tax is a tax on
period of administration· or settlement An gratuitous transfer of property
"estate" is a mass of all the property, rights, either through gift/donation
and o.bligations of. a deceased person which (subject to donor's tax) or
are not extinguished by his death, including through inheritance (subject to
those which have accrued the~eto since the estate' tax). A transf~r tax is
opening of succession. · For instanc·e, the · ' not an income tax because
parcel of land worth P60,000,000 in there · is no taxable income
illustration 1:, CASE B .above is the estate of realized from the passage of
Noy. The passag)e of his property to his he'irs property to the heirs upon ·the
upon· his death is subject to, Estate Tax (Refer . death of the decedent.
to Volume 2 - Business and Transfer Taxes).
I

"Administration or Settlement Period' refers to the period when title to

the properties left . by a decedent is not yet finally transferred to the I

heirs/ben~ficiaries. At this•period, the executor named by .the deceased in

his "last will or · testame_
nt", if any, or the administrator appointed by the
court, as·the ,case may ~e, is temporarily in-charge of the administration of
. the estate u·ntil such time t~at the estate is finally distributed to the rightful
. heirs. While under administration, the estat_e may earn income, thus , the
corresponding income tax should be paid. · ·
', • I

ILLUSTRATION 2:
A decedent died leaving the following to his lawful heirs:
Cash P5,000,000
House and lot 15,000,000
Vacant.parcel of land 5,000,000
Commercial building , 30,000,000
Vehicles · . 5,000,000
Total(@ FMVs upon death) P60,000,000

/ ,❖ The p~operties to be received by his lawful heirs upon his death are not
part of their gross income for purposes of computing the heirs' taxable
income·because it does not come within the definition of income.
,.
The estate , of a decedent may be settled judicially or extrajudicially.
Judicial settlement pertains. to settlement of an estate in a _co_urt
proceeding while in extrajudicial settlement, the heirs or benefic1anes
settle for themse·tves the distribution of the estate or their inheritance.

194
 Co-,-tH(TIUrsf &&des vu{Tt-Mts
C/asslfication of {states under settlement or admioistration
■ Estate under 'Judicial" Fiduciary/trustee
administration -+ (administrator!ex,ecutbr} files th~ /TR
and pays the tax due thereon.

Estate_s not under "judicial" -+ Heirs and/or beneficiaries file the /TR
admi,nistration (i.e, of the estate and pay the tax due
extrajudicial settlement) . thereon .

Applicable tax

· The taxable incqme of the estate is computed in the same manner as

an individual taxpayer. Consequently, the tax due i~ therefore computed
using the gradl:Jated income tax rates for individuals under Section 24(A)
of the Tax Code (as amended . under RA 10963 otherwise known as the
"TRAIN Law"). Likewise, an estate is ·required to adopt the cal~ndar year
as its accounting period. Where prior to the ·settlement of the estate, the
executor or administrator sells property of a decedent's estate for more
than the appraised value place ·upon it at the decedent's death, the excess
is income taxable to _the estate.. Where the heir sells the property after the
. settlement, the heir is taxable .individually on a·ny profit derived.

GRADUATED TAX RATE for Individuals, Estat~s and Trusts _

TAXABLE YEAR 2018-2022 TAXABLE YEAR 2023 onwards
INCOME )
TAX TAX
Not over P250,000 Exempt ·Exempt

Over P250,000 but not over 20% of excess over P250,000 15% of excess over P250,000
P400,000

Over P400,000 but not over P30,000 + 25% in excess of ·P22,500 + 20% in excess of P 00,00D
P800,000 P400,000
(, '
Over P800,000 but not over P130,000 + 30% in excess of P102,500 + 25% in excess of PB00,000
P2,000,000 PB00,000

Over P2,000,000 but not over P490,000 + 32% in excess of P402,500 + 30% in excess of P2,000,000
PB,000,000 p2,ooo,ooo
Over P8,000,000 P2,410,000 + 35% in excess P2,202,500 + 35% in exces of
of PB,000,000 PB,000,00Q

195
 ILLUSTRATION 3:-

On November 1, 2020, Juan Dela Cruz died leaving various properf

P30,000,000. The properties are income producing properties deriv_ies ~Orth
income. ~ "l_ast will and testament" was executed by the decedent p~;r ~~~~
death assigning ·GJ as the executor. In 20~1, (whil~ unde: administration), the
~state earned ~,750,000 (net ·of 5% creditable .withholding tax on rent) and
incurred operating expenses of.P2,000,000.

Question: How much is the taxable income of the Estate of Juan Del Cruz 2n
2021? . . · . .

•!• Answer: P560,000

Solution:
11
"Gross rental income (4.75M/95%) · PS,000,000
r
Allow·able deductions (2,000,000)
Taxable income . P3,000,000

TAX DUE (using the graduated tax rate):

1st P2,000,000 P490,000
In excess of P1M @32% 320,000
Income Tax Due P810,000
Less:-CWTax on rentals (250,000)
Income Tax Pa able P560,000

Deduction from estate's gross income

.
. Deductions from the estate's gross income ar~ the same items -of
_deductions (business expenses) allowed for individual taxpayers under
Section 34 of the Tax Code. However, Jn addition. to the usual allowable
busineis expenses, the amount of income of the estate for the taxable
year· which is properly paid or credited during such year to any lega~ee,
heir, or beneficiary should be deducted (also known as special deduction)
_in the .determination of the -estate's taxable income. However, such
amount of income distributed shall be included in the determination of th e
taxable income of the le:gatee/heir/beneficiary.
I.

·' . . C~-{)-[fmersf Esf:«!es cvu{TrM6

th Shtowt A bedlotwh is t~e pro-forma computation 9f the taxa.ble income of
e es a e a~ e heir~/beneficiaries: ,

T~xable income of the Estate

. Grqss income Pxxx
· ~ess: Deductions- . r

Business expenses Pxxx

..-+---special Deduction:
Distribution of estate's income to beneficiaries XXX
Taxable income of the Estate · · • Pxxx
Tax Due [Graduated Tax Rate] Pxxx

Taxable Income of the Beneficiary

Compensation income, if any
Net inc~me of the beneficiary from business Pxxx
and/or practice of profession
Add:
► Amt. received from the income of the estate XXX
Taxable income Pxxx
Tax Due Graduated Tax Rate Pxxx

ILLUSTRATION 4:

On November 1, 2020, Juan Dela Cruz died leaving various properties worth
P30,000,000 to his heirs; Pedro, Ana and Lorna. The properties are income
producing properties deriving rental income. ln ,2021, (while under administration),
the _estate earned P4,750,000 (net of 5% creditable withholding tax on rent) and
incurred opera.ting expenses of P2,000,000.

During 202.1, Pedro (one of the lawful heirs) received P200,000 from the income of
· the estate. Pedro's other income and expenses were as follows:
Compensation income PB00,000
Business income 1,500,000
Business expenses 600,000

Question 1: Assume that the estate is still under administration, how much is the
taxabl~ income of the estate in ·2021?· ·
❖ Answer: P2,800,000

197
 Solution: .
'"Gross" rental inco'me (4.75M + .25M) P5,000,000
Allowable business expenses · (2,000,000)
Distribution of income to Pedro (heir) 200,000
Taxable income · P2,800,000
-
Question 2: Hqw much is the taxabfe income of Pedro?
•!• · Answer: P1 ,900,000 computed as follows:
· Compensation income · · PB00,000
Business·income 1,500,000
Business expenses (600,000)
Amt. .received from '
200,000 ._
. ' . the income- of the estate
.
Ta·xable income i · - P1 ,900,000

· Terrnination_of Judicial/Extrajudicial Settlement

· After ·termination of .judicial/extrajudicial settlement of the

estate where the heirs still ·do not divide the property but instead·
_. . co'ntribute to the estate money, property, or industry with intention to
· · divide the profits between/among themselves, an unregistered partnership
is created and the estate becomes .liable for the payment of corporate
· ·income tax. (Evangelista vs. Collector, ,GR No. L-9996, October 15, 1957;
Ona vs. Commissioner; GR No. L-19342, May 25, 1972).

On the other hand, · if the heirs, without contributing money,

property (?( industry. to improye· the estate, simply divide the fruits thereof
between/among themselves, a co-ownership is ·created, and individual
income tax · is imposed on the income received by each of the heirs
payable in their · separate and individual capacity. (Pascual vs.
Commissioner GR No. L-78133, · October 18, 1988; Obillos vs.
' .
I
Commissioner GR·No. L-68118, October 29, ·1985).
I
I

198
. ;
 Meaning of Trust.

Trust is a · ht ' i
the benefit of . ng on property, real or personal, held by one party for .
h b · ano th er.-, Trust also refers to a legal instrument or device
w er~r/ a person called a Tru~tor or Grantor delivers part or all of his
prope ,es to .another person called Trustee or Fiduciary who administer
and rn~~a~es the property/ies for the benefit 9f designated per.son/s called
Benefl9iar,e~. _T~e term "person" may refer to af) individual or natural
persor,i or a Juridical person like a corporation.

.. · Trust may be ·arranged inter-vivas or ~reated by will under which

title 'to a property is passed to another for conservation or investment with
~he income.therefrom and ultimately the corpus (princi.pal)' to _
be distributed
in accordance with the dire~tions of the creator as expressed in the
governing in~trum~nt.

The SL:Jbject matter of the trust or the must be clearly iden_tified. It is

·important that the- property to be ·transferred in trust must be existing ,
lawful, . definite and transferrable. Anything that . has an economic value
and which a person may own · and to ·which he may own and to_which he
may transfer legal title, by gift or sale, is a property that may be conveyed
in trust such as cash, stocks, bonds real property, livestock and growing
crops and jewelry.

Trust agreement allows· ind!viduals to create sustained benefits for

an individual or entity~ For instance, a parent may place a sum of money
property or other types of financial assets such as equity and debt
instruments· in the hands of a tr~stee for the benefit of an incapacitated or
minor child.
. .

Parties to the Trust . . .

1. Trustor - Person who establishes a trust.
· 2. Truste~ _ One in who~ confidence is reposed as regards prqperty
·. for the benefit of another person.
Fiduciary- any p_erson or corporation that holds in trust an estate qt
._
a nother person or persons.
3. Beneficiary - Person for whose benefit trust is C(eated.

. I

199
 ' .
Tax~bility of lncom~ of Trusts

The income of a trust may be taxable to the trustee, _

beneficiary or
·grantor, as the case may be.

Taxable to the "Trustee" if:

The income of the trust is taxable to the "trustee" if the income ·is to be
accumulated or held for future distribution, whether ordinary income or
. gain from sale of asse~s included in the corpus of the trust. The imposition
of the .tax is not affected by the fact that the ultimate beneficiary .may be a
person exempt from tax. Likewise, the i'ncome of a, trust administered in a .
foreign country is taxable to the trustee. '

Taxable to the "Grantor/Trustor" if:

■ Un~er the term of the trust, the title .to any .part of the corpus or
principal of the trust may be revested to the granter (Revocable Trust).
· The income of the corpus or principal that may be revested to grantor
shall be taxable to the grantor. ;,
■ The income of the .trust m·ay be held or distributed for the benefit of the
grantor. ·
■ Under the term of the trust,' the income of the trust _shall be ·applied for
the benefit of the grantor.
\

· Taxable to the Beneficiaries

The income of the trust is taxable to
the beneficiaries if the income · is to · be · Special Deductions:
distributed to the beneficiaries .. In such a 1. Distribution of the
case, the beneficiaries include in their · . year's income to an
· · heir or beneficiary;
return·, their_di~tributive share. in the net
and
income of the trust. The distribution of 2. , Amount collected by
the year's · inc9me to an heir ot a guardian of an
·beneficiary is ·a special item of deduction infant which is to be
for the trust. At the same time, the held or distributed
income distributed . (actual . or a_s the court may
direct.
constructive) shall be treated as . a
special itern of income to the
hei r/b/enefici ary.

200
 Special deductions are not allowed in case of a trt.ist administered in a
foreign country [Sec.6_1(C)-NIRC]. ' _

Computation of Taxable Income

The principles applied in computing. the taxable income of an estate,

as previously discussed, is also applicable in the determination of the
taxable income of a trust. Hence, ·the Trust's taxable income is likewise
computed in the same manner as an individual taxpayer. The tax due is
also based on the graduated rates provided under Section 24(A) of the
Tax Code as shown in Table 2-2 of Chapter 2 . . Moreover, calendar period
shaH be used as accounting period for tax pu.rposes. A trust is required to ·
adopt the calendar year as it~ accounting period.

· Shown below is-the pro-forma computation of the taxable income of

a Trust and a Beneficiary:

Taxable income of the Trust

Gross income Pxxx.
Less: Deductions
. Business expenses Pxxx I•

Special Deduction: : _.
Distribution of trust's income to beneficiaries . XXX
Taxable income of the Trust Pxxx
Tax Due [Graduated Tax Rate] Pxxx

Taxable Income of the Beneficiary

Compensation income, if any . · I

Net income of the beneficiary

. from business Pxxx
-and/or practice of profession
.._,
Add:
Amt. received from the income_
fi of the trust
,-
XXX
Taxable income of the Bene ,c,ary Pxxx
Tax Due Graduated Tax Rate Pxxx

201
 ..
Classification of Trusts
I ' I

1. Ordinary Trust - the in.come and corpus .o f the trust d<? not revert ·to the
granter. The trust incor:ne is accumulated and held for ·distribution to
the bereficiaries. Under the _T~x Code, .ordinary' trust is any· of the .
following trusts: . · ·
,s A trust where 'the income is accumulated or held for future
drstribution under the terr:ns of a will trust.
■ A trust where the income is to be distributed currently_by the
fiduciary to -the beneficiaries. ·
■ A trust where the income is· accumuJated for the benefit of
unborn or unascertained person · or· persons· with contingent
interest ' , I , .

■ A trust where the income collected by a guardian of a infant is

h~ld or di.stributed as the court .may direct; and
•· A. trust where the income, ·is at the di$cretion of fiduciary, . may
be either distriquted to the beneficiaries or accumulated

2. Revocable 'Trust (Section 63-NIRC)- a trust where at any time, .the

power to revest in the grantor, title to any part of the corpus of the trust
is vested:
■ In the grantor e~.ther alone or tn ·
conjunction w~th any person not -having a. The . income of
. substantial advt;rse .interest in the such pa rt of t~e
disposition of such part of the corpus of trust shall · be
the income therefrom; or included in
• In any person not having a ·substantial computing the
Qdverse interest in the disposition of such taxa.b le income
part of the · · corpus or the . income . of . the . . grantoi-
therefrom. [Sec. 63, Nl~C].

3. Employees' .Trust _·'income tax- shall not apply 'to employee's trust
Which forms part of pension, stock bo~us 1 or profit-sharing plan of an ·
employ·e r 'for the . b.enefit of. some ·, or all ' of his ~·mployees [Section
. 60(8)-NIRC]. Jhe income of an employees' 'trust is likewise exempt
· ,from the payment of final taxes as -well a~ income derived from the
sale of real property whos.e funds are sourced from the employees'
, trus_t fund [Miguel J. Ossorio P~nsion Foundation, Inc. vs. CA and
CIR(G.R. ,NQ .. 162175, June·2a, 2010)].

202
 .. C{}--{}{fJ?t,ersf Es&ue6 ~TrtMts ,
Reqwsttes or ~onditions for Exemption .of Employee's Trust

■ The _employee's . trust must form part of a·

pensiqn, st0 ck bonus, or prqfit-sharing plan of .
a~ employer for the ben~fit of some or all of -Any amo~nt
his employees; actually distributed
• Contri~utions are made to the trust by ·such · to any employee
employer, or employees, or"both; or distributee shall
t • T_he _cqn_tributions are made for the purpose of be taxable to him
d1stnb~tm~ to such- employees the earnings ·in tbe year of
and ~nnc1pal of the fund accumulated by the distribution, to the
trust in accordance with such plan; extent that . it
■ Und~~ the ~rust instrument, it is impos~ible a.t exceeds the amount
any time prior to the satisfaction of all liabilities contributed by such
'
with respect to e,mployees under. the trust , ·tor employee or
any· part of the corpus or income to be (within · distribute~.
the taxable year ~x thereafter) used for, or
.diverted to, purposes other than for the
exclusive benefit of his-_employees.

Con_solidated Income Tax R~turns (Two .or more trusts)

Where two or more trusts is crea~ed by the same truster or granter

and the beneficiary is the same perso~, the following rules shall apply: ·

1. The taxable income of all the trusts shall be consolidated and the tax
computed on such consolidated · income. The tax computed on the
consolidated income shall be apportioned to the different trusts , such that
each trust shall have a share in the income tax on consolidated income.

The format of computation follows (Tax Apportionment/'

.=
0

Tax Apportione d Taxab,le income of the trust x Consolidated

to a Trust Taxable income of all trusts income ta
. ..

2. Such proportion of said tax shall be assessed ~~d collected . from each
trustee which the taxable income of the trust administered by him bears to
the consolidated ihcome of the several trusts. Each trust shall pay an
income tax still due or payable computed as follows:
- Income Tax apportioned to a trust ~xxx
Less: Income tox a lr?ad y paid (xxx)
Income tax payable .P.xxx

203
 -ILLUSTRATION 5:
In 2021, George created three (3) trusts for his minor daughter. The following data
were furnished by t~e trusts during 2021:
Trust Grqss lncom·e Expenses · Net Income Income Tax Paid
1· P5,000,000 P2,500',000 . 122,500,000 P500,000
2 . 10,000;000 5,000,000 · 5,000,000 1,200,- 000
3 15,000,000 7,500,000 . 7,500,000 2,000,000
t

Required: ·Compute the income tax payable of Trust 1, 2 and 3

■ Consolidated Tax·-Due , .
Consolidated Gross Income · /230,000,000
Consolidated expenses · . (15,000,000)
Consolidated t~xab/0 income /215,000,000

Tax Due [Section 24(A)J .

. '
·on 1st PB,000,-000' /22,410,000
In excess over PBM@ 35% 4,450,000
Consolidated Income Tax Due /24,860,000

■ Income Tax ~till Due/Payable of Trust 1

Tax Apportionment to Trust 1 P810,000
(2,500115,000 x P4,860,000)
- L~ss: Income tax ·already paid (500,000)
Income tax still due/payable_ P310,000
·■ In.come Tax Still Due/Payable of Trust 2
Tax Apportionment to Trust 2 P1,620,000
(5,'000/15,000 X 124,860,000)
Less: Income tax already paid (1,200,000)
-Income tax still due/payable P420,000
■ Income Tax Still Due/Payable of Trust 3
Tax Apportionment to Trust 3 P2,430,000
(7,500115,000 X /24,860,000)
Less: Income tax already paid (2,000,000)
Income tax still due/payable P430, 000
..
Filing of Income Tax Returns

. The following persons acting in any fiduciary c~pacity shall file the
income tax return for an estate or trust (Section 65-NIRC):

■ Guardians
■ Trustees
• Executors/administrators

204
 ■. Rec~ivers
• Con_
s ervators .
• All other persons or corporations·acting in any fiduciary capadty

In case of _t~o or more joint fiduciaries, ~efurn filed by one of them

shall be a sufficient cor:,,pli_a nce with the ·r~quirements of the Tax Code.
The return and_ the tax -d ue may be filed and paid in:
• Authorized agent banks; '
• Revenue District Officer·
• Collection agent; '
• Duly ~u~horized city or municipal Treasurer in which the taxpayer
has his legal residence or principal place of business.

PREPARATION OF INCOME TAX RETURN of ari ESTATE

Namahing~ Nah died leaving an estate worth P1 _0,000,000. The estate is
under administration. In 2020, the properties in the estate earned a gross
income of P1 ,200,000 and the estate incurred expenses .of P600,000.
Felipe, the only heir, received P200,000 from the income of the estate.

Required:

1. Determine the· income tax due of the estate and fill-up the applicable
income tax return
Solution:
Gross income P1 ,200,000
OPEX . . (600,000)
Income of the estate distributed to Felipe (200,000)
Estate's taxable net income P400,000'
Income Tax Due of the Estate ·
iTax Table for individuals - _TRAIN Law) PJO, 000

2. Assume that Felipe also earned riet incom~ of P50~000:-ro~ hi~

tr;ding business. What amount should Felipe repo as 1s . axa 1e
income for the year?
Solution:
Gross·income from trading business I
P500,000
Amount received from the Income of the estate 200,000
Taxable net income ofFelipe P700,000
 I . . . < I

J - n,a ••~~~ rn,:kl is

fx1 Grad_ua
~ (CtKlr:lse ·~
ates
,Dst.,::f,:n -
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 a 'Formf«l.

1701 ):\nn'ua1· Income Tax Return

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 PREPARATION OF INCOME TAX RETURN of a TRUST ,

. · On January 1, 2020, P.edro esta~lished a trust, fund for th·e benefit

of his daughter, Ana. , Pedro appointed Atty. Digon.g .as the trustee. The
property transferred to the trust is a piece of land with a dormitory earning
rental income. ··

During the year, the trust earned P40,000,000 r'evenues and

incurred e~penses of P10,000,000. Out of the trust's income, Atty. Digong
transferred P10,000,000 to Ana. Durin,g · the year, Ana earned
compeDsation income of P2,500,000.

Required:
1. D~termine the income tax due of the trust and fill-:-up the applicaple
income tax return of the trust.

· Solution:
Gross income-trust P4_0, 000,.000
· Expense's (1o;ooo, oooJ
Income of the trust given to Ana ., (10,000,000)
Net Taxable Income-trust P20,000, 000 ·.
-·
lncof!1e Tax Due (Tax Table) P6,610,000

2. How much is the taxable income of Ana? ·

.Solution:
. Compensation income . · ·' · P2,500,. 000
Income of the ·trust. distributed to Ana 10,000,000
Net Taxable Income-Ana Pt2, 50('1000 ·:

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ATTY. DIGONG

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214
 ·. CHAPTER EXERCISES
PROBLEMS

P4~ 1. (Estate)
.~ edro dfied two (2) years ago leaving an undivided property ~deriving
income . . His he·irs were .L.ouie
rom . ·rentals
under admi ·. and· Floyd. The property is
were providrn~tdrat,?n th rough the decedent's executor. The following data
e unng the taxable year:

Ren~al !ncome of the estate (gross of 5% tax) P800,000

Deductible operating expenses - estate 420,000

Personal Income/Expenses of the heirs:. Louie Floyd

Gross pusiness income · P 325,000 P 380,000
117,000 105,000
Deductible business expenses·
25,000 30,000
q_ividend from dom.estic corporation
12,000 8,250
-Dividend from foreign corporation
15,000 7,500
Prize, supermarket raffle · ·
1 1-0,000 18,000
Royalty, books

Additional Information:
- Louie is married with 2 dependent children while Floyd is single
without dependent children.
· Required: Determine the following:
1. Income tax payable of the estate
·2 . . Income tax payabie of Louie
3. Income tax payable of Floyd

P4.2. (Estate) _
Pedro died two (2) years ago leaving an undivided property deriving
income from rentals. His, heirs were Louie and Floyd. The property i .
under administration through the decedent's executor. The folio .in .a
were provided during the taxable year:
P1 ,000000
Rental income of the estate l

500 ,0 ·
Oeductib_ le operating expenses (estate)
50 00
Income distributed to Louje 50 00
Income distributed to Floyd 100 000
Dividend income from domestic corpor tion
200 000
Interest income from U.S.$ d posits 100 000
Interest income from peso deposits
. t

215
 Personal Income/Expenses of the heirs:
Louie Floyg_
Gross Income P 325,000 P 380,000
Deductible expenses 117,000 1os,ooo
Dividend from domestic corporation 25,000 30,00Q
Dividend from foreign corporation 12,000 8,250
Prize, supermarket raffle 15,000 7,500
Royalty, books 10,000 18,000

Additional Information:
Louie is married with 2 dependent children while Floyd is sing!
without dependent children.

Required: Determine the following:

1. Income tax payable of the estate
2. Income tax payable of Louie
3. Income tax payable of Floyd

P4.3. (Trust)
Mr. Masigasig created a trust in · favor of Pedro. A large sum of money
was entrusted to BOO (Trustee), the income of which is accumulated in
favor of Pedro. The following data w~re provided:

Gross income of the trust P3 ,000 ,000

Deductible business expenses of the trust 1,800 ,000
Income d1stributed to Pedro during the year 200 000
Dividend income from domestic corporation 100,000
Dividend income from resident foreign 100,000
corporation
Interest ir:,come from U.S.$ deposits 200 1000
Interest income from peso deposits ' 100,000

Personal Income and Expenses of Pedro

Compensation income 800 0 ·0
Rental income (net) 475 ; 1
• 0
Rental expenses ,. 0 0
Royalty income, books • I ' 0
Other royalty income 0
Dividend from dom : stic corpor tion .o000
Divid(:md from for ign corpor tian 8 2 ·0
Prize, S&R raffle 15000
Lotto winnings 1,0 000 000
Quarterly tax payments 120 0 .

21 .
 Required: D:etermine the following:
, 1. Income tax payable of the trust
- 2. Income tax pay'able of Pedro

MULTIPLE CHOICE. Choose ~he letter of the correct answer.

1. It arises when two· or· more heirs or beneficiaries inherit an undivided

property from a d~cedent, o·r when a donor makes a gift of an
.. undivided property in favor of tw·o or more donees
a. Partnership _ c. Joint account
b. Trust.· d. Co-ownership

2. Which qf the following shall qualify as co-ownership?

I. Successton by several heirs to an undivided estate, the estate
is not under administration;
11. Donation of property to two, or more beneficiaries.
a. Both I and 11 · . c. I only
b. Neither I nor II d. II only

Use the following data for the next three (3) questions:

Ana, Lorna, and Fe, are the heirs of Pedro who died o'n Nov. 1, 2020. The
properties of Pedro comprised solely of real property valued at
PS0,000,000 at the time of his death. The property is primarily deriving
rental income. In 2021, the property remained undivided and it derived a
net rental income of P15,000~000.

3. For income tax purposes, the heirs will be tax on net rental income
from the inherited property for the year 2021 as:
a. Partners in a commercial partnership
b. Partners in a ge,neral professional partnership
. c. Partners in an unregistered co-partnership
d. Co-owners

4. What amount should be reported as ·taxable income of the co-

ownership?
a. PS0,000,000 c. P14,980,000
b. P15,000,000 d. nil

217
 "'
~~-lerCM~
5. ·what am.aunt should each heir report in their individual returns as the·
share in the net rental income of the property they inherited? ir
a. PS0,000,000 c. P10,000,000
b. P15,000,000 . d. PS,000,000

6. Que_stion 1: ·Is a co-owner~hip taxable?

Question 2: Is the share of co-owner taxable?

Answer to Question 1: No, . because the activities of the co-

owners are limited .:to the preservation of the property and the
· collection of ~ncome therefrom. ' ·

Answer to Question 2: . Yes, because each co-owner is taxed

- individually on th~ir distributive share in- the income of the co-
·ownership .

.a. Answers to both questions are correct.

b.· Only the answer for _Question 1 is wrong.
c. Only the·answer for Question 2 is wrong.
d. Answers to ~oth question_s are wrong.

7. Statement 1; Co-owners_are taxed individually on their distributive

share in the income of the co-ownership .

.Statement 2: Jf. co-owners invest the income in a .co-ownership in

, business for profit, they would constitute them~elves into a partnership
·and as s·uch shall be taxable as corporation.

a. Statements 1 and 2 are f~lse

b. Statement 1 is true but statement '2 is false
c. Statement 1 is false but statement 2 is true
d ... Statements 1 and 2.are true
,J

8. When will aD inherited property be considered as owned by an

unregistered partnership?

I. . When the property remained undivided for more than ten (1 O)

years.
II. · When ·no attempt was ever made to divide the same among
the co-heirs: nor was the property under administration
proceedings nor held in trus~ ·
 a. Only cond!t!6n I is required.
b. - Only ??nd1t1on II is required
c. Conditions I and II are required
d. None of the above

9. It compose·d of all the . · · .

erson which . · pr~pe~y, rights, and obligations of a deceased
h are not extinguished by his death including those which
. ave accrued th ereto since the opening of succ~ssion.
a . . Estate , .
b Q . c. · Legatee
· · evisee d. Testator

10. Income received by,the estate during the pe'riod of administration or

. settlement of the estate, for tax purposes is known as
a. Income of the estate c. Income.of the trustee
· b. Income of the heirs · d. Income of the testator

11. Statement 1: For taxation purposes, the taxable income of the estate
shall be determined in the same manner and basis as in the case of
· individ.ual taxpayers. ·

Statement 2: In·come of the· estate distributed to a be_n~ficiary is

allowable d_eduction from the gross income ~f the estate.

a. Statements 1. and 2 are false

b. ·Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true

12. The following statements refer to the rules in determining the taxable
income and the applicable income tax liability of an estate. Which of
the statements is correct?

1. -The items of gross income of the estate are the·same items as

the items of gross income of individual taxpayers.
11. Deductions from the gross income of the estate are the same
as the items of deductions allowed to an individual taxpayer.
111. In addition to the allowable dedyctions under Section 34 of the
Tax Code, the estate is allowed to deduct the amount of
income of the estate during the taxable year that is paid or
credited to the legatee, heir or beneficiary.
IV. The amount of income ofthe estate during the year that is
paid or credited to the legatee, heir or beneficiary is subject to ·
final withholding tax of 15%.

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 c1ft_« q;er@es - · C(f,-/J{U,Un'fo . Es~es-vufTrtu6
I • •

a. I and !I only c. I', 11, Ill .and IV

b. I, II and Ill orily d. None ·o f the above

13. Which of the following is included in the income of the estate of a

deoedent?

a. Income·received by the .estate of a deceased person during

the period of administration or settlement. of the estate.
b. · Excess of selling price over the appraised value placed upon
th~ property at the time of death, where the property was sold
. after the settlement of the estate.
· c. Appreciation in the value of property p~ssed to the executor or
administrator ·upon death of decedent.
d. Delivery of property in kind to legatee or devisee.

14. Statement 1: Where the estate is under ·judicial administration, the

_income of the estate shall be taxable to the fiduciary or trustee.

Statement 2: Wher~ the estate is not under judicial administration, the

rncome of the estate shall be taxable to the heirs and beneficiaries.

a. Statements 1 and 2 are false

b. Statement 1 is true but statement 2 is .false·
c. Statement 1 is false but statement 2 is true
d. St~tements 1 and 2 c;1re true
' .
15. When an individual taxpayer dies, future income on his property will
be taxed .to · ' ·· · .

· a. · Those who inherit the property after they rec~ive the property.
b. The estate itself, after the heirs have received the property.
c. The individual himself.
d. · None of the above.

16,._S.ta_tement 1: The amount of income of the estate for the taxable year,
which is properly paid or credited during such year to any legatee,
heir, or beneficiary, is a special item -of deduction from the gross
/ income of the estate. ·
. .

Statement 2: An allowance paid to a widow or heir out of the corpus

of the estate, is not deducti_ble from the gross income of the estate.
a. Statemen~s 1 and 2 are false ·
b. Statement 1 is \rue but statement 2 is false

220
 cfter °qercis&s - Ctf,-{/-{(J7lers'fa E.smt&s vu{TrM6
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true

17~Statement 1: When an estate, under administration, has income-

producing properties, the annual income of the estate becomes part of
the. taxable gross estate. ·

Statement 2: When an estate, under administration, has income-

producing properties and its income during the year is distributed to ·
the heirs, the inco.me so ·distributed is taxable to the heirs as .part of
their gross income for the yea.r. ~ I • •

a~ Statements 1 and 2 are false

b. Stateme_nt 1 is true but statement 2 is false
c. Statement 1 is false but statement .2 i$ true
d. Statements 1 and 2 are true

. 18. Statement 1: The income of the estate distributed to the beneficiary

during the year is ·subject to final withholding tax of 15%.

-Statement 2: The withholding tax on the income distributed to the

- beneficiary is creditable against the total tax liability of the beneficiary.

a. Statements 1 and 2 are false

b. Statement 1 is true but ~tatement 2 is false
c. Statement 1 is false but statement 2 ·is true
d. Statements 1 and 2 are true
I •

19. Statement 1,: Where prior to- the settlement of the estate, the executor
or administrator sells property.of a decedent's estate "for more than the
appraised .value place upon it at the decedent's death, the excess is
income' taxable to the estate. ·

Statement 2: Where the devisee, .legatee, or heir sells-the property

- after the settlement, the devisee, legatee, or heir is taxable individually
on any profit derived . .
I
/

a. Statements 1 and '2 are false

b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true ,

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 . l

c(J,~IH(f1lersf Es&aes ,vu[7rq,,ts

. I

use· the following data for the next two questions:

_Namahi_nga Nha ·died _Ii~ 20~0 leaving an estate worth ~10,000,000. The
estate Is· under_ a~m1rn$tration. In 2021, the pro~ertIes in the estate
earned a gross income of P.600,000 and the estate incurred expenses of
P150,000. Francis, one of the heirs, received f2120,000 from the income
of the estate. " ·
. .
20. The taxable income of the ·estate is
a. P480,000 ·c. P310,000
b. ·P45.O,000 d. P330,000

· 21. Assume that Francis, head of the family, also earned net income of
PS00,000 from his trading business . . What amour:,t should Francis
report as his taxable income for 2021?
a. B620,000 c. PS00,000
· b. P570,000 d. P-450,000 .

22. An agreement created by will or an agreement under which title to

property is passed to another·for conservation or investment with the
· inc(?me th~refrom and ultimately the corpus to be distributed in
accordance with the directives of the creator as expressed in the
governing instrument.
a. Estate c. Fiduciary
b. Trust d. Beneficiary

· 23. Whi.ch of the following is correct ·pertaining to estates and trusts?

a. Estates and trusts are tre.ated as separate taxable entities.
, o.The labular rates ~r graduated rate of tax prescribed under
Section 24A for individuals shall be used in computing the
income tax of trusts and estates.
~- The taxable income of estates and trusts shall be determined
in the same manner and basis a's in the case of individual
taxpayers. .
d. All of the above

24~Which of the following statements regarding trust agreement(s) is

correct? ·· ·
I. A trust is a right of property; real or. personal, held by one party
for the benefit of another.
II. The creation of.trusts may either be express or implied.
· Ill. Trusts are treated as separate taxable entities.

222
 a. I, II and Ill c. I and Ill only
b. - I and II only d. I only

25. The followi~g are the classifications of Trusts, except

.a. Ordinary trust . · ,
b. Revocable trust
c. lrr~vocable trust
d. Employer's trust

26. The following statement(s) refer to a Testamentary Trust, except:

I. It is created under a Last Will and Testament.

II. It exists in the Will .only until the death of the Testator.
111. l;"his type of trust is amendable and revocable at any time
during the Testator's lifetime} but becomes irrevocable upon
the Testator's death.
JV. . A Testamentary Trust is considered its own legal entity, so itis
taxed separately from ·the individual Beneficiaries ev~n before
the death of the testator. ·

a. I only c. IVonly
b. If only- d. Ill and IV only
. '
27. Which of the following statement(s) is/are correct description(s) of an
"Ordinary Trust"? · .

I. A trust where.the income is accumulated or held for future

- . , distribution under the terms of a testamentary trust.
II. A trust where-the income is to be distributed currently by the
fiduciary to the beneficiaries.
11( A trust where the· income is accumulated for the benefit of
unborn or unascertained person ·p r persons with contingent
interest.
IV. A trust where the income collected by a guardian of an infant
is held or distribµted as the court may direct.
V. A trust where the income, is at the discretion of the fiduciary,
may,·be either distributed to the beneficiaries or accumulated.

a. I and II only c. I, 11_, Ill and IV only

b. I) 11 and Ill only d. I, II, Ill, ·IV and V

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28. Statement 1: Revocable Trust is a trust in which the power to revest
in the grantor title to any part of the corpus of the trust is vested in the
grantor himself or in any person not having any substantial adverse
interest in the trust corpus on its income.

Statement 2: The income Of a trust will be taxed against grantor if the

income of the trust that may be held or distributed for the benefit of the
grantor.

· a. Statements 1 and 2 are false

b. Statement 1 is true but statement .2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true

29. Statement 1: Income tax shall not apply to employee's trust which
forms part of pension,~ stock bonus, or profit-sharing plan of an
employer for the benefit of some or all of the employees.

Statement 2: Any ,amount actually distributed to any employee or

distributee shall be taxable to. him in the year of distribution to the
· extent that it exceeds the atnount contributed by _such employee or
distributee.

a. Statements· 1 and 2 are false

b. Statement 1 is true but statement 2 is false
· c. Statement 1 is fal.se but statement 2 is true
d. Statements 1 and 2 are true .

30. Statement 1: For taxation purposes, the taxable income of a trust

shall be determined in the same manner and basis as in the case of
individual taxpayers.

Statement 2: Income of a trust distributed to a beneficiary is allowabl'e

deduction from the gross income of the trust.

a., Statements 1 and 2 are false

b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true

224
 31. The following statements refer to the rules in determining the taxable
incom_e and the applicable income tax liability of a trust. Which of the
following statements is/are correct?

I. The items of gross income of the trust are the same items as
the items of gross income of individual taxpayers.
II. Deductions from the gross income of the trust are the same as
the items of deductions allowed to, an individual taxpayer.
111. In addition to the allowable deductions under Section 34 of the
Tax Code, the trust is allowed to deduct the amount of income
of the trust during the taxable year that is paid or credited to
the legatee, heir or beneficiary.
IV. The amount of income of the trust during the year that is paid
. or credited to the legatee, heir or benefi9iary is subject to final
·withholding tax of 15%.

a. I and II only c. I, 11, Ill and IV

b. I, II and Ill only d. None of the above

32. Which of the following statements is not correct?

a. An irrevocable trust is subject to income tax.
b. An irrevocable trust is taxed in the same manner as an
individual taxpayer.
c. An irrevocable trust is taxed -at a rate of 25% of net taxable
income.
d. None of the above

33. Which of the following income of the trust is not taxable to the trust?
a. Income·of a trust which is to be accumulated or held for future
distribution consisting of. ordinary income or gain from the sal,e
of assets included in the corpus of the trust.
b. Income of a trust, whether c~eated by will or deed, for
accumulation of income, whether for an unascertained pers,on
or persons with contingent interest or otherwise.
c. Income of a trust, where under the terms of a will or deed the
trustee may, in his discretion, distribute the income and
accumulate it. · .
d. Income of a trust, which in full in part, is subject to revocation
anytime.

225
 C~er ~mu -- c~~s'fo &ttdu cvu{;~ 6
34 .. Whi~h of the fol.lowing statem~nts is correct regarding revocable
trusts? · ,
I. . ·A revocable trust exists when the _grantor reserves the right to
revoke his power to change at any time any.part of the 'terms
· of the trust. · ·
II. : · The incom.e of the revocable trust is taxable against the
· ·. granter. ·.
a. I only ·c. Both I and II
b~ II only d. Neither I nor II

35. Which._statement is·true? ·Income derived by a trust

a. Is taxable to the beneficiary if such income i~ retained by the
trust.
b. Is taxable to the trust if such income is distributed to
beneficiaries.
c. Is taxed depending on who is in current posses~io_ n of the
income.
· · d.· All 'Of the-above.

36. Statement 1: The income tax of irrevocable trust is taxable in the

same.. manner as ther income of the estate ..
StatenJent 2: In the case of two or ·more trusts created by the· same
pe·rson for the same beneficiary, the taxable income of all trusts shall
· be consolidated ..and the tax shall be based on the con·solidated
income
a. Statements -1 and 2 are false
b. . Statement 1 is tru.e but statement 2 is fals·e
c. · Statement 1 is false but statement 2 is tru~
d. State.ments 1 and '2° are true

37. The income distributed .fo the beneficiaries of_estates and trusts,
except income su,bject to final withholding tax and income exempt
fr-om tax, is subject to · .
a. Creditable withholdin·g tax of 10%
b. · Creditable withholding t~x of 15°%
· c. Final withholding tax .of 20%
d. · Neither final nor creditable withholding tax .

·3a_ Statement 1: Estates ~nd trusts can deduct from the gross -income
the sa·me items of deductions·authorized under the Tax Code as those
allowed ·to individual taxpayers. . .. .
Statement 2: rhe scheduler tax rates under Section 24(A), which are
prescribed for individuals, will be used in computing the income tax of
estates and trusts~

.226 \
 I •

ciyt; Ecrerd,su

a. Statements 1 and 2 are false,

b. Statement 1 is true but statement 2 is false
c: . Statement 1 is false but statement 2 is true
d. Statements 1' and 2 are true

Use the following data for the next two (2) questions: . ·
. Mr. Nag-aalangan created a trust naming his elqest son, Kadudaduda as
revocable beneficiary ·who will receive the income of the trust. If the eldest
son could ·not abide with the terms provided in the _trust _instrument, Mr.
Nag-aalangan could change anytime ·the terms of the _trust. For the
current taxable year, the trust earned a net income of P1 ,000,000. On the
other han'd, the granter earned a compensation income .o f P.1,500,000 and
business income of P1 ,000,000. No part of the income of the trust were ·
distributed to the revocable beneficiary during the year. Determine the
following:·

39: The taxable income of the trust

a. P1 ,000,000 C; . P950,000
b. P980,000 ·-·d: nil

40. The taxable income of th~ grantor

a. P1 ,000,000 c.. P3,000,000
· b. P2,500,000 d. P3,500,000 _

Use the following· data .for the next two (2) questions:
On January 1, 2020, Francis established a trust fund for the benefit of his _
daughter, Princess. Francis appointed Atty. Lo Yer as the trustee. The
property transferred to the trust is a piece· of lot with a dormitory earning
rental i'ncome. ·

buri.ng the year,. ttie trust earned P10,000,000 revenues and incurred
expenses of p2,ooo,ooo. Out of the trust's income, Atty. Lo Yer gave
Princess P1 ,500,000. In the same year, Princess earned compensation
income of P1 ,850,000, net of withholding tax of P650,000. ·

Determine the following:

· 41. Ta~abl~ income -of the trust
a. P5,000,000 C. P8,000,000
b. P6,500,000 d. P1 o·,poo,000

42. Taxable income of Princess

a. P1 ,500,000 c. P2,500 ,000
. b. P1 ,850,000 d. P4,000,.000

227
 Use the following data for the next two (3) questions:

In 2021, Mr. Mapagbigay created two (2) trusts for· his minor son, Lucky
During the year, the two trusts earned_net,income as follows: : ·

Trust 1 P4,000,000
Trust 2 -6,000,000

. Each trust filed their own income tax return and paid the corresponding
income tax
.
due as computed in their separate .returns.
,
Determine the following:

43. Con~olidated tax due ·of the Trust

a. Pf,1130,000 c. P3,1110-1000
. b. P1 ,770,000 . d. nil

,44. Additional income tax payable of Trust 1

a. P96,000 . c. P1,130,000
b. P114,000 d. .,P1 ,.770,000
'

45. Additional income tax payable pf Trust 2

a. P96,000 c. P1,130,000
b. , P114,000 d. P1 ,770,000

228