Co-Ownership, Estates and Trusts

part 1
Article 484 of the Civil Code provides that there is
co-ownership whichever the ownership of an undivided thing or
right belongs to different persons. The portions belonging to the
co-owners in the co-ownership shall be presumed equal, unless
the contrary is proved (Art 485 (CC)
For taxation purposes, there is co-ownership when two or
more heirs or beneficiaries inherit an undivided property from a
decedent, or when a donor makes a gift of an undivided
property in favor of two or more donees.
Inheritance is subject to “Estate Tax”
Donation is subject to ”Donor’s tax”.
= Both taxes are not income taxes but classified
as “Transfer Taxes” .
Co-owners are taxed individually on their distributive share
in the income of the co-ownership.

Co-ownership itself is not taxable for the reason that the

activities of co-ownership are generally limited to
preservation of the common property and the collection of
the income therefrom.

Should the co-owners invest the income in business for

profit, they would constituting themselves into a partnership
and such shall be taxable as a corporation .
When inherited property remained undivided for more
than ten (10) years and no attempt was ever made to
divide the same among the co-heirs, nor was the
property under administration proceedings nor held in
trust, the property should be considered as owned by
an unregistered partnership, consequently, taxable as
corporation.
ILLUSTRATION 1

Case A:

Ana, Lorna and Fe “bought”a parcel of land for the

purpose of improving the same before leasing it out to
interested tenants.

Question: Was a co-ownership created?

Answer : NO
Case B:
On , January 1,2021, Noy, a resident citizen taxpayer died leaving an undivided
parcel of land to his heirs Allan, Mar and Paquito valued at P60,000,000. The
property is an income producing property primarily through rentals. In 2021, the
property earned gross rentals amounting to P15,000,000 while expenditures
necessary to carry out the operations was P3,000,000.
On the other hand, the heirs, who are all engaged in business in their own
individual capacity, provided the following data for 2021 taxable year.
Allan Mar Pacquito
Gross Business income P6,000,000 P5,000,000 P8,000,000
Business expenses P3,000,000 P2,500,000 P6,000,000
Income subject to final taxes (net) 200,000 320,000 500,000
Question. Was a co-ownership created?
Answer : YES
Question No. 2

Assuming Noy was able to secure a partition and three

separate land title were issued by the government before
his death, naming his heirs as the rightful owners in his
last will and testament, was a co-ownership created?

Answer : NO.
Question No. 3

What is the applicable tax for the gratuitous transfer

(inheritance) of the property from Noy to his heirs?

Answer : Estate Tax

How much is the taxable income of the
co-ownership?

Answer : None
Question No. 4: How much is the taxable
income of Allan in 2021

Answer : 7,000,000
Solution:

Gross income of Allan P6,000,000

Allowable business expenses of Allan (3,000,000)
Share in net income of the co-ownership 4,000,000
(P15M-3M) /3
Taxable income P7,000,000
Question No. 5

How much is the income tax payable of

Allan in 2021?
Solution :(using the tax table 2018-2022)

Taxable income P7,000,000

TAX DUE (using graduated tax rates)
1st P2,000,000 490,500
In excess of 2M; (5M x 32%) 1,600,000
Income Tax payable P2,090,500
Solution :(using the tax table effective July 2023)

Taxable income P7,000,000

TAX DUE (using graduated tax rates)
1st P2,000,000 402,500
In excess of 2M; (5M x 30%) 1,500,000

Income Tax payable P1,902,500

Part 2- Estate and Trusts
Income Tax of an Estate

Income tax of an estate refers to the tax on income received by

the estate during the period of administration or settlement. An
“Estates” is a mass of all property, rights and obligations of a
deceased person, which are not extinguished by his death,
including those which have accrued thereto since the opening
of succession.
Administration or Settlement Period - refers to the period
when title to the properties left by a decedent is not yet finally
transferred to the heirs/beneficiaries. At this period, the executor
named by the deceased in his last will and testament, if any or the
administrator appointed by the court, as the case may be , is
temporarily in-charge of the administration of the estate until such
time that the estate is finally distributed to the rightful heirs. While
under administration, the estate may earn income, thus, the
corresponding income should be paid.
Illustration :
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

* FMV- fair market value

● The properties 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 income
 The estate of a decedent may be settled
judicially or extrajudicially.

Judicial settlement pertains to settlement of an

estate in a court proceedings.

Extrajudicial settlement, the heirs of

beneficiaries settle themselves the distribution
of the estate or their inheritance.
Applicable Tax
The taxable income of the estate is computed
in the same manner as individual taxpayer.
The tax due therefore computed using the
graduated income tax rates for individual ,
likewise, an estate is required to adopt the
calendar year as its accounting period.
Where prior to the settlement of the
estate, the executor or administrator sells
property of 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 any profit derived.
Illustration

On November 1,2020, Juan Dela Cruz leaving various properties

worth P30,000,000. The properties are income producing properties
deriving rental income. A “last will and testament was executed by
the decedent prior to his death assigning GJ as the executor. In
2021, (while under administration), the estate earned P4,750,000
(net 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

dela Cruz for 2021?
Solution :
Gross rental income (4.75M/95%) P5,000,000
Allowable deductions (2,000,000)
Taxable income P3,000,000

Tax DUE (using the graduated tax rate 2018-2022):

1st 2,000,000 P490,000
In excess of P1M @32% 320,000
Income tax due P810,000
Less: CWTax on rentals (250,000)
Income tax payable P560,000.
Solution :
Gross rental income (4.75M/95%) P5,000,000
Allowable deductions (2,000,000)
Taxable income P3,000,000

Tax DUE (using the graduated tax rate 2023):

1st 2,000,000 P402,500
In excess of P1M @30% 300,000
Income tax due P702,500
Less: CWTax on rentals (250,000)
Income tax payable P452,500.
Deduction from estate’s gross income

Deductions from the estate’s gross income are the

same items of deductions (business expenses) allowed
for individual taxpayers.
HOWEVER , in addition to the usual allowable business
expenses, 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 should be
deducted (special deduction) in the determination of the
estate’s taxable income.
Computation of the taxable income of the estate and the
heirs/beneficiaries.

Taxable income of the Estate

Gross Income Pxxx
Less : Deductions
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 income of the beneficiary from business Pxxx
and/or practice of profession
Add :
Amt. received from the income of the estate Pxxx
Taxable income Pxxx
Tax Due (Graduated Tax Rate ) Pxxx
Illustration

On november 1, 2020, Juan Dela Cruz died leaving

various properties worth P30,000,000 to his heirs;
Pedro, Anan and Lorna. The properties are income
producing properties deriving rental income. In 2021,
(while under administrator), the estate earned
P4,750,000 (net 5% creditable withholding tax on rent)
and incurred operating expenses of P2,000,000.
During 2021, 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 P800,000

Business income 1,500,000
Business expenses 600,000
Question 1.

Assume that the estate is still under administration,

how much is the taxable income of the estate in
2021?
Solution:
Gross “rental income (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.

How much is the taxable income of Pedro?

Solution :

Compensation Income P800,000.

Business income 1,500,000.
Business expenses (600,000.)
Amt. received from the income of the estates 200,000
Taxable income P1,900,000
Termination of Judicial/Extrajudicial Settlement

*If the heirs still do not divide the property but instead
contribute 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.
● But if the heirs, without contributing money
property or industry to improve 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.
TAXATION OF TRUSTs
Trust is a right on property, real or personal,
held by one party for the benefit of another.
- It also refers to a legal instrument or device whereby
a person called a Trustor or Grantor delivers part or
all of his properties to another person called Trustee
or Fiduciary who administer and manages the
property/ies for the benefit of designated person/s
called Beneficiaries.

“Person”- can be individual or natural person or

juridical person like a corporation.
Trust may be arranged inter-vivos (while alive) or
created by will under which title to a property is
passed to another for conservation or investment with
the income therefrom and ultimately the corpus
(principal) to be distributed in accordance with the
directions of the creator as expressed in the
governing instrument.
Subject matter
- Must be clearly identified
- It must be existing,lawful, definite and transferable
- Anything that has an economic value and which a
person may own
- to which he may transfer legal title, by gifts or sale .
- Property than can be conveyed such as cash,
stocks, bond real property, livestock, growing crops
and jewelry.
Parties to the Trust

1. Trustor - Person who establishes a trust

2. Trustee - One in whom confidence is reposed as
regards to property for the benefit of another
person
3. Beneficiary - Person for whose benefit trust is
created
CLASSIFICATION OF TRUSTS

1. Ordinary Trust- the income and corpus of the trust

do not revert to the grantor. The trust income is
accumulated and held for distribution to the
beneficiaries.
Ordinary trust is any of the following trusts:

● A trust where the income accumulated or held for

future distribution under the terms 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 accumulated for the
benefit of unborn person or persons with contingent
interest
● A trust where the income collected by a
guardian of an infant is held or distributed
as the court may direct;
● A trust where the income is at the discretion
of fiduciary, may be either distributed to the
beneficiaries or accumulated.
2. Revocable Trust - a trust where any time, the power
to revest in the grantor, title to any part of the corpus of
the trust is vested.

● In the grantor either alone or in conjunction with any person

not having a substantial adverse interest in the disposition
of such part of the corpus of the income
● In any person not having a substantial adverse interest in
the disposition of such part of the corpus or the income
therefrom.
3. Employees’ Trust - 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 his employees.
Consolidated Income Tax Returns (Two or more trusts)
Rule when two or more trusts is created by the same
trustor or grantor and the beneficiary is the same person

1. The taxable income of all the trusts shall be

consolidated and the tax computed on such
consolidated income shall be apportioned to different
trusts, such that each trusts shall have a share in the
income tax on consolidated income.
Tax apportionment computation

Tax Apportionment = Taxable income of the trust x Consolidated

To a Trust Taxable income of all trusts income ta x
2. Such proportion of said tax shall be assessed and
collected from each trustee which the taxable income of
the trusts administered by him bears to the
consolidated income of the several trusts.
Each trust shall pay an income tax still due or payable
computed as follows:

Income tax apportioned to a trust Pxxx

Less : Income tax already paid (xxx)
Income tax payable Pxxx
Illustration
In 2021,George created three (3) trusts for his minor
daughter. The following data were furnished by the
trusts during 2021:
Trusts Gross Income Expenses Net Income Income Tax
Paid

1. P5,000,000 P2,500,000 P2,500,000 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

(Using Income tax Tables 2018-2022)
Required : Compute the income tax payable of Trusts 1, 2 and 3
● Consolidated Tax Due
Consolidated Gross Income P30,000,000
Consolidated Expenses (15,000,000)
Consolidated taxable income P15,000,000

Tax due (Section 24 (A) P2,410,000

In excess over P7M @35% 2,450,000
Consolidated Income tax Due P4,860,000
● Income Tax Still Due/Payable of Trust 1

Tax Apportionment to Trust 1 P810,000.

(2,500,000/15,000,000 x 4,860,000)
Less: Income tax already paid (500,000)
Income tax still due/payable P310,000
● Income Tax Still Due/Payable of Trust 2

Tax Apportionment to Trust 2 P1,620,000.

(5,000,000/15,000,000 x 4,860,000)
Less: Income tax already paid (1,200,000)
Income tax still due/payable P 420,000
● Income Tax Still Due/Payable of Trust 3

Tax Apportionment to Trust 3 P2,430,000.

(7,500,000/15,000,000 x 4,860,000)
Less: Income tax already paid (2,000,000)
Income tax still due/payable P 430,000
Filing of Income Tax Returns
The following persons acting in any fiduciary
capacity shall file the income tax return for an estate
or trust:
● Guardians * Receiver
● Trustees * Conservators
● Executors/administrators
● All other persons or corporations acting in any
fiduciary capacity
 In case of two or more joint fiduciaries, return filed
by one of them shall be sufficient compliance with the
requirements of the tax Code
The return and the tax due may be filed and paid in:
● Authorized agent banks
● Revenue District Officer
● Collection agent
● Duly authorized city or municipal Treasurer in which
taxpayer has his legal residence or principal place of
business.
PREPARATION OF INCOME TAX RETURN of an ESTATE

Namahinga Nah died leaving an estate worth

P10,000,000. 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
Operating Expenses (600,000)
Income of the estate distributed to Felipe (200,000)
Estate’s taxable net income P400,000
Income tax Due of the Estate
( Tax table for Individuals-2018-2020) P30,000
2. Assume that Felipe also earned net income of
P500,000 from his trading business. What amount
should Felipe report as his taxable income for the year?
Solution:
Gross Income from trading business P500,000
Amount received from the income
of the estate 200,000
Taxable net income of Felipe P700,000
PREPARATION OF INCOME TAX RETURN OF A TRUST
On January 1, 2020, Pedro established a trust fund for
the benefit of his daughter, Ana. Pedro appointed Atty.
Digong 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
revenues and incurred expenses of P10,000,000. Out of
the trust’s income, Atty. Digong transferred P10,000,000
to Ana. During the year, Ana earned compensation
income P2,500,000
Required :
1. Determine the income tax due of the trust and
fill-up the applicable income tax return of the trust.
Solution :
Gross income-trust P40,000,000
Expenses (10,000,000)
Income of the trust given to Ana (10,000,000)
Net taxable income-trust P20,000,000

Income tax Due (Tax Table) P6,610,000

Required : Net taxable income P20,000,000

Tax due (Section 24 (A) P 2,410,000

In excess over P 8=12Mx35% 4,200,000
Income tax Due P6,610,000

Income 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 10,000.00
Net Taxable Income-Ana P12,500,000
End of slides