TAX2 3RD ED Solutions Manual

SOLUTIONS MANUAL

TRANSFER & BUSINESS TAXATION, 3rd Edition By:

TABAG & GARCIA

CHAPTER 1 – SUCCESSION & TRANSFER TAXES TRUE OR FALSE 1. T 6. 2. T 7. 3. T 8. 4. T 9. 5. F 10. MULTIPLE CHOICE 1. D 12. 2. A 13. 3. D 14. 4. C 15. 5. C 16. 6. A 17. 7. B 18. 8. A 19. 9. B 20. 10. A 21. 11. D 22.

T F T T T

11. 12. 13. 14. 15.

T T T T F

C C B D C B D C B B B

23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.

D B D D B D A D B A D

34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

D B B D B D D B D B B

45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.

B C D D A B A D D D B

61. 62. 63. 64. 65. 66. 67. 68. 69. 70.

A A A C D B A C C D

CHAPTER 2 – GROSS ESTATE TRUE OR FALSE – SET A 1. T 6. T 2. T 7. T 3. F 8. T 4. T 9. T 5. T 10. T TRUE OR FALSE – SET B 1. T 6. F 2. F 7. T 3. F 8. T 4. T 9. T 5. T 10. F MULTIPLE CHOICE 1. A 16. D 2. B 17. C 3. D 18. B 4. B 19. D 5. C 20. A 6. C 21. D 7. A 22. A 8. B 23. B 9. A 24. A 10. A 25. C 11. C 26. C 12. B 27. C 13. D 28. D 14. A 29. B

1

|

11. 12. 13. 14. 15.

T F F T T

16. 17. 18. 19. 20.

F T T T T

11. 12. 13. 14. 15.

T F F T F

16. 17. 18. 19. 20.

T T T F T

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

C B B A B B D C B D C C B C

46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59.

C D C C C D D C C C B D C C

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

15.

C

30.

D

45.

B

60.

A

Supporting Computations: 23. Bank deposit in the foreign branch of a domestic bank Bank deposit in Makati branch of a foreign bank Shares of stock issued by a domestic corporation (certificate kept in Canada) Franchise exercised in Manila Receivable, debtor from Mindanao Total Exclusion from the gross estate

P500,000 300,000 1,000,00 0 800,000 200,000 P2,800, 000

23. House and lot, family home in Quezon City Bank deposit in Makati branch of a foreign bank Shares of stock issued by a domestic corporation (certificate kept in Canada) Franchise exercised in Manila Receivable, debtor from Mindanao Total Inclusion from the gross estate

P1,500,0 00 300,000 1,000,00 0 800,000 200,000 P3,800, 000

25. Shares of stocks, domestic corp. (certificate kept in UK) Shares of stocks, domestic corp. (certificate kept in Phils.) Franchise exercised in the Phils. Receivables, debtor is from Phils. Intangibles subject to reciprocity

P250,00 0 100,000 200,000 50,000 P600,0 00

26. Land & building, Philippines House and lot, Philippines Shares of stocks, domestic corp. (certificate kept in UK) Shares of stocks, domestic corp. (certificate kept in Phils.) Franchise exercised in the Phils. Receivables, debtor is from Phils. Gross Estate

33. 34. 35. 36. 44.

|

100,000 200,000 50,000 P6,100,0 00

(P12M/100,000) x 1,000 shares = P120,000 (P10M/100,000) x 1,000 shares = P100,000 P110 x 1,000 shares = P120,000 (P140 + P80/2) x 1,000 shares = P110,000 Considerat

2

P2,000,00 0 3,500,000 250,000

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

FMV upon r d

FMV upon

Gross Estate

E d i ti o n ) b y Ta b a g a n d G a rc i a

Land

ion received P1,500,00 0 100,000

transfer

death

P1,500,000

P2,000,000

Shares of 50,000 stock Vintage car 50,000 80,000 Painting 250,000 400,000 INCLUSION IN THE GROSS ESTATE

150,000 100,000 500,000

None. Valid sale None. Valid sale P50,000 250,000 P300,000

44. Bequests to charitable institutions are considered exclusions from the gross estate only if the problem clearly states that not more than 30% were used for administrative purposes. PROBLEM SOLVING: PROBLEM 1 (1) P19,300,000

(3) P11,800,000 (4) P14,300,000 Citizen/ NRA with R NRA w/o R Resident (# 1 & 2) (# 3) (# 4) Family home in the Philippines P8,000,000 P8,000,000 P8,000,000 Parcel land of with vacation house in Malaysia 5,000,000 Farm land in the Philippines 3,000,000 3,000,000 3,000,000 Shares of stock of a domestic corporation 2,000,000 2,000,000 deposited in a bank safety deposit box in Malaysia Shares of stock of a foreign corporation the 500,000 500,000 entire business of which is in the Philippines, deposited in a bank safety deposit box in Malaysia Receivable from a friend who has no property 300,000 300,000 300,000 whatsoever Receivables under insurance policies:  Life insurance policy, taken by the 200,000 200,000 200,000 decedent on his own life, with his estate as revocable beneficiary  Life insurance policy, taken by the 300,000 300,000 300,000 decedent, with his daughter as revocable beneficiary  Life insurance policy, taken by the decedent on his own life, with his son as irrevocable beneficiary  Life insurance (group) taken by the employer of the decedent, with the estate as revocable beneficiary  Property insurance, for a loss of property 50,000 50,000 50,000  Accident insurance, for injury sustained 50,000 50,000 50,000 TOTAL GROSS ESTATE P19,300,0 P11,800,0 P14,300,0 00 00 00

3

|

(2) P19,300,000

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

PROBLEM 2 To Juan To Pedro To Maria To Sisa Total Gross Estate

P25,000,0 00 18,000,00 0 15,000,00 0 20,000,00 0 P78,000, 000

PROBLEM 3 1. 2. 3. 4. 5.

P230,0000 P1,100,000 P0 P5,000,000 P1,000,000 + [1M x (1M x 10% x 1.5)] = P1,150,000

MODIFIED IDENTIFICATION EXERCISE A 1. Included 2. Included 3. Excluded 4. Included 5. Excluded 6. Excluded 7. Included * 8. Excluded 9. Excluded** 10. Excluded

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Included*** Excluded** Excluded** Included Included Included Excluded Excluded** Excluded Included

*Included in the gross estate if the beneficiary is the estate, administrator or executor. In case of doubt, the item should be taxable. **Exclusions from the gross estate. Nonetheless, the tax code requires these items to be included first in the gross estate before deducting the same from the gross estate. *** Bequests to charitable institutions are considered exclusions from the gross estate only if the problem clearly states that not more than 30% were used for administrative purposes. EXERCISE B 1. 2. 3. 4. 5.

4

|

P0; valid sale P0; valid sale P0; valid sale P4,000,000 P6,000,000

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

EXERCISE C 1. 2. 3. 4. 5.

r d

P10M P20M P5M P10M P0

E d i ti o n ) b y Ta b a g a n d G a rc i a

CHAPTER 3 – DEDUCTIONS FROM THE GROSS ESTATE TRUE OR FALSE 1. T 7. T 13. F 19. T 25. T 2. T 8. T 14. F 20. T 26. T 3. T 9. T 15. T 21. T 27. F 4. T 10. F 16. F 22. F 28. T 5. T 11. F 17. T 23. T 29. F 6. F 12. F 18. T 24. T 30. T MULTIPLE CHOICE 1. C 12. C 23. A 34. C 45. C 2. D 13. B 24. A 35. A 46. B 3. D 14. A 25. A 36. C 47. A 4. C 15. A 26. B 37. B 48. A 5. C 16. A 27. B 38. B 49. C 6. B 17. D 28. B 39. C 50. C 7. B 18. D 29. C 40. D 51. A 8. D 19. D 30. A 41. A 52. A 9. C 20. D 31. C 42. D 53. A 10. A 21. C 32. D 43. D 54. B 11. B 22. D 33. C 44. D 55. D Supporting Computations: 7. Mourning clothing of the decedent’s surviving P1,500 spouse Mourning clothing of the decedent’s dependent 3,200 children Expenses of the wake preceding the burial 40,000 Publication charges for death notices 5,000 Telecommunication expenses incurred in 3,000 informing relatives of the deceased Cost of burial plot 20,000 Interment fees and charges 12,000 Expenses for the performance of the rites & 5,000 ceremonies incident to interment Actual Funeral Expenses P89,700 Limit: 5% of Gross Estate (P2M x 5%) P100,000 ALLOWED (Lower Amount) P89,700 15. Real property tax for the year 2013 P100,000 Notarized interest bearing promissory note 100,000 Accrued interest on the promissory note at the 20,000 time of death Income tax due for 2013 200,000 Allowable deductions P420,00 0 (Disregard standard deduction) 23. Income tax from practice of profession - 2013 Income tax from practice of profession for Jan.-

5

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

P300,000 100,000

E d i ti o n ) b y Ta b a g a n d G a rc i a

June ‘13 Real property taxes for 2013 Deductible taxes

150,000 P550,00 0

35.

ERRATUM: Pedro died leaving a car acquired by purchase from Pedro JUAN 41. Value to take/Initial Basis Mortgage paid Initial basis 2nd Deduction: (850/1,000 x P100,000**) Final Basis X Vanishing rate VANISHING DEDUCTION

P900,000 (50,000) 850,000 (85,000) P765,000 40% P306,00 0

** Mortgage P150,000 – 50,000 54. Shares, domestic corporation Tangible personal property Gross Estate ELIT (500,000 x 2,000/2,500) Taxable Estate TAX DUE 1st P500,000 In excess of (1,100,00 x 8%) Estate Tax Due

P500,000 1,500,000 2,000,000 (400,000) P1,600,00 0

P500,000

=

P15,000 88,000 P103,00 0

55. Gross Estate (Tangible property Phils.) ELIT (1,200,000 x 6,000/10,000,000) Taxable Estate

PROBLEM SOLVING Problem 1 Case A: Case B: Case C: Case D: Case E:

6

|

P6,000,00 0 (720,000) P5,280,0 00

P150,000 P200,000 P150,000 P150,000 P0

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

Problem 2

ASSUME GROSS ESTATE OF P2,000,000 Embalming charges Burial apparel of the decedent Cost of coffin Mourning apparel of the surviving spouse during the burial Mourning apparel of the minor child Snacks and drinks during the wake Honoraria of priest for daily masses before burial Telecommunication charges to inform relatives Charges for death notice published in a newspaper Cost of video footage of the burial and interment Funeral car service during interment Honorarium of priest who celebrated the mass during interment Cost of tombstone ACTUAL FUNERAL EXPENSE

P15,00 0 3,500 125,00 0 5,000 2,000 12,500 2,000 1,000 8,000 12,000 4,000 2,000

30,000 P232,0 00 Vs. Limit (P5% of P2M) 100,00 0 ALLOWABLE FUNERAL EXPENSE P100, 000 NOTE: Hospital bills for two months of confinement before decedent’s death should be charged to “medical expenses” Problem 3 Case A: P100,000 Case B: P333,333 computed as follows: Receivable Collectible portion (400/1,200) x 500,000 Uncollectible portion of the claim Case C: P0.

P200,00 0

Assets of Pedro

P400,00 0 (200,00 0) 200,000 X 200/600

Less: Due to the BIR for unpaid taxes Balance Collectible by Juan UNCOLLECTIBLE PORTION (Deductible from Juan’s Gross

|

P333,33 3

Debtor is not insolvent

Problem 4 DUE FROM PEDRO

7

P500,000 (166,667)

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

(66,667)

P133,3 r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

Estate) 33 Problem 5 Question 1: P550,000 computed as follows: Unpaid taxes on the estate before death P150,000 Unpaid mortgage on the estate 200,000 Unpaid loans arising from debt instruments 125,000 (notarized) Unpaid loans arising from debt instruments (not 75,000 notarized). The debt instrument was issued by a financial institution not requiring notarizations for debt instruments issued Total Deductible Claim Against the Estate P550,00 0 Question 2: P2,097,000 computed as follows Ordinary Deductions: Claim against insolvent person Unpaid taxes on the estate before death Unpaid mortgage on the estate Funeral expenses Actual = P182,000 + 37,500 = P219,500 Limit = P5M x 5% = P250,000 Maximum = P200,000 Judicial expenses Unpaid loans arising from debt instruments (notarized) Unpaid loans arising from debt instruments (not notarized). The debt instrument was issued by a financial institution not requiring notarizations for debt instruments issued Casualty loss Special Deductions: Standard deduction Medical expenses Total Allowable deduction from the gross estate

P100,000 150,000 200,000 200,000

100,000 125,000 75,000

65,000 1,000,000 82,000 P2,097,00 0

Problem 6 Question 1: P217,500 Question 2: P217,500 Same answer with question #1. Whether or not the estate was settled judicially is irrelevant in the determination of allowable deduction for judicial expenses. Solution: Expenditures incurred for the collection of assets P100,000 and payment of debts Attorneys fees (1/2 were incurred after six 20,000 months) P40,000 x 1/2 Accountant’s fees 25,000 Executor’s commission 15,000 Appraiser’s fees 2,500 Court fees 18,000

8

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

Cost of preserving and distributing the estate Cost of storing or maintaining the property of the estate Brokerage fees for selling property of the estate Total allowable judicial expenses

Problem 7 Loss due to shipwreck, two (2) months after the decedent’s death. Robbery loss, seven (7) months after the decedent’s death. The decedent’s executor was allowed by the Bureau of Internal Revenue to extend the filing (within the period allowed by the Tax Code) of estate tax return due to a meritorious reason Allowable Deduction

Problem 8 Value to take 1st Deduction: Mortgage paid

15,000 12,000 10,000 P217,50 0

P500,000 2,000,000

P2,500,0 00

P937,500 (187,500 ) P750,000

Initial basis 2nd Deduction: Proportionate deduction (750/4,500) x 562,500 Final Basis x Vanishing rate Vanishing Deduction

(93,750) P656,250 40% P262,50 0

Problem 9 Value to take

P1,500,0 00 -----P1,500,0 00

1st Deduction: Mortgage paid Initial basis 2nd Deduction: Proportionate deduction (1,500/1,980) x 170,000 Final Basis

(128,788 ) P1,371,2 12 80% P1,096, 970

x Vanishing rate Vanishing Deduction

Problem 10 Case A: P1,000,000 Case B: P1,000,000

9

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

Case C: P1,000,000 Case D: P0 Case E: P0 Problem 11 Case A: Case B: Case C: Case D: Case E:

P500,000 P500,000 P150,000 P500,000 P0

Problem 12 Case A: Case B: Case C: Case D: Case E: Case F:

P1,000,000 P500,000 P0 P500,000 P600,000 P750,000; [ (1M/2) + (500,000/2)]

Problem 13 Gross Estate Funeral expenses Actual P300,000 – 120,000 = P180,000 Limit = P3M x 5% = P150,000 Standard deduction Medical expenses Taxable Estate

P3,000,0 00 (150,000 )

(1,000,0 00) (400,000 ) P1,450, 000

CHAPTER 4 – PROPERTY RELATIONS TRUE OR FALSE 1. T 6. 2. T 7. 3. T 8. 4. T 9. 5. T 10. MULTIPLE CHOICE 1. A 7. 2. B 8. 3. B* 9. 4. C 10. 5. C 11. 6. D 12.

10

|

F F T F F

11. 12. 13. 14. 15.

T F T T F

16. 17. 18. 19. 20.

F T T T T

D D B C D C

13. 14. 15. 16. 17. 18.

B D** A D D C

19. 20. 21. 22. 23. 24.

C C A A D B

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

25. 26. 27. 28. 29. 30.

C D C A *** D D

E d i ti o n ) b y Ta b a g a n d G a rc i a

*Change Aug. 3, 1998 TO August 3, 1988 ** Under conjugal partnership of gains, fruits earned during marriage, regardless of source, are common properties Supporting Computations No. 22 and 23 Gross Estate: Rest House in Batangas Car Commercial land Income from the commercial land Income from exclusive property of the spouse Jewelry owned before the marriage Other properties at the time of her death Gross Estate

No. 24 and 25 Gross Estate: Rest House in Batangas Car Commercial land Income from the commercial land Jewelry owned before the marriage Other properties at the time of her death Gross Estate

Exclusive P2,500,00 0 1,000,000 5,000,000

300,000

1,000,000 P1,700,00 0

Exclusive P2,500,00 0

Common

1,000,000 5,000,000 500,000 300,000 1,000,000 P2,500,00 0

(35,000)

(20,000) (45,000) P100,00 0 2

Divide Tr a n s fe r & B u s i n es s Ta xa ti o n (3

P7,800,00 0

P200,00 0

Conjugal Deductions: Funeral expenses Actual = P45,000 Limit = (P500,000 + 200,000) x 5% = 35,000 Judicial expenses Claim against the estate Net Conjugal properties

|

500,000 200,000

P8,800,00 0

No. 26 Conjugal properties

11

Conjugal

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

Share of the Surviving Spouse

P50,00 0

No. 27 Real property, Philippines Real property, USA Funeral expenses Judicial expenses (200,000 – 50,000) Claim against insolvent persons Unpaid taxes Balance Standard Deductions Medical expenses (max.allowed) Family Home (P1,500,000/2) Share of the surviving spouse (P8,550,000/2) Net Taxable Estate

P4,000,00 0 5,000,000 (200,000) (150,000 (50,000) (50,000) P8,550,00 0 (1,000,00 0) (500,000) (750,000) (4,275,00 0) P2,025,0 00

No. 28 Exclusive Conjugal real properties Conjugal family home Exclusive properties Total Ordinary Deductions: Funeral expenses Actual P300,000 x 25% = P75,000 Limit = 5% x P9M = P450,000 Casualty losses*** Miscellaneous deductions (P1M x 75%) Net

P2,500,00 0 P2,500,00 0

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

Total

P6,500,00 0

P9,000,00 0

(75,000)

(100,000)

P2,400,00 0

Special Deductions: Standard Deductions

12

Common P5,000,00 0 1,500,000

(750,000)

(825,000)

P5,675,00 0

P8,075,00 0 (1,000,00

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

Medical expenses (P500,000

0) (250,00)

x

50%) Family Home (1,500,000/2) Share of the surviving spouse (5,675,000/2) Net Taxable Estate

(750,000) (2,837,50 0) P3,275,0 00 ERRATUM: DISREGARD ….Exclusive Properties are NET of Casualty Losses***

No. 29 ABSOLUTE COMMUNITY OF PROPERTY Exclusive P2,400,00 0

Properties-Land Other personal property owned before marriage Other personal property acquired during marriage Gross Estate

Common

1,600,000 500,000

P2,400,00 0

Ordinary Deductions Funeral expenses Judicial expenses Net conjugal before special deductions

P2,100,00 0 (200,000) (100,000) P1,800,00 0 P900,000

Share of surviving spouse (P1,800,000/2) No. 30 CONJUGAL PARTNERSHIP OF GAINS Exclusive P2,400,000 1,600,000

Properties-Land Other personal property owned before marriage Other personal property acquired during marriage**** Gross Estate

P4,000,000

(1,120,000) P2,880,000

Standard deductions Medical expenses Share of the surviving spouse (P200,000/2) Share of surviving spouse (P1,800,000/2)

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

Total

P500,000

Ordinary Deductions Funeral expenses Judicial expenses Vanishing Deductions***** Net Estate Before Special Deductions

13

Common

r d

P500,000

P4,500,00 0

(200,000) (100,000) 200,000

P3,080,00 0 (1,000,00 0) (500,000) (100,000) P1,480,0 00

E d i ti o n ) b y Ta b a g a n d G a rc i a

****If silent and unless the problem clearly illustrate that it is exclusive, assume the property is common. Value to take 1st Deduction: Mortgage paid Initial basis 2nd Deduction: Proportionate deduction (1,500/4,500) x 300,000 Final Basis x Vanishing rate Vanishing Deduction

P1,500,0 00 P1,500,000 (100,000) P1,400,000 80% P262,500

*****

PROBLEM SOLVING PROBLEM 1: (a)P1,624,773

(b)P4,132,955

Exclusive properties

(c)P3,691,250 Exclusive P2,000,00 0

Conjugal properties* ELIT** Vanishing Deductions *** Transfer for Public Use **** Net Estate Share of the Surviving Spouse (4,132,955/2) Net Taxable Estate 1st P2,000,000 In excess of P2,000,000 @ 11% ESTATE TAX DUE

(175,227) (200,000) P1,624,77 3

(d)P321,038

Common

Total

P5,000,00 0 (867,045)

P7,000,00 0

P4,132,95 5

P5,757,72 8 (2,066,478 ) P3,691,25 0

P135,000 186,038 P321,038

*The problem is silent as to reciprocity, hence, the gross estate should include tangible and intangible properties within the Philippines. **ELIT: Funeral expenses Judicial expenses Claim against the estate TOTAL ELIT X ALLOWABLE ELIT

P200,000 800,000 1,725,000 P2,725,00 0 7,000/22,0 00 P867,045

**VANISHING DEDUCTIONS: Value to take

14

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

P500,0 00 r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

1st Deduction: Mortgage paid Initial basis P500,000 2nd Deduction: Proportionate deduction (61,932) (500/7,000) x 867,045 Final Basis P438,068 x Vanishing rate 40% Vanishing Deduction P175,227 **** Since the properties were already classified as exclusive and common, it should be assumed that the exclusive properties were already inclusive of transfer for public use. PROBLEM 2: (Decedent: Resident Citizen) a) Vanishing deduction = P1,676,200 b) Net exclusive property of the decedent = P7,923,800 c) Net community property = P17,800,000 d) Net Taxable estate = P15,323,800 e) Estate tax due = P2,279,760 Exclusive Conjugal Exclusive properties P10,000,00 0 Ordinary Deductions: Conjugal properties 20,000,000 Funeral expenses Judicial expenses Claims against conjugal properties Claims against exclusive properties* Legacy against exclusive properties ** VANISHING DEDUCTION*** Amount received under RA4917 Net exclusive/conjugal

(400,000) (1,676,200) P7,923,800

Special Deductions: Standard deduction Medical expenses Share of the surviving spouse NET TAXABLE ESTATE

Total

-

P30,000,00 0 (200,000) (300,000) (200,000) (400,000) -

(1,500,000) P17,800,00 0

(1,676,200) (1,500,000) P25,723,80 0

(200,000) (300,000) (200,000)

(1,000,000) (500,000) (8,900,000) P15,323,8 00 P2,279,76 0

ESTATE TAX DUE

*From the information provided in the problem, the amount of P400,000 as “claim against exclusive property” should pertain to the unpaid mortgage on the land inherited. Therefore, the present decedent paid P100,000 on the original amount of the mortgage (P500,000). This should be taken into consideration in computing the vanishing deduction. ** LEGACY AGAINST EXCLUSIVE PROPERTIES Legacy means bequest or inheritance of personal properties. The deductible legacy/devised (bequests) under the tax code are:

15

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

 

Transfer for “public use” (Rule: Include both in the “Gross Estate” as well as in the “Deductions from the Gross Estate) ; and Bequests to charitable institutions wherein not more than 30% of the bequest was used for administrative purposes (Rule: Same as transfer for public use)

From the information provided above, the problem was silent as to the type of the legacy. In case of doubt, the two types of transfers enumerated above should not be assumed. Therefore, the item should be treated as a simple “legacy” or “transfer in contemplation of death” which is added only in the gross estate. Value to take Mortgage Paid (refer to explanation above) Initial basis 2nd Deduction: 2,900/30,000 x P1.1M Final Basis x rate Vanishing Deduction***

PROBLEM 3: (Decedent: Resident Alien) due = P307,700 House and lot, USA *

P3,000,000 (100,000) P2,900,000 (106,333) P2,793,667 60% P1,676,20 0

(a) Net Taxable estate = P3,570,000;

P2,000,00 0 800,000 1,000 000 700,000 300,000 50,000 200.000 800,000 50,000

Investment in stock, Philippines Investment in stock, USA Investment in bonds, USA Cash in bank, Philippines Cash on hand, Philippines Accounts receivable Car, Philippines Legacy in favor of Philippine National Red Cross** Devise to Quezon City for children’s playground** Total Gross Estate Ordinary Deductions: Funeral expenses Judicial expenses Unpaid Philippine income tax for income in 2011 Loss on December 31, 2012 due to theft Legacy in favor of Philippine National Red Cross Devise to Quezon City for children’s playground Accounts receivable (fully uncollectible) *** Special Deductions: Standard deduction Medical expenses Net Taxable Estate

16

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

(b)Estate tax

70,000 P5,970,00 0 P150,000 300,000 120,000 10,000 50,000 70,000 200,000

(900,000) (1,000,00 0) (500,000) P3,570,0 00

E d i ti o n ) b y Ta b a g a n d G a rc i a

Estate Tax Due

P307,70 0

NOTE (Problem 3) *Family home is not allowed as a deduction for single decedent **To be deductible, the legacy/devise should be included first in the decedent’s gross estate ***Assume the debtor is an insolvent person. PROBLEM 4 (Decedent: Resident Alien) a) Vanishing deduction = P441,463 b) Net Taxable estate = P3,200,000 c) Estate tax due = P386,739 Exclusive Land P3,000,000 House and Lot, furniture and appliances Other tangible personal properties Amount received under RA4917 Claims against insolvent persons Ordinary deductions: Funeral expenses Judicial expenses Other claims against conjugal properties Claims against insolvent persons Unpaid mortgage** VANISHING DEDUCTION* Net exclusive/conjugal Special deductions: Standard deduction Medical expenses Share of the surviving spouse TAXABLE ESTATE

Conjugal

Total

P5,000,000 1,200,000 1,000,000 50,000

P10,250,00 0

(200,000) (100,000) (500,000) (350,000) (441,463) P2,208,537

(50,000) P6,400,000

P8,608,537 (1,000,000) (120,000) (3,200,000) P4,288,53 7 P386,739

Estate Tax Due Value to take/Initial Basis*** 2nd Deduction: 2,500/10,250 x 1,200,000 Final Basis x rate Vanishing Deduction*

P2,500,000 (292,683) P2,207,317 20% P441,463

** P700,000 – 350,000 = P350,000 ***The amount paid on the mortgage should not be considered in computing the vanishing deduction because the amount pertains to a mortgage entered into by Pedro during his lifetime. To be deductible, the mortgage should have been assumed on the property at the time of inheritance.

17

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

PROBLEM 5

1.

Real Property inherited by the decedent during the marriage. 2. Income earned during marriage from the property in the preceding number. 3. Property acquired by the decedent with cash owned before the marriage 4. Personal belongings used exclusively by the decedent 5. Jewelry for the exclusive use of one of the spouses 6. Property unidentified when and by whom acquired 7. Lot acquired before the marriage by the surviving spouse (surviving spouse had a previous marriage and legitimate children in that previous marriage) 8. Income from the lot above 9. Cash – income during marriage 10. Exclusive property was sold, and was repurchased using conjugal property

Conjugal Partnersh ip E

Absolute Communi ty E

C

E

E

C

E

E

C

C

C

C

E

E

E C C

E C C

CHAPTER 5 – ESTATE TAX CREDIT AND ESTATE TAX DISTRIBUTABLE MULTIPLE CHOICE 1. B 8. 2. C 9. 3. D 10. 4. C 11. 5. C 12. 6. C 13. 7. C 14.

A D A D D A D

15. 16. 17. 18. 19. 20. 21.

A C C A D A C

22. 23. 24. 25. 26. 27. 28.

Supporting Computations: No.5 Estate tax due (for P4M) Estate tax credit (3/4 x P355,000) vs P80,000 Estate tax payable

C A C D C A B

29. 30. 31. 32.

C D A B

P355,000 (80,000) P275,000

No. 6 Estate tax due (for P500,000) Less: Estate tax credit Estate tax payable

18

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

P55,000 (20,500) P34,500

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

Limit 1: Singapore: 300/1,000 x P55,000 USA: 100/1,000 x P55,000 Limit 2: 400/1,000 x P55,000 ALLOWED TAX CREDIT (LOWER AMOUNT)

Limit P16,500 5,500

Actual P30,000 4,000

Allowed P16,500 4,000 P20,500

P22,000

34,000

22,000 P20,500

No. 7 Gross Estate

P10,000,00 0 (5,000,000) (1,500,000)

Deductions Share of the surviving spouse (5,000,000 x 60% x 50%) Net taxable estate P3,500,000 Tax Due P300,000 Estate tax credit (2.8/3.5 x P300,000) vs (124,500) P124,500 Estate tax payable P175,500 Net estate France = [(6M -2M) x 0.6 x 1/2] + (6M-2M) x 0.4 = P2,800,000 Net estate R.P. = [(4M-3M) x 0.6 x 1/2] + (4M-3M) x 0.4 = P700,000 No. 8 Estate tax due (for P500,000) Less: Estate tax credit Estate tax payable

P71,000 (41,417) P29,583

Limit 1: Japan: 300/1,200 x P71,000 USA: Exclude for purposes of computing Limit 1 HK: 450/1,200 x P71,000 Limit 2: (Include USA) 700/1,200 x P71,000 ALLOWED TAX CREDIT (LOWER AMOUNT)

Limit P17,750 -

Actual P20,000 -

Allowed P17,750 -

26,625

45,000

26,625 P44,375

P41,417

65,000

41,417 P41,417

No. 9 and 10 Net Taxable Property inherited Property acquired through own labor Funeral expenses Judicial expenses Claims against the estate

19

|

P1,400,000 3,600,000

Net Distributable P1,400,000 3,600,000

(200,000) (200,000)

(240,000) (200,000)

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

Notarized Not notarized Standard deduction Net Taxable/Distributable estate

(40,000) (1,000,000) P3,560,000

(40,000) (20,000) P4,500,000

No. 28 Letter “a” ……….The Bureau of Internal Revenue can ask payment from the heirs to whom the estate has been disturbed …….. change to Distributed

PROBLEM SOLVING Problem I: (1)P200,000 (2)P0; not allowed Net Taxable Estate

P10,000,0 00

Estate Tax Due [P465,000 + (5M x 15%)]

P1,215,00 0 (200,000 ) P1,015,00 0

Estate tax credit (4/10 x P1,215,000) vs P200,000 Estate tax payable

Problem II: Net Taxable Estate

P2,000,00 0

Estate Tax Due Estate tax credit Estate tax payable after tax credit Net Taxable Estate Limit 1: Canada: 500/2,000 x P135,000 USA: 500/2,000 x P135,000 Limit 2: 1,000/2,000 x P135,000 ALLOWED TAX CREDIT

P135,000 (67,500) P67,500 P2,000,00 0 Limit Actual P33,750 P150,000 33,750 110,000 P67,500

260,000

Allowed P33,750 33,750 P67,500 67,500 P67,500

Problem III: (a) Net Taxable estate = P3,570,000; (b)Estate tax due after tax credit = P142,770 (c ) Net Distributable Estate = P4,427,230 House and lot, USA * P2,000,00 0 Investment in stock, Philippines 800,000 Investment in stock, USA 1,000 000 Investment in bonds, USA*** 700,000 Cash in bank, Philippines 300,000

20

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

Cash on hand, Philippines Accounts receivable Car, Philippines Legacy in favor of Philippine National Red Cross** Devise to Quezon City for children’s playground** Total Gross Estate

Ordinary Deductions: Funeral expenses Judicial expenses Unpaid Philippine income tax for income in 2011 Loss on December 31, 2012 due to theft Legacy in favor of Philippine National Red Cross Devise to Quezon City for children’s playground Accounts receivable (fully uncollectible) Special Deductions: Standard deduction

50,000 200.000 800,000 50,000 70,000 P5,970,00 0

P150,000 300,000 120,000 10,000 50,000 70,000 200,000

(900,000) (1,000,00 0) (500,000) P3,570,0 00 P307,70 0 (164,930)

Medical expenses NET TAXABLE ESTATE Estate Tax Due Estate Tax Credit Limit: [(3,200/5,970) x 307,700 = P164,930 Actual: P250,000 ESTATE TAX DUE AFTER ESTATE TAX CREDIT

P142,77 0

NOTE: *Family home is not allowed as a deduction for single decedent **To be deductible, the legacy/devise should be included first in the decedent’s gross estate *** Considered as Estate “within” TOTAL GROSS ESTATE (Refer above) Ordinary Deductions: Funeral expenses Judicial expenses Unpaid Philippine income tax for income in 2011 Loss on December 31, 2012 due to theft Legacy in favor of Philippine National Red Cross Devise to Quezon City for children’s playground Accounts receivable (fully uncollectible) Special Deductions: Standard deduction Medical expenses Estate Tax Due after tax Credit

21

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

P5,970,00 0 P150,000 300,000 120,000 10,000 50,000 70,000 200,000

(900,000) (500,000) (142,770

E d i ti o n ) b y Ta b a g a n d G a rc i a

) P4,427,2 30

NET DISTRIBUTABLE ESTATE

Problem IV: Real property, Philippines Claim Against Insolvent Persons Real property, USA Real property, Japan Net estate, Malaysia Total Gross Estate (common) Funeral expenses (maximum) Judicial expenses (P200,000-100,000) Claim against insolvent persons Unpaid taxes Net estate before special deductions X (Share of the surviving spouse) Net estate of the decedent in the conjugal properties Standard Deduction Family Home Medical Expenses NET TAXABLE ESTATE

22

|

P4,000,00 0 50,000 3,000,000 2,000,000 (1,000,00 0) P8,050,00 0 (200,000) (100,000) (50,000) (50,000) P7,650,00 0 1/2 P3,825,00 0 (1,000,00 0) (1,000,00 0) (500,000) P1,325,0 00

TAX DUE: 1ST P500,000 In excess of P500,000 @ 8% ESTATE TAX DUE Estate Tax Credit (None; No Estate Tax Payments abroad) ESTATE TAX PAYABLE

P81,000

Total Gross Estate (common; as computed above) Funeral expenses (actual) Judicial expenses (actual) Claim against insolvent persons

P8,050,00 0 (300,000) (200,000) (50,000)

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

P15,000 66,000 P81,000 ----

E d i ti o n ) b y Ta b a g a n d G a rc i a

Unpaid taxes Net estate before special deductions

(50,000) P7,450,00 0 1/2 P3,725,00 0 ----------(650,000) (81,000) P2,994,0 00

X (Share of the surviving spouse) Net estate of the decedent in the conjugal properties Standard Deduction Family Home Medical Expenses (actual) Estate Tax NET DISTRIBUTABLE ESTATE

CHAPTER 6 – DONOR’S TAX TRUE OR FALSE 1. T 7. 2. T 8. 3. F 9. 4. T 10. 5. T 11. 6. T 12. MULTIPLE CHOICE 1. A 11. 2. A 12. 3. C 13. 4. C 14. 5. B 15. 6. D 16. 7. D 17. 8. D 18. 9. D 19. 10. C 20.

F T F F T F

13. 14. 15. 16. 17. 18.

F F F F F F

19. 20. 21. 22. 23. 24.

F F F F F T

25. 26. 27. 28. 29. 30.

T T F T F F

D B C D D B D* A B C

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

D C A D C C D C D B

31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

B C D A B D C B D** D

41. 42. 43. 44. 45. 46. 47. 48. 49. 50.

A B A A C B B D D A

Supporting computation: No. 17. ERRATUM: Letter “C”: is exempt from gift *

A gift to the International Rice Research Institute……

No. 19. If the sale is considered fictitious, the entire value at the date of sale is subject to donor’s tax. No. 22. Letter “a” – onerous transfer Letter “b” - To be considered valid donation, the renunciation should be specifically and categorically done in favor of identified heir(s) to the exclusion or disadvantage of the other co-heir(s) in the hereditary estate. Letter “c” – gratuitous transfer, subject to donor’s tax

23

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

No. 25. Donation to Gross Gifts (2M/2) /2 Less Dowry Net taxable gift

Pedro P500,000 (10,000) P490,000

Clara P500,000 P500,000

No. 28.

Gross Gifts (5M/2) Less Dowry Net taxable gift

DONEE Son D. in Law P2,500,0 00 (10,000) P2,490,0 00

No. 32-34. NG (3/1) Tax Due (P25,000 x 2%) GG (5/1) Dowry PNG 3/1 TNG

Tax Due Tax Paid 3/1 D.T. Payable GG (7/1) PNG 3/1 and 5/1 TNG Tax Due Total Taxes Paid 7/1

Husband 125,000 P500

Wife 125,000 P500

P100,000 (10,000) 125,000 P215,00 0

P100,000 (10,000) 125,000 P215,00 0

P2,600 (500) P2,100

P2,600 (500) P2,100

100,000 100,000 215,000 215,000 P315,00 P315,00 0 0 6,600 6,600 P13,200

No. 39. Taxable gift Tax Due Tax Credit P4,500 vs. (200/300 x P6,000=P4,000) D.T.Pyable

P300,00 0 P6,000 (4,000) P2,000 **

**Change Choice “d” from P2,200 to P2,000

PROBLEM SOLVING Problem I: ITEM A

24

|

Q#1 P800,000

Q#2 P800,000

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

Q#3 P800,000 r d

Q#4 P800,000

Q#5 P800,000

E d i ti o n ) b y Ta b a g a n d G a rc i a

B C D E* F G H I Land 1** Land 2*** Land 3**** Car GROSS GIFT

3,000,000 250,000 100,000 5,000,000 1,500,000 100,000 100,000 500,000 5,000,000

3,000,000 250,000 100,000 5,000,000 1,500,000 100,000 100,000 500,000 5,000,000

3,000,000 250,000 100,000 5,000,000 1,500,000 100,000 100,000 500,000 5,000,000

-

250,000 100,000

1,500,000 500,000 -

1,500,000 100,000 500,000 -

200,000 P16,550,0 00

200,000 P16,550,0 00

200,000 P16,550,0 00

200,000 P3,000,00 0

200,000 P3,450,00 0

*The question is “gross gifts”, hence, disregard the mortgage. **Sale of Land #1 is a transfer with insufficient consideration. However, unlike in Estate Taxation, Transfer with insufficient consideration for donor’s tax purposes is not taxable if the property donated is a real property classified as capital asset subject to capital gains tax. *** Sale of Land # 2 is considered bonafide or valid sale. ****Sale of Land #3 is a transfer with insufficient consideration. Nonetheless, the sale is subject to donor’s tax because the property was not subjected to capital gains tax. Capital gains tax on real properties are applicable only on sale of real properties classified as capital assets located in the Philippines. Problem II: ITEM A B C D E F Car, Alabang Car, Malaysia Land Cebu GROSS GIFT Problem III: 1.P0

Q#1 P4,500,00 1,000,000 1,500,000 2,000,000 3,000,000 500,000 200,000 200,000

Q#2 P4,500,00 3,000,000 200,000 -

P12,900,0 00

P7,700,00 0

2.P5,000

3.P10,000

Problem IV: Donation-Red Cross (exempt under a special law)*

25

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

43,000

P100,000

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

Donation to Manila City Hall * Mortgage on the land (400,000 x ¼) Total deductions from the gross gifts

300,000 100,000 P500,00 0 *Exempt donations which partake the nature of deductions and are, therefore , deductible from the gross gifts to arrive at taxable net gifts.

Problem V (Donations to Relatives and Strangers) Cash to his son on account of marriage Cash to PPCRV for 2013 election Jewelry to his auntie Shoes and bags to his girlfriend Books to the City of Makati Second hand car to his first cousin Brand new SUV to his second cousin (subject to revocation) Shares of stocks of a domestic corp. to his best friend Car to his daughter (a donation mortis causa) Forgiven a loan due from his brother(50,00025,000) Sports equipment to his brother in law Parcel of land to the Philippine government for public use Gross Gifts

Relative P50,000 46,000 500,000 -

Stranger 30,000 20,000 150,000

25,000

P621,00 0

75,000 1,000,00 0 P1,275,0 00

NOTE:  Cash to PPCRV. Not considered as donation under the tax code. It is subject to the rules and regulations of the COMELEC under the election code of the Philippines.  City of Makati AND Land for Public Use. Although the donation is exempt, it shall be considered in the determination of “gross gifts”  Gift subject to revocation is not a gift.  Donation mortis causa is a donation subject to estate tax, not donor’s tax. Problem VI Tax payable on: 1) March 1 = P2,000 2) May 30 = P18,000 3) June 30 = P90,000 4) July 31 = P0 5) September 30 = P447,200 Solution Gross Gifts Dowry

P200,000 -

Net taxable gift Donor’s Tax Due/ Payable – March 1

26

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

 1 year after celebration

P200,000 P2,000 r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

Gross gift Less: Mortgage assumed by the donee Add: Prior net gift Taxable gift – May 30

P500,000 (100,000) 200,000 P600,000

Donor’s Tax Due Less: Tax paid Donor’s tax payable-May 30

P20,000 (2,000) P18,000

Donor’s tax payable-June 30 (P300,000 x 30%)

P90,000

Donor’s tax payable-July 31 (Bantay Bata)

Problem 1) 2) 3) 4) 5)

Gross Gift Dowry Mortgage assumed Prior net gift Taxable gift

September 30 Relative P1,500,000 (10,000) (300,000) 600,000 P1,790,000

Tax Due Less: Tax Payments Tax Payable

P107,200 (20,000) P87,200

Total

P1,200,000 @30% P360,000 360,000

P447,200

P1,000,000 (200,000) P800,000 P32,000

Gross gift – April 1, 2012 Add: Prior net gift Taxable gift Donor’s Tax Due Less: Tax paid Donor’s tax payable-Apr. 1, 2012

|

Stranger P1,500,000 (300,000)

VII January 15, 2012 = P32,000 April 1, 2012 = P6,000 December 25, 2012 = P0 March 30, 2013 = P30,000 May 25, 2013 = P0

Solution Gross Gifts-Jan. 1, 2012 Less: Encumbrance Taxable gift Donor’s tax due/payable-Jan. 1, 2012

27

P0

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

P100,000 800,000 P900,000 P38,000 (32,000) P6,000

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

December 25, 2012

P0

March 30, 2013 P100,000 x 30%

P30,000

May 25, 2013 Gross gift Deductions

The rule that gift of not more than P100,000 is exempt is applicable only to donations made to relatives.

P200,000 (200,000 ) P0 P0

Taxable gift Tax Due

Problem VIII 1) October 8, 2014 = P9,800 2) November 4, 2014 = P1,200

Gross Gift Dowry Mortgage assumed Taxable gift Donor’s Tax Payable

Gross Gift Dowry Prior Net Gift Taxable gift Donor’s Tax (Tax Table) Tax Paid-June 6 Donor’s Tax Payable

Gross Gifts (strangers) Exempt Prior Net Gift Taxable gift Donor’s Tax Payable

June 6, 2014 Husband P240,000 (10,000) (2,000) P228,000 P3,120

Wife P240,000 (10,000) (2,000) P228,000 P3,120

October 8, 2014 Husband P30,000 --P228,000 @30

Wife P30,000 (10,000) 228,000 P248,000 P3,920 (3,120) P800

P9,0000 November 4, 2014 Husband P7,000 (5,000) P2,000 @30 P600

Wife P7,000 (5,000) P2,000 @30 P600

Total

P6,240

Total

P9,800

Total

P1,200

Problem IX 1) October 10, 2013 = P3,140 2) April 4, 2014 = P13,500

28

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

Gross Gifts (strangers) Exempt Taxable gift Donor’s Tax Payable

Gross Gifts Dowry Mortgage assumed Prior net gifts Taxable gift Donor’s Tax Tax paid Donor’s Tax Payable

Gross Gifts Dowry Prior net gifts (none; different year) Taxable gift Donor’s Tax Payable Problem X (1)P7,000

June 6, 2013 Mr.Ramos P115,000 (90,000) P25,000 @30 P7,500

Mrs.Ramos P115,000 (90,000) P25,000 @30 P7,500

October 10, 2013 Mr.Ramos Mrs.Ramos P191,000 P191,000 (10,000) (10,000) (2,500) (2,500) P178,500 P178,500 P1,570 P1,570

P1,570 P1,570

April 4, 2014 Mr.Ramos P45,000 P45,000 @30 P13,500

Mrs.Ramos P45,000 (10,000) -

Total

P3,140

Total

Exempt

P13,500

(2)P2,600

Gross Gifts Dowry Prior net gift Taxable gift Donor’s Tax Donor’s tax paid Donor’s Tax Payable

|

P15,000

P35,000

(3)P69,800 (4)P30,000 Feb. 15, 2014 Mr.Macariol Mrs.Macari a ola Gross Gifts P200,000 P200,000 Dowry (beyond 1 year) Mortgage assumed (50,000) (50,000) Taxable gift P150,000 P150,000 Donor’s Tax Payable P1,000 P1,000

29

Total

March 30, 2014 Mr.Macariol Mrs.Macari a ola P200,000 P150,000 P350,000 8,000 (1,000) P7,000

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

Total

P2,000

Total

P7,000

E d i ti o n ) b y Ta b a g a n d G a rc i a

Gross Gifts Dowry Prior net gift Taxable gift Donor’s Tax Donor’s tax paid Donor’s Tax Payable

June 1, 2014 Mr.Macariol a P-

Mrs.Macari ola P100,000 (10,000) 150,000 240,000 P3,600 (1,000) 2,600

Total

P2,600

October 12, 2014

Gross Gifts Dowry (claimed June 1) Mortgage assumed Prior net gift Taxable gift Donor’s Tax Donor’s tax paid Donor’s Tax Payable Total Donation by Clifford: Gross Gifts

Donor’s Tax

Mr.Macariola Donation Donation to to a Relative Stranger P200,000 P200,000 -

Mrs.Macariola Donation to a Relative P400,000 -

(50,000)

(50,000) 240,000 590,000

350,000 550,000

150,000 @30%

P45,000 P54,000

Total

P17,000 (8,000) P9,000

P19,400 (3,600) P15,800

P69,80 0

P100,00 0 @30% P30,00 0

ERRATUM: Ronald

Change to Clifford

CHAPTER 7 – BUSINESS TAXES MULTIPLE CHOICE 1. A 7. 2. D 8. 3. D 9. 4. D 10. 5. D 11. 6. C 12.

30

|

B C D C A C

13. 14. 15. 16. 17. 18.

D C B C A D

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

19. 20. 21. 22. 23. 24. r d

C D D A D C

25. 26. 27. 28. 29. 30.

A* D C** A A C

E d i ti o n ) b y Ta b a g a n d G a rc i a

* The end-use (person using the communication facility is the one liable for OCT, not the communication company. **3% CCT is applicable only to domestic carriers transporting passengers by land, not by air or sea.

CHAPTER 8 – VALUE ADDED TAX TRUE OR FALSE-PART A 1. T 6. F 2. F 7. F 3. F 8. F 4. T 9. T 5. T 10. T TRUE OR FALSE-PART B 1. T 6. F 2. T 7. F 3. T 8. F 4. F 9. T 5. F 10. F MULTIPLE CHOICE 1. D 21. A 2. C 22. B 3. A 23. D 4. D 24. C 5. D 25. A 6. D 26. C 7. D 27. C 8. D 28. D 9. D 29. C 10. B 30. D 11. A 31. B 12. C 32. C 13. C 33. B 14. A 34. A 15. A 35. D 16. D 36. A 17. C 37. B 18. C 38. B 19. A 39. B 20. D 40. B

11. 12. 13. 14. 15.

F F F F F

16. 17. 18. 19. 20.

T F F T T

11. 12. 13. 14. 15.

F F T F T

16. 17. 18. 19. 20.

T T T F F

41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

B C A B C D D B D D C C D B C B D D C A

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.

B C A C A B B C D A C B D A D D A D B C

21. 22. 23. 24. 25

F F T F F

81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95.

D C D C B D A B D D B C D C D

ERRATUM: Illustration #6 …. Medical fees (included in the hospital bills)

Supporting Computations: No. 14 To be exempt, the contributions from each member in item “III” should not exceed P15,000. No. 21 Item “a” is composed of selling price and the applicable output vat

31

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

No. 23 Output Vat (P280,550 +P152,400) x 12% Input vat (P110,220+P101,250) x 12% Vat Payable

P51,954 (25,374.6 ) P26,578

No. 24 Output Vat, 3rd quarter (P150,000 x 12%) Input vat, 3rd quarter (P120,000 x 12%) Deferred input vat – previous quarter Vat Payable (Carry-over)

P18,000 (14,400) (6,000) (P2,400)

No. 40 AR, July 1 Billings, July-Sept. AR, Sept. 30 Collections Output vat @ 12% Input vat on purchases @ 12% Vat Payable

P180,00 0 850,000 (120,00 0) P910,00 0 109,200 (57,600) P51,600

No. 42 Output vat (P10M x 12%) Input vat on materials Input vat on capital goods (P3Mx12%) /60 mos. Vat Payable June 30, 2014

P1,200,0 00 (480,000 ) (36,000) P684,000

No. 44 Sales, shares held as inventory Cos of shares, held as inventory Gross income Vat rate Output vat Les: Input vat Supplies expense Rent expense Vat payable

32

|

P5,000,0 00 (2,000,00 0) 3,000,00 0 12%

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

P360,000 12,000 24,000

r d

(36,000) P324,00

E d i ti o n ) b y Ta b a g a n d G a rc i a

0 No. 52 Domestic sales (P600,000 x 12%) Add: Transaction deemed sales Jan. 4 consignment (P200,000 x 12%) Goods consumed on Fe. 27 (P50,000 x 12%) Property dividends (P150,000 x 12%) Total Output Vat

P72,000 24,000 6,000 18,000 P120,00 0

No. 63 Output tax (1,500,00 x 12%) Less: Input taxes Purchases (800,000 x 12%) Machinery (240,000/60 x 3mos.) Carry-over Excess input vat

P180,000 96,000 12,000 97,000

205,000 (P25,000)

No. 64 Output tax on sale (2,000,000x 12%) Output tax on sale of machinery (2,000,000x 12%) Less: Input taxes Purchases 1,000,000x 12%) Unamortized input tax on machinery (240,000- 12,000) Carry-over

P240,000 240,000

120,000 25,000 228,000

VAT Payable

(373,000 ) P107,00 0

No. 71 & 72 Output vat (P592,480 x 3/28) Less: Input Vat Purchases of goods (P100,000 x 12%) Purchases of services (P20,000 x 12%) Transitional input vat VAT Payable

P63,480 P12,00 0 2,400 4,800

(19,200 ) P44,28 0

No. 77 Change the year from 2010 to 2012 Output Vat for October 2012 = P3M x 12 = P360,000  Ratio of Initial Pay’t over Gross S.P. = P900,000/P3,000,000 = 30%

33

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

 If initial payment is more than 25% of Selling Price, the sale is classified as Deferred Sale which is treated as Cash Sale. Therefore, the entire output vat is due on the month of sale. No. 78 Output Vat for 2013 = P0; The entire output vat was paid in 2012 No. 80 Downpayment 1st installment payment Total (vat inclusive) Less: VAT (P224,000 x 3/28) Initial Payment (exclusive of vat) Divide by contract Price (P1,120,000 x 3/28) Ratio of Initial Payment over SP Output vat for 2012 (P200,000 x 12%)

P112,00 0 112,000 224,000 (24,000) P200,00 0 1,000,00 0 20% P24,00 0

No. 80 VAT ON CASH SALE: (FMV is higher than SP) (P600,000 x 12%) VAT ON DEFERRED SALE: (Ratio of Initial payment over SP  25% (Not qualifying under installment method) (Treated as cash sale; SP is higher than FMV) [(P336,000/1.12) x 12%] TOTAL OUTPUT VAT

No. 83 and 84 Output vat (P336,000 x 3/28) Input vat (56,000 + 11,200) x 3/28 x 300/500 Vat Payable

P72,000 36,000

P108,0 00

P36,000 (4,320) P31,68 0

No. 85 OUTPUT VAT (P896,000 x 3/28) INPUT VAT Purchases of goods, vat business, vat included (P224,000 x 3/28) MIXED Transactions: Purchases of supplies, for vat & non vat business [(112,000 x 3/28) x (800,000/1,000,000)]

34

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

P96,000 (24,000)

(9,792)

E d i ti o n ) b y Ta b a g a n d G a rc i a

Purchase of depreciable asset, for use in vat and non vat business [(P2,240 x 3/28) x (800,000/1,000,000)] VAT PAYABLE No. 86 and 87 OUTPUT VAT Domestic sales (P330,000 + P274,996) x 3/28 Export sales (zero rated) INPUT VAT Purchases of goods, supplies and services for domestic sales and for export (374,000 + 69,848 + 154,000 + 55,000) x 3/28 Vat Payable

P62,208

P64,821 0

(69,948 ) (P5,127 )

No. 88 Raw Materials (P560,000 x 3/28) x 400,000/1M Supplies (P448,000 x 3/28) x 400,000/1M Equipment (P300,000 x 12% x 400,000/1M) INPUT VAT ATTRIBUTED TO EXPORT SALES

P24,000 19,200 14,400 P57,600

PROBLEM SOLVING Problem 1: a) P0 b) P134,400 x 3/28 = P14,400 c) PP201,600 x 3/28 = P201,600 (regardless of whether or not Abi is a vat registered exporter) Not zero rated. To be zero rated, the problem should provide that Abi exported more than 70% of its annual production d) Vat exempt Problem 2: Cash sales (P660,800 x 3/28) Sales on account (P246,400 x 3/28) Transaction deemed sales: (P22,400 + 16,800 + 19,040 + 8,960) x 3/28 Total output vat Input vat (P291,200 x 3/28) Vat Payable

P70,800 26,400 7,200 P104,40 0 (31,200) P73,20 0

Problem 3:

35

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

OUTPUT: Sales (P8M – 400,000) x 12% Sales from consignment (March and Feb.) (20+10) x P10,000 x 12% Transactions deemed sales January 8 consignment (20 x P10,000) x 12% Goods withdrawn Goods taken as payment to creditors INPUT VAT Purchase of goods, supplies, freight/insurance) Capital goods (ASSUME USEFUL LIFE OF 4 YEARS) (P1,100,000 x 12%) / 48 mos. VAT PAYABLE

Problem 4: Business tax Gross receipts (collections) from: Hotel rooms

P912,000 36,000

24,000 6,000 3,600 82,080 2,750

P896,77 0

P1,800,0 00 3,150,00 0 700,000 P5,650,0 00 12%

Other revenues Total VAT Gross receipts (collections) from disco operations @18% TOTAL Business Taxes

Charlie (P4M-P1M) x 12% Delta (P2M x 12%) VAT PAYABLE, 1st Quarter 2014

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

OPT

P678,00 0 P504,00 0 P1,182,000

Problem 5: Output vat on gross receipts (collections) from construction contracts with: Bobads, City Condo & Urban Dev’t. (P30M x 12%) Less: Input vat on payments/advances made to: Alpha (P12M x 90% x 12%)

|

(84,830)

VAT

Dining hall

36

P981,600

r d

P3,600,00 0

(1,296,00 0) (360,000) (240,000) P1,704,0 00

E d i ti o n ) b y Ta b a g a n d G a rc i a

Problem 6: Ratio of Initial Payment over Selling Price: Lot A = 50/250 = 20% ; Installment Sale Lot B = 70/200 = 35%; Deferred Sale; Treated as Cash Sale Lot C = 60/300 = 20%; Installment Sale No. 2013 Lot A: P25,000 x 12%; P25,000 x 12% Lot B: P200,000 x 12% Lot C: P40,000 x 12%; P20,000 x 12% Vat Payable

P3,000

Dec. 2013 P3,000

24,000 4,800

2,400

P31,800

P5,400

Problem 7: Output vat: school supplies and gift items (P560,000 + 336,000) x 3/28 Input vat:  Directly attributable to vatable sales (P406,000 x 3/28)  Not directly attributable to vatable sales (P21,112 x 3/28 x 800*/1,000**) VAT PAYABLE

P96,000 (43,500) (1,809.6 0) P50,690 .40

*(560,000/1.12) + (P336,000/1.12) = P800,000 vatable sales **vatable sales + vat exempt sales (sale of books) = P1,000,000

CHAPTER 9 – OTHER PERCENTAGE TAXES TRUE OR FALSE-SET A 1. F 6. F 2. T 7. F 3. T 8. 4. F 9. 5. F 10. TRUE OR FALSE-SET

37

|

T T F B

11. 12.

T F

16. 17.

13. 14. 15.

F T T

18. 19. 20.

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

T F (False, should be 20 days) F T F

E d i ti o n ) b y Ta b a g a n d G a rc i a

1. T 6. F 2. T 7. F 3. F 8. T 4. T 9. F 5. T 10. F MODIFIED IDENTIFICATION 1. A 6. C 2. A 7. A 3. E 8. A 4. C 9. C 5. C 10. C MULTIPLE CHOICE 1. C 21. -----2. D 22. A 3. D 23. B 4. C 24. D 5. A 25. B 6. A 26. C 7. D 27. B 8. A 28. C 9. A 29. C 10. C 30. A 11. D 31. B 12. A 32. D 13. B 33. D 14. C 34. D 15. D 35. D 16. B 36. A 17. B 37. A 18. D 38. A 19. A 39. D 20. B 40. A

11. 12. 13. 14. 15.

T F F T T

16. 17. 18. 19. 20.

T T T T T

11. 12. 13. 14. 15.

C A A A A

16. 17. 18. 19. 20.

A C C C C

21. 22. 23. 24. 25.

C A A A B

41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

D C A D D C B C B B A C C C A A ----C C A

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.

A D D B C D A A B C** A C C C C D D D C A

81. 82. 83. 84. 85. 86. 87. 88. 89. 90.

C B D D B B A D D D

Supporting Computations: No. 5 (P280,000 + P220,000) x 3% = P15,000 No. 6 (P50,000 + 100,000 – 75,000) x 3% = P2,250 No. 7 Gross receipts (refer to P75,000 #6) x vat rate 12% Output vat P9,000 Input vat (P11,200 x (1,200) 3/28) Vat Payable P7,800 No. No. No. No. No.

16 17 18 22 22

38

|

P6.5M x 12% = P780,000 P660,00 x 3% = P19,800 (P400,000 + P100,000) x 12% = P60,000 P10M x 2.5% = P250,000 P10M x 1.5% = P150,000 Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

E d i ti o n ) b y Ta b a g a n d G a rc i a

No. No. No. No.

26 27 30 34

(P10M x 40%) 3% = P120,000 (P10M – P6M) X 30% = P1,800,000 Subject to vat, not franchise tax AR, beg.

P600,00 0 5,000,00 0 (960,000 ) P4,640,0 00 12% P556,8 00

Revenues (P4M + P1M) AR, end Gross receipts Vat rate Business tax due

No. 35 Covered Franchise AR, beg. Revenues

by

the

AR, end Gross receipts Franchise tax rate Business tax due Total Business Taxes No. 42

P600,000 4,000,00 0 (800,000) P3,800,00 0 2% P76,000 P176,80 0

NOT Covered Franchise AR, beg. Revenues

by

the

Gross receipts

P---1,000,00 0 (160,000 ) P840,000

Franchise tax rate Business tax due

12% P100,800

AR, end

P3M x 10% = P300,000

No. 34 Output vat (P5M x 12%) Input Vat  P300,000 x 12%  P800,000 x 12% x 5/8 Vat Payable

P600,00 0 (36,000) (60,000) P504,0 00

No. 48 OPT% Interest income from lending activities from inst1uments with remaining terms of: Five years and less More than five years

39

|

5,000,00 0 3,000,00 0

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

GRT

5%

P250,000

1%

30,000

E d i ti o n ) b y Ta b a g a n d G a rc i a

Dividends & equity shares from subsidiaries Rental income Net trading gains Total Gross Receipts Tax

1,000,00 0 500,000 300,000

0%

0

7% 7%

35,000 21,000 P336,000

Rentals from safety deposit boxes Net foreign exchange gains Net trading gains from trading of securities Trust fees Dividends from domestic corporations Other service fees Interest income from lending activities from inst1uments with remaining terms of: Five years and less More than five years Total Gross Receipts Tax

P880,000 220,000 660,00 0 110,000 30,000

OPT% 7% 7% 7%

GRT P61,600 15,400 46,200

7% 0%

7,700 0

220,000

7%

15,400

700,000 800,000

5% 1%

35,000 8,000 P189,300

No. 49

No. 50 Interest income with maturity of less than 5 years (P500,000 x 5%) Rentals (P500,000 x 7%) Net trading loss = none; if net trading gain, tax is 7% Gross receipt tax (GRT)

P25,0 00 35,00 0

P60,0 00

No. 51 Interest income with maturity of less than 5 years (P1M x 5%) Rentals (P500,000 x 7%) Net trading gain [200,000 – (100,000 net trading loss previous month) x 7%] Gross receipt tax (GRT)

P50,000 35,000 7,000 P92,00 0

No. 52 Interest withheld and paid (P100,000 x 5 years x 1%) Adjusted amount of tax due to pretermination (P100,000 x 5 years x 5%) Tax Payable

40

|

Tr a n s fe r & B u s i n es s Ta xa ti o n (3

r d

P5,000 25,000 P20,0 00

E d i ti o n ) b y Ta b a g a n d G a rc i a

No. 55 P2M x 10% = P200,000 No. 56 [(P500,000 x 12%)-(300,000x12%)] = P24,000 No. 58 P2M x 2% = P40,000 No. 64 P7.5M x 18% = P1,350,000 No. 65 P5M x 18% = P900,000 No. 66 Not subject to OPT. Gross Receipts > 1,919,500, therefore, JC is subject to vat, not OPT No. 70** ERRATUM: CHANGE THE QUESTION TO : WHICH OF THE FOLLOWING IS SUBJECT TO PERCENTAGE TAX? “a” - not subject to percentage tax or any business tax…… Overseas communication into the Philippines. “b” and “d” - subject to vat “c” – not world or oriental championship. Subject to 10% OPT No. 75 No. 77 No. 79 rate = 1% No. 80 No. 81

P350,000 x .005 = P1,750 [(P1,500,000 - P1,000,000) x 12] = P60,000 (120,000 – 30,000) x ½ x P30 x 1% = P13,500;

Ratio = 45/75 = 60%;

(2,000 x P25 x 4% = P2,000; Ratio = 2/75 = 2.67%; (6,000 x P40 x .005% = P1,200

PROBLEM SOLVING Problem I: Gross receipts-passenger operations (P8,000,000 x 3% CCT) Gross receipts cargo operations (P5M x 75% x 12%vat) Rentals (P2M x 12%vat) Total business taxes

IPO

IPO rate = 4%

P240,000

450,000 240,000 P930,00 0

Problem II: 1) 3% OPT on vat exempt sales (GR