Chapter 4: Co-Ownership, Estates and Trusts
Chapter 4
Co-Ownership, Estates and Trusts
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 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” while Donation is subject to “Donor’s Tax”. Both taxes are not income taxes but classified as “Transfer Taxes” which are discussed in Volume 2 (Transfer and Business Taxation). Nonetheless, incomes from such properties 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 activities of co-ownership are generally limited to the 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 be constituting themselves into a partnership and such shall be taxable as a corporation as discussed in Chapter 6 – Income Tax of a Partnership.
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, Loma 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.
Though the property may be undivided, it was acquired by the owners not through gratuitous transfer (inheritance or donation) but by purchase. Ana, Loma and Fe formed a partnership, instead of co-ownership. Partnership is generally taxable as a corporation. Consequently, Ana, Loma and Fe shall be considered “shareholders” for income tax purposes. Income tax of a partnership as well as the partners are discussed in Chapter 6.
CASE B:
On January 1, 2024, Noy, a resident citizen taxpayer died leaving an undivided parcel of land to his heirs Allan, Mar and Pacquito valued at ₱60,000,000. The property is an income producing property primarily through rentals. In 2024, the property earned gross rentals amounting to ₱15,000,000 while expenditures necessary to carry out the operations was ₱3,000,000.
On the other hand, the heirs, who are all engaged in businesses in their own individual capacities, provided the following data for 2024 taxable year:
• Allan: Gross business income ₱6,000,000; Business expenses ₱2,000,000; Income subject to final taxes (net) ₱200,000
• Mar: Gross business income ₱5,000,000; Business expenses ₱2,500,000; Income subject to final taxes (net) ₱320,000
• Pacquito: Gross business income ₱8,000,000; Business expenses ₱6,000,000; Income subject to final taxes (net) ₱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 ₱60M is not subject to income tax but to estate tax (transfer tax is discussed in Volume 2).
Question 2: Assuming Noy was able to secure a partition and three separate land titles 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.
The property involved is not an undivided property.
Question 3: What 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 (repeated): How much is the taxable income of the co-ownership?
Answer: none
A co-ownership is not a taxable person or entity. Its income, however, is distributed or shared by the heirs/beneficiaries, to be taxed by them in their individual capacity.
Question 4: How much is the taxable income of Allan?
Answer: ₱7,000,000
Solution:
• Gross income of Allan: ₱6,000,000
• Allowable business expenses of Allan: ₱2,000,000
• Share in net income of the co-ownership [(₱15M – ₱3M) / 3]: ₱4,000,000
• Taxable income: ₱7,000,000
Question 5: How much is the income tax payable of Allan?
Answer: ₱1,902,500
Solution:
• Taxable income: ₱7,000,000
• TAX DUE (using the graduated tax rates):
◦ 1st ₱2,000,000: ₱490,500
◦ In excess of ₱2M: (₱5M x 30%): ₱1,500,000
• Income Tax Payable: ₱1,902,500
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 “estate” is a mass of all the 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. For instance, the parcel of land worth ₱60,000,000 in Illustration 1, CASE B is the estate of Noy. The passage of his property to his heirs upon his death is subject to Estate Tax (Refer to Volume 2 - Business and Transfer Taxes).
A transfer tax is a tax on gratuitous transfer of property either through gratuitous disposition (subject to donor’s tax) or through inheritance (subject to estate tax). A transfer tax is not an income tax because there is no taxable income realized from the passage of property to the heirs upon the death of the decedent.
“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 or 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 tax should be paid.
ILLUSTRATION 2:
A decedent died leaving the following to his lawful heirs:
• Cash: ₱5,000,000
• House and lot: ₱15,000,000
• Vacant parcel of land: ₱30,000,000
• Commercial building: ₱5,000,000
• Vehicles: ₱5,000,000
• Total @ FMVs upon death: ₱60,000,000
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 of income.
The estate of a decedent may be settled judicially or extrajudicially. Judicial settlement pertains to settlement of an estate in a court proceeding while in extrajudicial settlement, the heirs or beneficiaries settle for themselves the distribution of the estate or their inheritance.
Classification of Estates under settlement or administration
• For estates under “judicial” administration: The fiduciary/trustee (administrator/executor) files the ITR and pays the tax due thereon.
• For estates not under “judicial” administration (i.e., extrajudicial settlement): The heirs and/or beneficiaries file the ITR of the estate and pay the tax due thereon.
Applicable tax
The taxable income of the estate is computed in the same manner as an individual taxpayer. Consequently, the tax due is computed using the graduated 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 calendar 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 placed 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.
GRADUATED TAX RATE BEGINNING 2023 TAXABLE YEAR for Individuals, Estates, and Trusts
• Not over ₱250,000: Exempt
• Over ₱250,000 but not over ₱400,000: 15% of excess over ₱250,000
• Over ₱400,000 but not over ₱800,000: ₱22,500 + 20% in excess of ₱400,000
• Over ₱800,000 but not over ₱2M: ₱102,500 + 25% in excess of ₱800,000
• Over ₱2,000,000 but not over ₱8M: ₱402,500 + 30% in excess of ₱2M
• Over ₱8,000,000: ₱2,202,500 + 35% in excess of ₱8M
ILLUSTRATION 3:
On November 1, 2023, Juan Dela Cruz died leaving various properties worth ₱30,000,000. 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 2024 (while under administration), the estate earned ₱4,750,000 (net of 5% creditable withholding tax on rent) and incurred operating expenses of ₱2,000,000.
Question: How much is the income tax payable of the Estate of Juan Dela Cruz in 2024?
Answer: ₱452,500
Solution:
• Gross rental income (₱4,750,000 / 95%): ₱5,000,000
• Allowable deductions: ₱2,000,000
• Taxable income: ₱3,000,000
• TAX DUE (using the graduated tax rates):
◦ 1st ₱2,000,000: ₱402,500
◦ In excess of ₱2M (₱1M x 30%): ₱300,000
◦ Total Tax Due: ₱702,500
• Less: CWT Tax on rentals: ₱250,000
• Income Tax Payable: ₱452,500
Deductions from the Gross Income of an Estate and Trust
Deductions from the gross income of an estate and trust are the same items of deductions (business expenses) allowed for individual taxpayers under Section 34 of the Tax Code. 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 (also known as special deduction) in the determination of the taxable income of an estate and trust. However, such amount of income distributed shall be included in the determination of the taxable income of the legatee/heir/beneficiary.
Shown below is the pro-forma computation of the taxable income of the estate and the heirs/beneficiaries:
Taxable Income of the Estate
• Gross income: ₱xxx
• Less: Deductions
◦ Business expenses: ₱xxx
◦ Special Deduction: Distribution of the estate’s income to beneficiaries: ₱xx
• Taxable income of the Estate: ₱xxx
• Tax Due (Graduated Tax Rate): ₱xxx
Taxable Income of the Beneficiary
• Compensation income, if any: ₱xxx
• Net income of the beneficiary from business and/or practice of profession: ₱xxx
• Add: Amt. received from the income of the estate: ₱xx
• Taxable income: ₱xxx
• Tax Due (Graduated Tax Rate): ₱xxx
ILLUSTRATION 4:
On November 1, 2023, Juan Dela Cruz died leaving various properties worth ₱30,000,000 to his heirs, Pedro, Ana and Loma. The properties are income-producing properties deriving rental income. In 2024 (while under administration), the estate earned ₱4,750,000 (net of 5% creditable withholding tax on rent) and incurred operating expenses of ₱2,000,000.
During 2024, Pedro (one of the lawful heirs) received ₱200,000 from the income of the estate. Pedro’s other income and expenses were as follows:
• Compensation income: ₱800,000
• 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 2024?
Answer: ₱2,800,000
Solution:
• Gross rental income (₱4.75M + 25M correction/clarification – actual computation: ₱4,750,000 / 95%): ₱5,000,000
• Allowable business expenses: ₱2,000,000
• Distribution of income to Pedro (heir): ₱200,000
• Taxable income: ₱2,800,000
Question 2: How much is the taxable income of Pedro in 2024?
Answer: ₱1,900,000
Solution:
• Compensation income: ₱800,000
• Business income: ₱1,500,000
• Business expenses: ₱600,000
• Amt. received from the income of the estate: ₱200,000
• Taxable income: ₱1,900,000
Termination of Judicial/Extrajudicial Settlement
After termination of judicial/extrajudicial settlement of the estate where 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. (Evangelista vs. Collector, GR No. L-9996, October 15, 1957; Ofia vs. Commissioner, GR No. L-19342, May 25, 1972).
On the other hand, 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. (Pascual vs. Commissioner, GR No. L-78133, October 18, 1988; Obillos vs. Commissioner, GR No. L-68118, October 29, 1985).
TAXATION OF TRUSTS
Meaning of Trust
A 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 administers and manages the properties for the benefit of designated persons called Beneficiaries. The term “person” may refer to an individual, natural or juridical person like a corporation.
A trust may be arranged inter-vivos 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.
The subject matter of the trust must be clearly identified. It is important that the property to be transferred in trust must be existing, lawful, definite and transferable. Anything that has economic value and which a person may own and to which may transfer legal title, by gift or sale, is property that may be conveyed in trust – such as cash, stocks, bonds, real property, livestock, growing crops and jewelry.
A trust agreement allows individuals 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 trustee for the benefit of an incapacitated or minor child.
Parties to the Trust
1. Trustor – Person who establishes a trust.
2. Trustee – One in whom confidence is reposed as regards property for the benefit of another person. A fiduciary is any person or corporation that holds in trust an estate of another person or persons.
3. Beneficiary – Person for whose benefit the trust is created.
Taxability of Income 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 assets included in the corpus of the trust. The imposition of tax is not affected by the fact that the ultimate beneficiary may be a person exempt from tax. Likewise, the income of a trust administered in a foreign country is taxable to the trustee.
Taxable to the Grantor/Trustor if:
• Under the terms of the trust, the title to any part of the corpus or principal of the trust may be revested to the grantor (Revocable Trust). The income of the corpus or principal that may be revested to the grantor shall be taxable to the grantor.
• The income of the trust may be held or distributed for the benefit of the grantor.
• Under the terms 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 distributed to the beneficiaries. In such a case, the beneficiaries include in their return their distributive share in the net income of the trust. The distribution of the year’s income to an heir or beneficiary is a special item of deduction for the trust. At the same time, the income distributed (actual or constructive) shall be treated as a special item of income to the heir/beneficiary.
Special Deductions:
1. Distribution of the year’s income to an heir or beneficiary; and
2. Amount collected by a guardian of an infant which is to be held or distributed as the court may direct.
Special deductions are not allowed in case of a trust administered in a foreign country [Sec.61(C)-NIRC].
Computation of Taxable Income
The principles applied in computing the taxable income of an estate are also applicable to determining the taxable income of a trust. Thus, a trust’s taxable income is computed the same way as an individual taxpayer’s, and the tax due is based on the graduated rates for individuals under Section 24(A) of the Tax Code (as amended). Additionally, trusts must use the calendar year as their accounting period for tax purposes.
Shown below is the pro-forma computation of the taxable income of a Trust and a Beneficiary:
Taxable Income of the Trust
• Gross income: ₱xxx
• Less: Deductions
◦ Business expenses: ₱xxx
◦ Special Deduction: Distribution of trust’s income to beneficiaries: ₱xx
• Taxable income of the Trust: ₱xxx
• Tax Due (Graduated Tax Rate): ₱xxx
Taxable Income of the Beneficiary
• Compensation income, if any: ₱xxx
• Net income of the beneficiary from business and/or practice of profession: ₱xxx
• Add: Amt. received from the income of the trust: ₱xx
• Taxable income: ₱xxx
• Tax Due (Graduated Tax Rate): ₱xxx
ILLUSTRATION 5:
On November 1, 2023, Pedro established a trust agreement with Mr. Abogado for the benefit of his daughter, Ana. The properties in the trust are income-producing real properties in Cebu deriving rental income. In 2024, the trust earned ₱4,750,000 rental income (net of 5% creditable withholding tax on rent) and incurred operating expenses of ₱2,000,000.
During 2024, Ana received ₱500,000 from the income of the trust. Ana’s other income and expenses were as follows:
• Compensation income: ₱800,000
• Business income from self-employment: ₱1,500,000
• Business expenses: ₱600,000
Question 1: How much is the taxable income of the trust in 2024?
Answer: ₱2,500,000
Solution:
• Gross rental income (₱4.75M / 95%): ₱5,000,000
• Allowable business expenses: ₱2,000,000
• Distribution of income to Ana: ₱500,000
• Taxable income: ₱2,500,000
Question 2: How much is the taxable income of Ana in 2024?
Answer: ₱2,200,000
Solution:
• Compensation income: ₱800,000
• Business income from self-employment: ₱1,500,000
• Business expenses: ₱600,000
• Amt. received from the income of the trust: ₱500,000
• Taxable income: ₱2,200,000
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. Under the Tax Code, an ordinary trust includes any of the following:
◦ A trust where income is accumulated or held for future distribution under the terms of a will trust.
◦ A trust where income is to be distributed currently by the fiduciary to the beneficiaries.
◦ A trust where income is accumulated for the benefit of unborn or unascertained persons or those with contingent interest.
◦ A trust where income collected by a guardian of an infant is held or distributed as the court may direct.
◦ A trust where income, at the fiduciary’s discretion, may be either distributed to beneficiaries or accumulated.
2. Revocable Trust (Section 63-NIRC)
A revocable trust is one 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 either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom; or
• In any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom.
The income of such part of the trust shall be included in computing the taxable income of the grantor [Sec. 63, NIRC].
3. Employees’ Trust
Income tax shall not apply to an employees’ trust which forms part of a pension, stock bonus, or profit-sharing plan of an employer for the benefit of some or all of its employees [Section 60(B)-NIRC]. The income of an employees’ trust is also exempt from final taxes as well as income derived from the sale of real property whose funds are sourced from the employees’ trust fund [Miguel J. Ossorio Pension Foundation, Inc. vs. CA and CIR/GR No. 162175, June 28, 2010].
Requisites or Conditions for Exemption of Employee’s Trust
• The employee’s trust must form part of a pension, stock bonus, or profit-sharing plan of an employer for the benefit of some or all of its employees.
• Contributions are made to the trust by such employer, or employees, or both.
• The contributions are made for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan.
• Under the trust instrument, it is impossible at any time prior to the satisfaction of all liabilities with respect to employees under the trust for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees.
• Any amount actually distributed or distributable to any employee shall be taxable to him in the year of distribution, to the extent that it exceeds the amount contributed by such employee or distributee.
Consolidated Income Tax Returns (Two or more trusts)
Where two or more trusts are created by the same trustor or grantor and the beneficiary is the same person, 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, so that each trust shall have a share in the income tax on consolidated income.
The format of computation (Tax Apportionment) is:
Tax Apportioned to a Trust = (Taxable income of the trust / Taxable income of all trusts) x Consolidated income tax
2. Such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the trust 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: ₱xxx
• Less: Income tax already paid: ₱(xx)
• Income tax payable: ₱xxx
ILLUSTRATION 6:
In 2024, Pedro created three trusts for his minor daughter, Ana. The following data were furnished by the trusts during 2024:
• Trust 1: Gross Income ₱5,000,000; Expenses ₱2,500,000; Net Income ₱2,500,000; Income Tax Paid ₱500,000
• Trust 2: Gross Income ₱10,000,000; Expenses ₱5,000,000; Net Income ₱5,000,000; Income Tax Paid ₱1,200,000
• Trust 3: Gross Income ₱15,000,000; Expenses ₱7,500,000; Net Income ₱7,500,000; Income Tax Paid ₱2,000,000
Required: Compute the income tax payable of Trust 1, 2 and 3
Solution:
• Consolidated Gross Income: ₱30,000,000
• Consolidated Expenses: ₱15,000,000
• Consolidated Taxable Income: ₱15,000,000
• Tax Due (using graduated rate):
◦ On first ₱8,000,000: ₱2,202,500
◦ In excess of ₱8M (₱7M x 35%): ₱2,450,000
◦ Consolidated Income Tax Due: ₱4,652,500
The consolidated tax due is then apportioned to each trust based on their respective taxable incomes, and the income tax already paid by each trust is deducted to arrive at the income tax payable for each trust.
• Income Tax Still Due/Payable of Trust 1
◦ Tax Apportionment to Trust 1: (₱2,500,000 / ₱15,000,000) x ₱4,652,500 = ₱775,333
◦ Less: Income tax already paid: ₱500,000
◦ Income tax still due/payable: ₱275,333
• Income Tax Still Due/Payable of Trust 2
◦ Tax Apportionment to Trust 2: (₱5,000,000 / ₱15,000,000) x ₱4,652,500 = ₱1,550,867
◦ Less: Income tax already paid: ₱1,200,000
◦ Income tax still due/payable: ₱350,867
• Income Tax Still Due/Payable of Trust 3
◦ Tax Apportionment to Trust 3: (₱7,500,000 / ₱15,000,000) x ₱4,652,500 = ₱2,326,000
◦ Less: Income tax already paid: ₱2,000,000
◦ Income tax still due/payable: ₱326,000
Filing of Income Tax Returns
The following persons acting in any fiduciary capacity shall file the income tax return for an estate or trust (Section 65-NIRC):
• Guardians
• Trustees
• Executors/administrators
• Receivers
• Conservators
• All other persons or corporations acting in any fiduciary capacity
In case of two or more joint fiduciaries, a return filed by one of them shall be sufficient compliance with the requirements of the Tax Code.
PREPARATION OF INCOME TAX RETURN of an ESTATE
Namahinga Nah died leaving an estate worth ₱10,000,000. The estate is under administration. In 2023, the properties in the estate earned a gross income of ₱1,500,000 and the estate incurred expenses of ₱600,000. Felipe, the only heir, received ₱200,000 from the income of the estate.
Required:
1. Determine the income tax due of the estate and fill out the applicable income tax return
Solution:
• Gross income: ₱1,500,000
• OPEX: ₱600,000
• Income of the estate distributed to Felipe: ₱200,000
• Estate’s taxable net income: ₱700,000
• Income Tax Due of the Estate (Using Graduated Tax Rate): ₱82,500
2. Assume that Felipe also earned net income of ₱500,000 from his trading business. What amount should Felipe report as his taxable income for the year?
Solution:
• Gross income from trading business: ₱500,000
• Amount received from the income of the estate: ₱200,000
• Taxable net income of Felipe: ₱700,000
PREPARATION OF INCOME TAX RETURN of a TRUST
On January 1, 2023, 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 ₱40,000,000 in revenues and incurred expenses of ₱10,000,000. Out of the trust’s income, Atty. Digong transferred ₱10,000,000 to Ana. During the year, Ana earned compensation income of ₱2,500,000.
Required:
1. Determine the income tax due of the trust and fill out the applicable income tax return of the trust
Solution:
• Gross income - trust: ₱40,000,000
• Expenses: ₱10,000,000
• Income of the trust given to Ana: ₱10,000,000
• Net Taxable Income - trust: ₱20,000,000
• Income Tax Due based on Graduated Rate:
◦ First ₱8,000,000: ₱2,202,500
◦ 35% in excess of ₱8M (₱12M x 35%): ₱4,200,000
◦ Income Tax Due (Tax Table): ₱6,402,500
2. How much is the taxable income of Ana?
Solution:
• Compensation income: ₱2,500,000
• Income of the trust distributed to Ana: ₱10,000,000
• Net Taxable Income - Ana: ₱12,500,000
CHAPTER EXERCISES
PROBLEMS
P4.1. (Estate)
Pedro died two years ago leaving an undivided property that generates rental income. His heirs are Louie and Floyd, and the property is under administration through the decedent’s executor. The following data were provided for the taxable year:
• Rental income of the estate (gross of 5% tax): ₱800,000
• Deductible operating expenses – estate: ₱420,000
Personal Income/Expenses of the heirs:
• Louie: Gross business income ₱325,000; Deductible business expenses ₱117,000; Dividend from domestic corporation ₱25,000; Dividend from foreign corporation ₱12,000; Prize (supermarket raffle) ₱15,000; Royalty (books) ₱10,000
• Floyd: Gross business income ₱380,000; Deductible business expenses ₱105,000; Dividend from domestic corporation ₱30,000; Dividend from foreign corporation ₱8,250; Prize (supermarket raffle) ₱7,500; Royalty (books) ₱18,000
Additional Information:
Louie is married with 2 dependent children; Floyd is single with no 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
P4.2. (Estate)
Pedro died two years ago leaving an undivided property that generates rental income. His heirs are Louie and Floyd, and the property is under administration through the decedent’s executor. The following data were provided for the taxable year:
• Rental income of the estate: ₱1,000,000
• Deductible operating expenses (estate): ₱500,000
• Income distributed to Louie: ₱50,000
• Income distributed to Floyd: ₱50,000
• Dividend income from domestic corporation: ₱10,000
• Interest income from U.S. $ deposits: ₱200,000
• Interest income from peso deposits: ₱100,000
Personal Income/Expenses of the heirs:
• Louie: Gross income ₱325,000; Deductible expenses ₱117,000; Dividend from domestic corporation ₱25,000; Dividend from foreign corporation ₱12,000; Prize (supermarket raffle) ₱15,000; Royalty ₱10,000
• Floyd: Gross income ₱380,000; Deductible expenses ₱105,000; Dividend from domestic corporation ₱30,000; Dividend from foreign corporation ₱8,250; Prize (supermarket raffle) ₱7,500; Royalty ₱18,000
Additional Information:
Louie is married with 2 dependent children; Floyd is single with no 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, with BDO as the trustee. The trust’s income is accumulated for Pedro. The following data were provided:
Gross income of the trust: ₱3,000,000
• Deductible business expenses of the trust: ₱1,800,000
• Income distributed to Pedro during the year: ₱200,000
• Dividend income from domestic corporation: ₱100,000
• Dividend income from resident foreign corporation: ₱100,000
• Interest income from U.S. $ deposits: ₱200,000
• Interest income from peso deposits: ₱100,000
Personal Income and Expenses of Pedro:
• Compensation income: ₱800,000
• Rental income (net): ₱475,000
• Rental expenses: ₱80,000
• Royalty income (books): ₱30,000
• Other royalty income: ₱120,000
• Dividend from domestic corporation: ₱30,000
• Dividend from foreign corporation: ₱8,250
• Prize (SAR raffle): ₱15,000
• Lotto winnings: ₱10,000,000
• Quarterly tax payments: ₱120,000
Required: Determine the following:
1. Income tax payable of the trust
2. Income tax payable of Pedro
MULTIPLE CHOICE
Choose the letter of the correct answer.
1. It arises 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.
a. Partnership
b. Trust
c. Joint account
d. Co-ownership
2. Which of the following shall qualify as co-ownership?
I. Succession by several heirs to an undivided estate, the estate is not under administration;
II. Donation of property to two or more beneficiaries.
a. Both I and II
b. Neither I nor II
c. I only
d. II only
Use the following data for the next three (3) questions:
Ana, Loma, and Fe are the heirs of Pedro who died on Nov. 1, 2023. The properties of Pedro consist solely of real property valued at ₱50,000,000 at the time of his death. The property is primarily deriving rental income. In 2024, the property remained undivided and it derived a net rental income of ₱15,000,000.
3. For income tax purposes, the heirs will be taxed on net rental income from the inherited property for the year 2024 as:
a. Partners in a commercial partnership
b. Partners in a general 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. ₱50,000,000
b. ₱15,000,000
c. ₱80,000
d. nil
5. What amount should each heir report in their individual returns as their share in the net rental income of the property they inherited?
a. ₱50,000,000
b. ₱15,000,000
c. ₱10,000,000
d. ₱5,000,000
6. Question 1: Is a co-ownership 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 income therefrom.
Answer to Question 2: Yes, because each co-owner is taxed individually on their 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 both questions are wrong.
7. Statement 1: Co-owners are taxed individually on their distributive share in the income of the co-ownership.
Statement 2: If co-owners invest the income in a co-ownership in business for profit, they would constitute themselves into a partnership and as such shall be taxable as corporation.
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
8. When will an inherited property be considered as owned by an unregistered partnership?
I. When the property remained undivided for more than ten (10) 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 trust.
a. Only condition I is required.
b. Only condition II is required.
c. Conditions I and II are required.
d. None of the above
9. It is composed of all the 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.
a. Estate
b. Devisee
c. Legatee
d. Testator
10. Income received by the estate during the period of administration or settlement of the estate, for tax purposes is known as:
a. Income of the estate
b. Income of the heirs
c. Income of the trustee
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 individual taxpayers.
Statement 2: Income of the estate distributed to a beneficiary is allowable deduction from the gross income of 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?
I. The items of gross income of the estate are the same items as the items of gross income of individual taxpayers.
II. Deductions from the gross income of the estate are the same as the items of deductions allowed to an individual taxpayer.
III. In addition to the allowable deductions 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 of the estate during the year that is paid or credited to the legatee, heir or beneficiary is subject to final withholding tax of 15%.
a. I and II only
b. I, II and III only
c. I, II, III and IV
d. None of the above
13. Which of the following is included in the income of the estate of a decedent?
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 the property at the time of death, where the property was sold after the settlement of the estate.
c. Appreciation in the value of property passed 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: Where the estate is not under judicial administration, the income 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. Statements 1 and 2 are true
15. When an individual taxpayer dies, future income on his property will be taxed to:
a. Those who inherit the property after they receive the property.
b. The estate itself, after the heirs have received the property.
c. The individual himself.
d. None of the above.
16. Statement 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 deductible from the gross income of 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
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 income so distributed is taxable to the heirs as part of their gross income for the year.
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
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 statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true
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 placed 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.
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:
Namahinga Nha died in 2023 leaving an estate worth ₱10,000,000. The estate is under administration. In 2024, the properties in the estate earned a gross income of ₱600,000 and the estate incurred expenses of ₱150,000. Francis, one of the heirs, received ₱120,000 from the income of the estate.
20. The taxable income of the estate is:
a. ₱480,000
b. ₱450,000
c. ₱310,000
d. ₱330,000
21. Assume that Francis also earned net income of ₱500,000 from his trading business. What amount should Francis report as his taxable income for 2024?
a. ₱620,000
b. ₱570,000
c. ₱500,000
d. ₱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 income therefrom and ultimately the corpus to be distributed in accordance with the directives of the creator as expressed in the governing instrument.
a. Estate
b. Trust
c. Fiduciary
d. Beneficiary
23. Which of the following is correct pertaining to estates and trusts?
a. Estates and trusts are treated as separate taxable entities.
b. The tabular rates or graduated rate of tax prescribed under Section 24A for individuals shall be used in computing the income tax of trusts and estates.
c. The taxable income of estates and trusts shall be determined in the same manner and basis as 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.
III. Trusts are treated as separate taxable entities.
a. I, II and III
b. I and II only
c. I and III only
d. I only
25. The following are classifications of Trusts, except:
a. Ordinary trust
b. Revocable trust
c. Irrevocable 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.
III. This type of trust is amendable and revocable at any time during the Testator’s lifetime, but becomes irrevocable upon the Testator’s death.
IV. A Testamentary Trust is considered its own legal entity, so it is taxed separately from the individual Beneficiaries even before the death of the testator.
a. I only
b. II only
c. IV only
d. III and IV only
27. Which of the following statement(s) 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.
III. A trust where the income is accumulated for the benefit of unborn or unascertained person or persons with contingent interest.
IV. A trust where the income collected by a guardian of an infant is held or distributed as the court may direct.
V. A trust where the income, at the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.
a. I and II only
b. I, II and III only
c. I, II, III and IV only
d. I, II, III, IV and V
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 or its income.
Statement 2: The income of a trust will be taxed against the 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 an employee’s trust which forms part of a 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 amount 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 false 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 allowable 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
31. The following statements refer to the rules in determining the taxable income 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.
III. 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 beneficiary is subject to final withholding tax of 15%.
a. I and II only
b. I, II and III only
c. I, II, III and IV
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 trustee?
a. Income of a trust which is to be accumulated or held for future distribution consisting of ordinary income or gain from the sale of assets included in the corpus of the trust.
b. Income of a trust, whether created by will or deed, for accumulation of income, whether for an unascertained person 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 or in part, is subject to revocation anytime.
34. Which of the following statements 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 income of the revocable trust is taxable against the grantor.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
35. Which statement is true? Income derived by a trust:
a. Is taxable to the beneficiary if such income is 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 possession of the income.
d. All of the above.
36. Statement 1: The income tax of irrevocable trust is taxable in the same manner as the income of the estate.
Statement 2: In the case of two or more trusts created by the same person for the same beneficiary, the taxable income of all trusts shall be consolidated and the tax shall be based on the consolidated income.
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
37. The income distributed to the beneficiaries of estates and trusts, except income subject to final withholding tax and income exempt from tax, is subject to:
a. Creditable withholding tax of 10%
b. Creditable withholding tax of 15%
c. Final withholding tax of 20%
d. Neither final nor creditable withholding tax
38. Statement 1: Estates and trusts can deduct from the gross income the same items of deductions authorized under the Tax Code as those allowed to individual taxpayers.
Statement 2: The scheduler tax rates under Section 24(A), which are prescribed for individuals, will be used in computing the income tax of estates and trusts.
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 eldest 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 ₱1,000,000. On the other hand, the grantor earned a compensation income of ₱1,500,000 and business income of ₱1,000,000. No part of the income of the trust was distributed to the revocable beneficiary during the year. Determine the following:
39. The taxable income of the trust:
a. ₱1,000,000
b. ₱980,000
c. ₱950,000
d. nil
40. The taxable income of the grantor:
a. ₱1,000,000
b. ₱2,500,000
c. ₱3,000,000
d. ₱3,500,000
Use the following data for the next two (2) questions:
On January 1, 2024, 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 income.
During the year, the trust earned ₱10,000,000 revenues and incurred expenses of ₱2,000,000. Out of the trust’s income, Atty. Lo Yer gave Princess ₱1,500,000. In the same year, Princess earned compensation income of ₱1,850,000; net of withholding tax of ₱650,000.
Determine the following:
41. Taxable income of the trust:
a. ₱5,000,000
b. ₱6,500,000
c. ₱8,000,000
d. ₱8,000,000
42. Taxable income of Princess:
a. ₱1,500,000
b. ₱1,850,000
c. ₱2,500,000
d. ₱4,000,000
Use the following data for the next three (3) questions:
During the current taxable year, Mr. Mapagbigay created two (2) trusts for his minor son, Lucky. During the year, the two trusts earned net income as follows:
• Trust 1: ₱4,000,000
• 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. Consolidated tax due of the Trust:
a. ₱1,130,000
b. ₱1,770,000
c. ₱2,902,500
d. ₱3,110,000
44. Additional income tax payable of Trust 1:
a. ₱96,000
b. ₱158,500
c. ₱1,130,000
d. ₱1,770,000
45. Additional income tax payable of Trust 2:
a. ₱139,000
b. ₱114,000
c. ₱1,130,000
d. ₱1,770,000