I.

In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for P100,000. This
property has a current fair market value of P10 million in view of the construction of a concrete road
traversing the property. Juan Gonzales agreed to exchange his agricultural lot in Laguna for a one-half
hectare residential property located in Batangas, with a fair market value of P10 million, owned by Alpha
Corporation, a domestic corporation engaged in the purchase and sale of real property. Alpha
Corporation acquired the property in 2007 for P9 million.

a) What is the nature of the real properties exchanged for tax purposes capital asset or ordinary asset?
Explain. (3%)

b) Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax base and
rate? Explain. (3%)

c) Is Alpha Corporation subject to income tax on the exchange of property? If so, what is the tax base
and rate? Explain. (3%)
Suggested Answers:
a. as to the property exchanged by alpha corp., it is an ordinary asset. it is one that is held for sale
to customers because it is engaged in purchase and sale of real property. Sec. 39 of the NIRC

as to juan gonzales, it depends. the problem did not state his trade/business, or at least juan's
intended use for the property. if it will be used for trade/business or falls under the enumeration
under sec. 39 of the NIRC, it is an ordinary asset. if not it is a capital asset

b. again it depends on whether the asset exchanged is an ordinary or capital asset. if ordinary, he
is liable for net income tax of 5% to 32%. if the asset is a capital asset, he is liable for final
income tax of 6%. the base will be the fair market value of the property exchanged or acquired,
whichever is higher.

c. since alpha corporation is a realtor, the land is an ordinary asset. hence, he is liable for net
income tax of 35%.