INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

55

Chapter 7: Dealings in Property

CHAPTER 7

DEALINGS IN PROPERTY
Problem 7 1 TRUE OR FALSE 1. True 2. False Ordinary assets 3. False its real properties shall continue to be treated as ordinary assets. 4. True 5. False the basis is the same as the cost of the donor or the FMV at the time of donation whichever is lower. 6. True 7. False Regardless of gain or loss, a tax should be paid when the shares of stock are sold in the stock market because the basis of tax is the selling price. 8. False real property classified as ordinary assets are subject to normal tax. 9. True 10. False Loss on sale of debt securities sustained by bank can either be classified as capital loss or ordinary loss. Capital loss if owned by bank as investments but ordinary loss if acquired for clients loan settlements. 11. True 12. False For ordinary loss, the same; but for capital loss not the same because there is no capital loss carry over and not holding period for corporation.

Problem 7 2 TRUE OR FALSE 1. True 2. False No, because the 6% final tax is based on the higher of the selling price or zonal value. If there is loss on sale, the normal tax rate if preferable. 3. False Not subject to creditable withholding tax. 4. False whichever is lower 5. False equipment used in business operations is an ordinary asset. 6. True 7. False The basis is the fair market value at the date of donation. 8. True 9. True 10. False There should be no capital loss because there is an exercise of the option. 11. True 12. True Problem 7 3 TRUE OR FALSE 1. True 2. True 3. True 4. False Losses from wash sales are not deductible. 5. False No wash sales if the classes of shares of stocks are different.
6. True

7. 8.

True False Not subject to capital gains tax because the issuance is original and the shares of stock is owned by the corporation.

9. True 10. False subject to either stock transaction tax (traded-in stock market) or capital gains tax of 5% to 10% based on capital gains (not traded-in the stock market). 11. True

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
12.

56

Chapter 7: Dealings in Property

False additional assessments by a corporation from its shareholders are not income; hence, not taxable income.

Problem 7 4 1. False subject to capital gains tax of 6%. 2. True 3. False - the speculator sells securities which he does not own. 4. True 5. False this refers to patent. 6. 7. 8. 9. 10. 11. 12. True True False if the land is ordinary asset, subject to normal tax. True False not dealers of securities True True

Problem 7 5 1. C 2. B 3. D 4. C 5. C 6. A 7. B 8. A 9. C 10. C 11. A 12. D

Problem 7 6 1. A 2. D 3. D 4. A 5. C 6. B 7. D 8. D 9. D 10. A

Problem 7 7 D Real property inventories Land and house building used in business Vacation of the executives Acquired undeveloped properties Abandoned properties Total amount of ordinary assets

P10,000,000 3,000,000 1,500,000 500,000 600,000 P15,600,000

All properties acquired by real estate dealers/developers are ordinary assets. Ordinary assets of realty companies that were later abandoned and become idle continue to be considered as ordinary assets. (Rev. Reg. No. 7 03) Problem 7 8 C Interest in partnership Idle raw lands Proceeds of expropriated real property Capital assets

P1,000,000 100,000 2,000,000 P3,100,000

The transfer of property through expropriation with just compensation is basically a sale or exchange of property subject to capital gains tax of 6%. (Blas Gutierrez, and Maria Morales vs. CTA, and CIR, G.R. Nos. L-9738 and L-9771, May 31, 1957)

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Problem 7 9 1. Letter D Selling price per 200 sq. meters Multiplied by number of 200 s.m. sold (9,000 1,000)/200 Total sales Less: Cost of sales (P2,000,000 x 90%) Ordinary gain from sale of land

57

Chapter 7: Dealings in Property

P 100,000 40 P4,000,000 1,800,000 P2,200,000

2. Letter A There is no remaining capital asset of B because the remaining 10% of one hectare is also used into business as a warehouse. Problem 7 10 Fair market value Less: Book value of car Gain on exchange B P190,000 150,000 P 40,000

Problem 7 11 C There is capital loss if the property given away has fair value higher than P200,000 when it was inherited. Problem 7 12 A

There is no taxable amount in the above transaction because the transaction is an exchange solely in kind and Mr. A gained control of Veniz Corporation acquiring more than 50% of the outstanding shares (15/25 = 60%).
Problem 7 13 D Acquisition cost (P200,000 + P20,000) Agents commission (P500,000 x 10%) Deductible cost and expenses Problem 7 14 A P2,000,000 500,000 P1,500,000 P220,000 50,000 P270,000

Sales price Less: Fair market value at the time of his fathers death Gain on sale of farm land

The basis of the property shall be the fair market price or value at the date of acquisition, if the same was acquired by inheritance. [Sec. 40 (B) (2), NIRC] The value at the date of acquisition prevails over the fair market value because such is the lower amount. Problem 7 15 A Sales price Cost or basis to the donee (the lower of donors cost or the fair market value when the gift was made Capital gain No holding period because the seller is a corporation. Problem 7 16 B

P150,000 ( 50,000) P100,000

Sales price Less: Book value of the car Acquisition cost Less: Accum. depn. (P1,000,000/5) x 2

P700,000 P1,000,00 0 400,00

600,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
0 Capital gain Multiplied by percent of holding period Reportable capital gain
Problem 7 17 D Sales price Less: Cost or market whichever is lower) Capital gain No holding period is allowed for taxpayer other individuals. Problem 7 18 B

58

Chapter 7: Dealings in Property

P100,000 50% P 50,000

P200,000 100,000 P100,000

Operating income Capital asset transactions: Capital gain long-term (50%) Capital loss short-term (100%) Net capital gain (loss) Net capital loss carry-over, limit Taxable income

Year 1 P200,00 0 P 25,000 ( 40,000 ) (P15,000 ) P200,00 0

Year 2 P300,000

P 20,000 ( 10,000) P 10,000 ( 10,000) P300,000

The net capital loss carry-over is limited to only P10,000 instead of P15,000 because the net capital gains in year 2 is only P10,000.
Problem 7 19 1. Letter C Ordinary gain Capital asset transactions: Short-term capital gain Long-term capital gain (P30,000 x 50%) Long-term capital loss (P10,000 x 50%) Taxable income before personal exemption 2. Letter B Ordinary gaintransactions: Capital asset Short-term capital gain Long-term capital gain (P30,000) Long-term capital loss Taxable income before personal exemption Problem 7 20 1. Letter C Ordinary taxable income Short-term capital gain (loss) Long-term capital gain (loss) (P600,000 x 50%): (P100,000 x 50%) NCLCO applicable in year 2 is P60,000 P50,000 P20,000 30,000 ( 10,000)

P50,000 P20,000 15,000 ( 5,000)

30,000 P80,000

40,000 P90,000

Year 1 P 60,000 (P400,000) 300,000 (P100,000)

Year 2 P180,000 P200,000 (50,000) (60,000)