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MSJG TAX 1 Chap 7

Mar Sean Jan Gabiosa

Chapter Notes
Income Taxation 7th edition Valencia and Roxas
Chapter 7 Dealings in Property
Dealing in property refers to sale or exchange of:
a) Ordinary Assets
b) Capital Assets
Ordinary assets are assets that ae used primarily for business. Such as:
Merchandise inventory
Securities
Real Properties
Capital Assets, (Section 39(A) of NIRC), means property held by the taxpayer but
does not include ordinary assets. Examples are:
Stock and securities other than dealers
Interest in partnership/joint venture
Goodwill
Real and personal properties not used in trade or business
Investment property
Ordinary Asset is to business purposes;
While Capital Asset is to residential or ownership purposes.
Not using the ordinary asset for business for 2 years from consummation of tax
payment, automatically converts it to capital asset.
Ordinary Asset
Capital Asset
Real
Securities
Real
Securities
Income tax Normal
Normal
CGT
CGT or OPT*
DST
Yes
Yes
Yes
Yes
Business tax Yes
Yes
No
NO
Normal Tax
5%-32%; or
30%
CGT Capital Gains Tax
6% for real property
If NOT traded on Stock-exchange: 5% of 100,000, then 10% for the
excess
OPT Other percentage tax
If traded on stock exchange: 1% of 50% of Selling price.
DST Documentary Stamp tax
Sale of real property is subject to 1.5%
Investment in stocks and securities owned by bank shall be classified as capital
assets.

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Real and other properties ROPA, including stocks and securities acquired by banks
shall be treated as ordinary assets.
In disposing property with a selling price, costs to be capitalized are:
Acquisition cost reconditioning, testing
Incidental expenses processing, commission
Special Rules in determining acquisition cost (Cost basis)
If the property was acquired by purchase on or after March 1, 1913
Fair market value of property acquired
Less: Acquisition cost of property surrendered
If the property was acquired by inheritance
Sales price
Less: FMV of property when inherited
If the property was acquired as a gift
Sales price
Less: FMV when given
If the property was acquired less than full and adequate consideration
Sales price
Less: Amount paid by the transferee (owner of the property)
Ordinary Gain (Loss)
Ordinary Asset
Sale
Less: Cost
Less: Operating Expenses

Capital Gain(Loss)
Capital Asset
Sale
Less: Cost

Tax treatment for Capital gain/loss

Individual
Preference over ordinary gain
Net capital loss is not deductible from ordinary gain
Net ordinary loss is deductible from net capital gain
Reportable percentages
100% Short term capital gain(loss)
50% Long term capital gain(loss)
NCLCO net capital loss carry-over, conditions:
Not a corporation
Does not exceed taxable income the year it was sustained (year before)
Corporation
No NCLCO because no holding period.
No carrying over of capital loss in the subsequent year.
Net capital loss is not deducted from ordinary income
Summary of tax treatment of Ordinary and Capital Assets

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Ordinary loss is allowed to be ducted from business income and capital gains;
However, Capital loss is only allowed to be deducted from capital gains.
Transactions for Real property NOT used in business is a capital asset transaction,
therefore CGT of 6% of Selling price/Zonal Value, whichever higher.
Ex.
SP = 1,000,000
ZV = 1,200,000
CGT is 1,200,000 6% = 72,000
72,000 is a Final tax
Disposition of Principal Residence is also subject to 6% CGT.
But from disposition, if the proceeds are utilized to acquire new principal
residence, the transaction can be exempted from CGT, conditions:
a) 30 day notification from date of disposition to Commissioner
b) Can be availed only one every 10 years
c) Unutilized portion is subject to CGT 6%; and shall be paid within 30
days after 18 month utilization period. *20% surcharge per annum.
When the Principal residence is disposed and has availed the tax exemption
(Utilization):
a) Sales fully utilized
The old cost of the residence is the basis(new cost).
b) Portion/Partially applied
The percentage of utilized portion is the basis(cost) of new principal
residence.
c) Utilized cost exceed the sale proceed
Basis of the old cost; plus the Additional cost incurred (Total cost minus
sales proceed)
Sale or Exchange of Real Property Used in Business is an ordinary asset transaction,
thus subject to normal tax.
Rule 1 Real Property is Inventory
Gross selling price* (consideration received) or Fair market value
(Zonal value), whichever is higher.
Higher of GSP/FMV
XX
Multiply by Creditable tax rate
Selling price 500,000 or less
1.5%
500,000 - 2,000,000
3.0%
2,000,000 more
5.0%
Creditable withholding tax
XX
CWT is not a final tax, hence it is deducted from year-end income tax
due.
Income derived from real properties (as inventory) will be deducted
with this tax because the income itself is from the sale of properties.
Rule 2 Ordinary asset other than inventory

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CWT 6% of GSP/FMV whichever is higher

SP
XX
Multiply by creditable tax rate
6%
CWT
XX
Rule 3 Capital asset sold to government unit by an individual unit
The individual has the option to
a) 6% Final capital gain tax
Proceed 6% = CGT
b) Normal tax rate (5%-32%)
Proceeds
Less: Cost of property
Gain/Loss on Sale
Multiply by tax rate applicable
Tax
Sale of real property not located in the Philippines sold by a resident citizen or
domestic corporation is subject to normal tax rate (Schedular or 30%).
Stock Transactions
These transactions refer to sale of equity securities of other corporations which are
classified as either capital assets or ordinary assets.
Dealers in securities Stock transaction tax 30%
Non-dealers in securities Either;
If traded-in stock exchange = 50% of
1% of SP/FMV, whichever is higher.
If not traded-in stock exchange = CGT of
5%(100,000), 10% (in excess of 100,000)
Adjusted net asset method
Fair value of assets (Real properties appraised*)
Less: fair value of liabilities
Adjusted net asset value
*Re
(to be continued due to books discrepancy)
Installment sales of stock
If initial payment is less than 25% of Selling Price, CGT payment is installment.
If sale is not a mortgage sale, the tax due for the year is the proportionate ratio
installment received over the total SP/Contract price
Ex.
Year 1
(Downpayment + payment received)/Selling price
Capital gain tax
If mortgage sale, mortgage assumed by the purchaser.

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Year 1 (Initial payment*)/Contract Price* Capital Gains tax

*Initial payment
Downpayment
Add: Excess of mortgage over cost
*Contract Price
Selling price
Add: Excess of Mortgage over cost
Less: Mortgage assumed by the buyer
Wash sale is acquiring or purchasing of stocks that are substantially identical.
Conditions:
a) The sale is at loss;
b) 30 day before or after the sale;
c) Not a dealer of stock, or Dealer but not in ordinary course of business.
General rule; losses from wash sales are not deductible while gains are taxable.
If securities sold are more than securities purchases, then number of disposed
stocks will be matched to acquired stocks.
Short Sales is a capital asset transaction that is either:
a) short sale of a property; or
Selling price of speculator (e.g. a representative to buy)
Less: Purchase price (FMV of securities)
Capital gain/loss
*the speculator will usually postpones the delivery so that the
purchase price is lower thus having capital gain.
b) failure to exercise option to buy or sell.
Ex. The option money or the money given ahead of the time to
purchase a capital asset is a loss for the part of the buyer if he does not exercise the
privilege to buy such capita asset.
Worthless securities, rules:
a) written off;
b) bank and trust company cannot write off securities;
c) written of amount is capital loss.
Liquidating dividends
Total amount received
Less: Cost of shares invested
Taxable gain/Deductible loss

Own shares received in exchange of property

FMV of stock received back (because own stock)
Less: Cost of property given

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Taxable capital gain/Deductible capital loss

Reissuance of stock for consideration less than its cost is a deductible loss
Consideration received
Less: Cost of treasury stock
Taxable gain/Deductible loss
The gain/loss of retirement of bonds before its maturity is a taxable gain/deductible
loss
Face Value of bonds
Add(Less): Unamortized premium(Unamortized discount)
Retirement price
Gain/Loss on retirement
Net gain/loss on retirement of bonds
Gain or loss on sale of partners interest in partnership is a capital asset transaction
Capital loss is incurred, only if the loss resulting from abandoning of the property
comes form foreclosure sale (e.g. ordinary loss of business)
Disguised sale is a transaction with intention of partly sale and partly gift.
Not used two tax treatment
Donors tax
FMV over Selling price
*the selling price is intently lower because it
is a gift
Income tax
Selling Price over Cost of land
In lieu
6% CGT of FMV
Corporate Reorganization
Merger (Corp A + Corp B = Either Corp A/B)
Consolidation (Corp A +C Corp B = Corp C)
Gain or loss is not recognized if the exchange of property is solely in shares of
stock:
a) Corporation
b) Shareholder
c) Security Holder
d) Person which gain control of the corporation, alone or together, but not
exceeding four persons.

Corporation being merged (Use this ex. Corp A merged to Corp B)

Corp A

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FMV of shares received from Corp B
Less: Book Value of NET ASSETS of Corp A
Nondeductible loss/Nontaxable gain

Corp B
FMV of Corp A Net assets
Less: Par value of shares
Nontaxable gain/Nondeductible loss
Note that to compute either Corps side gain/loss, the value (book/par) which
is definite in their side of the books is used. And The FMV of the opposite party is
used.
#47 and 48 are examples of loss/gain not to be recognize because they are a
party there to the merger/consolidation.
Recognition of gain but not loss if:
a) Gain to recognize should not exceed the sum of money and the FMV of
property
Cost of stock transferred
Less: Money received*
FMV of property*
Total
Add: Gain on the exchange
*money+property received
Amount treated as dividend

usually

offset

by

this dividend represent if *money and

property has the effect to be as
dividend, hence should be taxed

Cost of stock received

Gain/Loss from Patent or Copyright is the difference between Selling Price and Cost
(Book Value/Adjusted basis of the Intangibles)
Sales price
Less: Acquisition cost
Less: Accumulated amortization
Gain/Loss on sale of patent
Patent is to be amortized, whichever is shorter:
a) useful life; or
b) legal life of 20 years.