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Topics in Income
Taxation
Ordinary v. Capital Assets
Capital Assets properties held by the taxpayer (whether or not
connected with his trade or business), but does not include the
following:
Stock in trade;
Property of a kind which would properly be included in the inventory;
Property held primarily for sale to customers in the ordinary course of
trade or business;
Property used in the trade or business subject to depreciation; and
Real property used in the trade or business. (NIRC, Sec. 39(A)(1)).
Ordinary vs. Capital Assets
The statutory definition of capital assets is negative in nature. If the
asset is not among the exceptions, it is a capital asset; conversely,
assets falling within the exceptions are ordinary assets. And
necessarily, any gain resulting from the sale or exchange of an asset
is a capital gain or an ordinary gain depending on the kind of asset
involved in the transaction (Tomas Calasanz, et al v. CIR, GR No. L-
26284, October 9, 1986)
Ordinary vs. Capital Assets
Net Capital Gain excess of the gains from the sales or exchanges of
capital assets over the losses from such sales or exchanges.
Net Capital Loss excess of the losses from sales or exchanges of
capital assets over the gains from such sales or exchanges.
Note:
Capital losses from sales or exchanges of capital assets shall be allowed
only to the extent of the gains from such sales or exchanges.
Ordinary losses can be offset against net capital gains if they are subject
to the same tax rate.
Shares of Stock Held as Capital Assets
RR No. 6-2008, as amended by RR No. 6-2013
In case the FMV of the shares of stock sold, bartered, or exchanged
is greater than the amount and/or fair market value of the property
received, the excess of the FMV of the shares of stock sold, bartered
or exchanged over the consideration received shall be deemed a gift
subject to donors tax
Shares of Stock Held as Capital Assets
RR No. 6-2008, as amended by RR No. 6-2013
FMV of the shares of stock sold shall be:
Listed shares sold, transferred, or exchanged outside of the trading
system and/or facilities of the Local Stock Exchange - the closing price
on the day when the shares are sold, transferred or exchanged or on the
day nearest to the date of sale, transfer or exchange
Unlisted shares the value of the shares of stock at the time of the sale
(using the Adjusted Net Asset Method, where the assets and liabilities
are adjusted to fair market values)
Shares of Stock Held as Capital Assets
RR No. 6-2008, as amended by RR No. 6-2013
Assume that Mr. X sold on April 30, 2013 5,000 shares of stock of A
Corporation. A Corporation has 10,000 outstanding shares. The
total assets and liabilities of A Corporation in its latest audited
financial statements are Php20M and Php5M, respectively.
Assuming further that the book value of all its assets and liabilities is
also the market value with the exception of its real property. Also,
the market value of the real properties of A Corporation are as
follows:
Shares of Stock Held as Capital Assets
RR No. 6-2008, as amended by RR No. 6-2013
Book Value MV per tax Zonal Independent Highest of Adjustment
per AFS declaration Valuation Appraiser the 3
Land A 2,000,000 2,500,000 5,000,000 6,000,000 6,000,000 4,000,000
Held: Yes. Under Section 20(d) of RA No. 7279, members of the private sector
participating in socialized housing shall be given the incentive of exemption from
the payment of the following:
Project-related income taxes;
CGT on raw lands used for the project;
VAT for the project contractor
Sale of Real Property Classified as Capital
Assets
BIR Ruling DA (C-015) 071-2010, May 21, 201
Issue: Whether the proceed from the sale of real properties by Company
P, a non-stock, non-profit corporation committed to social development, is
not subject to income tax, particularly, CGT
Excess MCIT from the previous taxable years shall not be allowed to be
credited against the annual MCIT due as the same can only be applied against
normal income tax.
MCIT Excess MCIT
Any excess of MCIT over the normal income tax can be carried
forward on an annual basis 3 years
MCIT BIR Rulings
BIR Ruling Nos. DA-147-2007 dated March 8, 2007 and DA S40M 018
436-08 dated November 18, 2008
The excess MCIT credit balances of the absorbed corporations in
statutory merger of commonly-owned corporations may be transferred
and carried over to the surviving corporation
BIR Ruling No. 041-00, September 15, 2000
GOCCs are subject to MCIT
Relief from MCIT
Section 27(E), Tax Code
The Secretary of Finance, upon the recommendation of the CIR, may suspend
the imposition of the MCIT upon submission of proof by the applicant-
corporation that the corporation sustained substantial losses on account of
the following:
Prolonged labor dispute;
Force majeure; and
Legitimate business reverses
Net Operating Loss Carry Over (NOLCO)
Section 34 (D)(3), Tax Code
NOLCO shall mean the excess of allowable deduction over gross
income of the business in a taxable year
Can be carried over as a deduction from gross income for the next 3
consecutive taxable years immediately following the year of such loss.
Any net loss incurred in a taxable year during which the taxpayer was
exempt from income tax shall not be allowed as a deduction
Net Operating Loss Carry Over (NOLCO)
Allowed only if there has been no substantial change in the
ownership of the business or enterprise in that
No less than 75% in nominal value of the outstanding issued shares, if
the business is in the name of a corporation, is held by or on behalf o
the same person; or
Not less than 75% of the paid up capital of the corporation, if the
business is in the name of a corporation, is held by or on behalf of the
same persons.
This rule shall only apply to a transfer or assignment of the taxpayers
NOL as a result of or arising from the said taxpayers merger or
consolidation or business combination with another person
Net Operating Loss Carry Over (NOLCO)
Rules for mines other than oil and gas wells
A NOL without the benefit of incentives provided for under the
Omnibus Investments Code of 1987, incurred in any of the first 10 years
of operation may be carried overs as a deduction from taxable income
for the next 5 years immediately following the year of such loss
The entire amount of the loss shall be carried over to the first of the 5
taxable years following the loss, and any portion of such loss, which
exceeds the taxable income of such first year shall be deducted in like
manner from the taxable income of the next remaining 4 years.
Net Operating Loss Carry Over (NOLCO)
In general, NOLCO shall be allowed as a deduction from the gross income
of the same taxpayer who sustained and accumulated the NOL regardless
of the change in its ownership. This rule shall also apply in the case of a
merger where the taxpayer is the surviving entity.