CHAPTER 5 AND 6 (BOOK BASED)

Question 1

T OR F

The taxable income of an estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, i.e., subject to Sec. 24(A) graduated rates.

Answer 1

T

Question 2

T OR F

Per TRAIN, estates and trusts are no longer allowed a personal exemption of P20,000. The income tax rates for individual taxpayers likewise apply.

Answer 2

T

Question 3

T OR F

The taxable year of estates and trusts shall be the calendar year.

Answer 3

T

Question 4

Refers to all the properties, rights and obligations of a person which are not extinguished by his death and also those which have accrued thereto since the opening of the succession.

Answer 4

Estate or Inheritance.

Question 5

is 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 or principal to be distributed in accordance with the directives of the creator as expressed in the governing instrument.

Answer 5

Trust

Question 6

is the person who establishes a trust.

Answer 6

Trustor or grantor

Question 7

is the person for whose benefit the trust has been created. It has equitable title to the property transferred to the trust, including, generally, the possession and use of the property.

Answer 7

Beneficiary

Question 8

is the general term which applies to all persons or corporations that occupy positions of peculiar confidence towards others, such as trustees, executors, guardians, or administrators, receivers, or conservators. For income tax purposes, a _____ is any person or corporation that holds in trust an estate of another person or persons.

Answer 8

Fiduciary

Question 9

T or F

When an individual is alive, income on his or her property (e.g., interest income on bonds, dividend income on stocks, rental income on an apartment complex) is taxed to that individual.

When the individual dies, future income on that property will be taxed to those who inherit the property. However, income on property is taxable to the heirs only after they receive the property. The receipt of the property itself is excluded from income. Often there is considerable time lag between the time a person dies and when final settlement of the estate occurs. Thus, a relevant question to ask is who is taxed on income realized from the decedent’s property during this interval. The answer provided by the Code is that the estate itself is taxed.

Answer 9

T

Question 10

are legal entities that exist for the purpose of managing and distributing the deceased person’s property to the heirs.

Answer 10

Estates

Question 11

T or F

Estate taxation has nothing to do with income and applies when the property passes from the deceased person to the estate. The estate tax is levied on the transfer and is based on the fair market value of the property being transferred at the time of death. The details of estate taxation are discussed in another text, Transfer and Business Taxation by the same book team.

Answer 11

T

Question 12

T or F

Taxable estates are estates of deceased persons under judicial settlement. Taxation of an estate begins from the time of death. Hence, any income received after the death shall form part of the income of the estate.

Answer 12

T

Question 13

T or F

Income of estates not under judicial settlement are not taxable to the estate. In this case, a co-ownership is created and the co-owners, after actual or constructive receipt of the income are the ones liable to income tax in their individual capacities.

Answer 13

T

Question 14

T or F

An individual may want another family member, such as a son or daughter, to become the owner of some particular piece of the individual’s property (e.g., stocks, rental property). However, the individual may feel that the son or daughter is not capable of managing the property. So, the individual transferred the property to a trustee in order to have the trustee manage the property for the benefit of the son of daughter.

This legal arrangement is known as a ____, and the son or daughter would be called the ____ of the trust.

Answer 14

• Trust
• Beneficiaries

Question 15

T or F

Trusts are a unique form of legal entity, being neither pure taxpayer nor pure conduit.

• For taxpayers such as corporations, all income is taxed to the income-earning organization.
• For conduits such as general professional partnerships, no income is taxed to the income-earning organization. Rather, income is taxed to the owners of the partnership when earned, regardless of whether that income is distributed to them.

Answer 15

T

Question 16

T or F

Pre-tax income earned by a trust may be either retained by the trust or distributed to the trust’s beneficiary.

• If retained by the trust, the income is taxed to the trust itself, not the beneficiary.
• If the income is distributed, the trust is allowed a deduction in determining its taxable income, and the beneficiary must include the receipt of the distribution as taxable income at the individual level.

Answer 16

T

Question 17

T or F

For a trust to be taxable, it must be irrevocable, meaning it cannot be changed by recall or cancellation, both as to corpus or principal and income.

Answer 17

T

Question 18

T or F

In a revocable trust where title to income may be revested in the grantor, the trust itself is not subject to income tax. It is the grantor who is taxable. In case of trust where the income may be held or distributed for the benefit of the grantor, such income is likewise taxable directly to the grantor.

Answer 18

T

Question 19

The items of gross income of estates and trusts are the same items of gross income of individuals as provided in the Tax Code. They include:

1. Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust.
2. Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct.
3. Income received by estates of deceased persons during the period of administration or settlement of the estate.
4. Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.

Answer 19

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Question 20

The income of trust or estate may be deductible from gross income Income which is to be distributed currently by the fiduciary to the beneficiaries; and income collected by a guardian of an infant which is to be held or distributed as the court may direct, are deductible from gross income of the fiduciary. This is so because such income is taxable** directly to the beneficiary**, whether distributed or not.

Answer 20

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Question 21

T or F

Income received by estates of deceased persons during the period of administration or settlement of the estate; and income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated, are taxable either to the fiduciary or beneficiary, depending on the amounts paid or credited to the legatee, heir of beneficiary.

Answer 21

T

Question 22

T or F

If taxable to the fiduciary (meaning no income has been distributed to the beneficiary), the income is not deductible from the gross income of the fiduciary. But if taxable to the beneficiary, such income shall form part of the gross income of the fiduciary and is deductible from such gross income. The income thus distributed is to be included in the gross income of the beneficiary. The deductions just discussed shall not be allowed the case of a trust administered in a foreign country.

Answer 22

T

Question 23

When two or more trusts are created by the same grantor and the beneficiary in both trusts is the same, the taxable income of all the trusts shall be consolidated and the tax computed on such consolidated income.

Answer 23

CONSOLIDATION OF INCOME OF TWO OR MORE TRUSTS

Question 24

2 Classifications of General Partnerships in Taxation

Answer 24

1. General professional partnership.
2. General co-partnership (compania colectiva).

Question 25

One formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.

Answer 25

General professional partnership

Question 26

A general partnership which is not a general professional partnership.

Answer 26

General co-partnership (compania colectiva)

Question 27

It shall not be subject to the income tax but is required to file annual income tax return/annual information return for the purpose of furnishing information as to the items of gross income, deductions, and the names, TINs, addresses and share of each of the partners.

Answer 27

GENERAL PROFESSIONAL PARTNERSHIPS

Question 28

Partners in a general professional partnership shall be liable for income tax in their separate and individual capacities.

Where the result of partnership operation is a loss, the loss will be divided as agreed upon by the partners. If there is no agreement as to division of losses but there is as to profits, the losses shall be distributed according to the profit sharing ratio. Such share in the losses may be taken up by the individual partners in their respective income tax returns.

Answer 28

T

Question 29

T or F

A GPP may avail of the OSD only once, either by the GPP or the partners comprising the partnership.

Answer 29

T

Question 30

T or F

GPP is not subject to income tax imposed pursuant to Sec. 26 of the Tax Code, as amended. However, the partners shall be liable to pay income tax on their separate and individual capacities for their respective distributive share in the net income of the GPP.

Answer 30

T

Question 31

T or F

The GPP is not a taxable entity for income tax purposes since it is only acting as a “pass- through” entity where its income is ultimately taxed to the partners comprising it, Section 26 of the Tax Code, as amended, likewise provides that- “For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation.”

As such, a GPP may claim either the itemized deductions allowed under Section 34 of the Code or in lieu thereof, it can opt to avail of the OSD allowed to corporations in claiming the deductions in an amount not exceeding 40% of its gross income.

Answer 31

T

Question 32

In computing taxable income defined under Section 31 of the Tax Code, as amended, the following may be allowed as deductions:

a. Itemized expenses which are ordinary and necessary, incurred or paid for the practice of profession; OR

b. Optional Standard Deduction (OSD).

Answer 32

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Question 33

T or F

The distributable net income of the partnership may be determined by claiming either itemized deductions or OSD.

Answer 33

T

Question 34

T or F

The share in the net income of the partnership, actually or constructively received, shall be reported as taxable income of each partner.

Answer 34

T

Question 35

T or F

The partners comprising the GPP can no longer claim further deduction from their distributive share in the net income of the GPP and are not allowed to avail of the 8% income tax rate option since their distributive share from the GPP is already net of cost and expenses.

Answer 35

T

Question 36

T or F

If the partner also derives other income from trade, business or practice of profession apart and distinct from the share in the net income of the GPP, the deduction that can be claimed from the other income would either be the itemized deductions or OSD.

Answer 36

T

Question 37

Partnerships (other than GPPs), whether registered or not, are considered as corporations and are therefore taxed as corporations.

Consequently, the partners are considered as stockholders and, therefore, profits distributed to them by the partnership are considered as dividends.

The share of an individual partner in a taxable partnership is subject to a final tax of 6% in 1998, 8% in 1999 and 10% in 2000.

Answer 37

GENERAL CO-PARTNERSHIPS

Question 38

T or F

The distributive share of a partner in the net income of a partnership is **equal to each partner’s distributive share of the net income declared by the partnership for a taxable year after deducting the corresponding corporate income tax. **

Such share shall be included in the individual returns of the partners, whether actually distributed or not.

The taxable income declared by the partnership for a taxable year shall be deemed to have been actually or constructively received by the partners in the same taxable year.

Answer 38

T

Question 39

T or F

If the partnership sustains a net operating loss, the partners shall be entitled to deduct their respective shares in the net operating loss from their individual gross income

Answer 39

T

Question 40

It shall not be subject to income tax if the activities of the co-owners are limited to the preservation of the property and the collection of the income therefrom.

Such being the case, it is the co-owners who are taxed individually on their distributive share in the income

Answer 40

CO-OWNERSHIP

Question 41

T or F

The co-owners invest the income in business for profit, they would be constituting themselves into a partnership and as such shall be taxable as a corporation.

Answer 41

T

Question 42

a unique form of legal entity, being neither pure taxpayer nor pure conduit.

Answer 42

Trust