ACCTAX1 - Income Taxation

Gains and Losses from Disposition of Property

Computation of Gain or Loss (from the sale or other disposition of property)

o Gains (Losses) = Proceeds – Cost Basis

 Gain  shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain,
 Loss  shall be the excess of the basis or adjusted basis for determining loss over the amount realized.

Factors in determining Gain or Loss (of the property disposed)

o Basis (Cost), if property acquired:

 By purchase  Acquisition Cost (Cost to buyer)
 By gift or donation Basis (Cost) in the hands of the donor or FMV at the time of donation (whichever is lower)
 By devise, bequest, or inheritance  FMV at the time of acquisition (time of inheritance)

 Property which should be included in the inventory  its latest inventory value
 If the property (other than capital asset) was acquired for less than an adequate consideration in money or money's worth, the
amount paid by the transferee for the property; or the transferor’s adjusted basis at the time of the transfer, whichever is greater.
 If the property was acquired in a transaction where gain or loss is not recognized [Sec.40(C)(2)]  Sec. 40(C)(5)
 Basis is used to determine Gain or Loss:
o In transactions involving ordinary assets
o Involving capital assets which are not subject to CGT
o Sale of Domestic Shares not traded in the stock exchange
o In forced sale of real property to government in the exercise of the latter’s power of eminent domain.

[Problem 47]

o Adjustments
 Additions (Capital Expenditures)
 Recoveries (Depreciation)
 Adjusted Basis (Cost)  Basis + Additions – Recoveries
o Amount Realized (Proceeds)  The sum of the:
 Cash or money received
 FMV of the property or asset (other than money) received
o Holding period (held by taxpayer)  apply to individuals only.

o Nature or Character of the Property (Classification of Properties for Tax purposes)

 Capital Assets
 Assets which is not an ordinary assets
 Personal or non-business property
 Asset held merely for investment (e.g. investment in bonds)
 Property not used in business
 Kinds of Capital Asset
 Short term – one which has been held by the taxpayer for 12 months or less.
 Long term – one which has been held by the taxpayer for more than 12 months.
 Ordinary Assets (Non-Capital Assets)
 Stock included in inventory
 Property primarily held for sale
 Property used in business which is capitalized and subject to depreciation (e.g. PPE)
 Real property used in the trade, business, or profession of the taxpayer.
 For Real Properties
 Engaged in Real Estate Business  Ordinary Assets (regardless if the asset is idle)
 Not Engaged in Real Estate Business
o If not idle  Ordinary Asset
o If idle
 For more than two years  Capital Asset
 For two years or less  Ordinary Asset
ACCTAX1 - Income Taxation
Gains and Losses from Disposition of Property

Sale or Exchange or Properties may give rise to:

 Capital Gains (subject to CGT)

o On the sale of domestic shares
o On the sale of real property classified as capital assets
 Tax-Free Exchanges – No Gain or Loss is recognized
o Tax-free exchange pursuant to a corporate reorganization under Sec. 40(C)(2)
 Exchange of property solely in kind in pursuance of corporate MERGERS and CONSOLIDATION
 Exchange by a person of his property for stock in a corporation as a result of which said person, alone or together with
others not exceeding four (4) persons, GAINS CONTROL of said corporations.
o Like-Kind Exchanges (However, DL said that this rule is already abandoned)
 Sales or Exchanges – Transactions where Gain is recognized, but not the Loss
o Exchanges not solely in kind pursuant to a corporate reorganization where boot is received
o Transactions between related persons
o Illegal transactions
 (a) Sales or Exchange of Ordinary Assets; and (b) Sale or Exchange of Other Capital Assets (i.e. capital assets other than those whose
sale shall be subject to CGTs)
o If Sale
 Sale – Basis = Gain (Loss)
o If Exchange, the property must be essentially different from the property disposed of (However, DL said that this rule is already
abandoned and it is now sufficient that the property received have market value only)
 FMV of the property received – Basis of Property Given = Gain (Loss)

TAXES ON DISPOSAL OF ASSETS

o Ordinary Assets  ordinary or regular rates

o Capital Assets
 Real property (  subject to 6% capital gain tax (CGT)
 CGT = 6% of Selling Price or Fair Market Value (whichever is higher)
 Sale of residential property  but if the proceeds will be used to acquire a new resident
o  Exempted as long as it’s within the 18 month period.
 Shares of stock (Domestic)
 For individuals and domestic corporations  15% CGT
 For foreign corporations (both resident & non-resident)
o 100,000 or less  5% CGT
o Over 100,000 10% CGT
 Other Capital Assets (e.g. investment in bonds)  ordinary/regular rates
*** The CGT must be same if you will offset a capital loss with capital gain

Gain / Loss
o Ordinary
 Ordinary Gain  forms part of the Gross Income
 Ordinary Loss  deductible
o Capital
 Capital gain  forms part of the Gross Income
 Capital Loss  deductible only up to the extent of capital gain

 Shares of Stock  shall include shares of stock of a corporation, warrants and/or options to purchase shares of stock, as well as units of
participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as
corporations, associations and recreation or amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates.
ACCTAX1 - Income Taxation
Gains and Losses from Disposition of Property

TAX-FREE EXCHANGES OF PROPERTIES IN CORPORATE READJUSTMENTS

Sec. 40(C)(2)  TAX-FREE EXCHANGES OF PROPERTIES IN CORPORATE READJUSTMENTS

1. No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation –

a. A corporation (transferor), which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which
is a party to the merger or consolidation; or
b. A shareholder (transferor), exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of
another corporation also a party to the merger or consolidation; or
c. A security holder (transferor) of a corporation, which is a party to the merger or consolidation, exchanges his securities in such
corporation, solely for stock or securities in such corporation, a party to the merger or consolidation.
 The term "securities" means bonds and debentures but not 'notes' of whatever class or duration.
 The term "merger" or "consolidation", when used in this Section, shall be understood to mean:
 the ordinary merger or consolidation, or
 the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock:
o Provided, that it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping
the burden of taxation:
 Provided, that in determining whether a bona fide business purpose exists, each and every step of the
transaction shall be considered and the whole transaction or series of transaction shall be treated as a
single unit:
o Provided, that in determining whether the property transferred constitutes a substantial portion of the property of
the transferor, the term "property" shall be taken to include the cash assets of the transferor.
o Substantially all – means the acquisition by the corporation of at least 80% of the assets of another corporation.

2. No gain or loss shall also be recognized if property is transferred to a corporation by a person (transferor) in exchange for stock or unit of
participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4)
persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property.\
 The term "control", when used in this Section, shall mean ownership of stocks in a corporation possessing at least fifty-one percent
(51%) of the total voting power of all classes of stocks entitled to vote.

 Section 40(C)(2) merely defers the recognition of gains and losses.

 Tax consequences:
o The transferor shall not recognized gain or loss (i.e. no CGT, no income tax, no CWT, no donor’s tax, no VAT); and
o ***** The basis (cost) of the stock or securities received by the transferor shall be the same as the basis of the stock, property, or
securities transferred (substituted basis).

 However, if the transferor receives not only stock or securities, but also money or property, GAIN but NOT LOSS shall be recognized
 Recognition of gain but not of loss (Exchange Not Solely in Kind): (DL page 233-238)
 The money and or property received is called “boot:

 Tax consequences:
o Gain shall be recognized ≤ Money + FMV of Property
Received
o Exception: No gain is recognized if the
transferor is a corporation and the boot is
distributed in accordance with the plan of
merger or consolidation.
o The basis of the shares received by the transferor shall be
computed as follows:

[Problem 48 and Problem 49]

In computing gain of transferor (FMV of Asset Received + Liabilities Assumed – BV of Asset Transferred)
OR (FMV of Asset Received + BV (net) of Asset transferred)
ACCTAX1 - Income Taxation
Gains and Losses from Disposition of Property

CAPITAL GAINS (LOSSES)

- Capital Gain (Loss)  gain (loss) derived from sale or exchange of capital assets.
- Net Capital Gain (Loss)  Capital Gain – Capital Loss
o Limitation on Capital losses – allowed to be deducted only to the extent of capital gain
 Exceptions: Any loss sustained by a bank or trust company (incorporated under the laws of the Philippines), a
substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other
evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision
thereof), with interest coupons or in registered form.
 Reason for exception: securities are considered as property primarily held for sale to customer in the
ordinary course of business.
- Net Capital Loss Carry over
o Applicable to individuals (does not apply to corporations) for one (1) year only.
 If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss (in an amount not in
excess of the net income (before net capital gain) for such year) shall be treated in the succeeding taxable year as a
loss from the sale or exchange of a capital asset held for not more than twelve (12) months.
o Applicable to ordinary or regular rates (thus not applicable to real property and domestic shares of stocks)

- Holding period
o Applicable to individuals (does not apply to corporations)
o Applicable to capital gain (loss)
o Applicable to ordinary or regular rates (thus not applicable to real property and domestic shares of stocks, applicable only to
other capital assets)
o Percentage taken into account in computing net capital gain, net capital loss, and net income.
 100% Declarable  short term capital asset (holding period of 12 months or less)
 50% Declarable  long capital asset (holding period of more than 12 months)

 Ordinary losses are deductible from capital gains but net capital loss cannot be deducted from ordinary gain or income

[Problem 50]

Cost and Expenses of Acquisition and Disposition  In the determination of capital gains and losses, the cost and expenses of acquisition and
disposition of capital assets would be treated as follows:

o The cost of acquisition is capitalized

o The expenses of acquisition (e.g. cost for registration for land) are to be treated as part of the cost and must also be capitalized
o Expenses of disposition such as agent’s commission and other selling expenses are considered as reductions from selling price.

Other Capital Asset Transactions Resulting in Capital Gains (Losses) (DL page 250-256)

- Retirement of Bonds, etc.

o amounts received by the holder upon the retirement of bonds, debentures, notes or certificates or other evidences of
indebtedness issued by any corporation (including those issued by a government or political subdivision thereof) with interest
coupons or in registered form, shall be considered as amounts received in exchange therefor
- Gains or losses from Short Sales, etc.
o treated always as short-term capital gain or loss
o “Short selling” is selling something one does not own in the future at a particular price in the hope that the property goes down in
value. For tax purposes, a short sale is deemed consummated upon delivery of the property to cover the short sale.
- Failure to exercise privilege or option to buy or sell property
o shall be considered as capital gains or losses.
- Securities becoming worthless
o capital loss is recognized
- Distribution in liquidation – When the assets of a corporation are distributed in complete liquidation thereof
o capital gain or loss to the shareholder is recognized
- Redemption of preferred shares
ACCTAX1 - Income Taxation
Gains and Losses from Disposition of Property

CAPITAL GAINS TAX ON SALE OF REAL PROPERTY

For Real Properties

 Engaged in Real Estate Business  Ordinary Assets (regardless if the asset is idle)
 Not Engaged in Real Estate Business
o If not idle  Ordinary Asset
o If idle
 For two years or less  Ordinary Asset
 For more than two years  Capital Asset
 subject to 6% capital gain tax (CGT)
 Nature
 Final when imposed (on individuals and domestic corporations)
 Imposed in lieu of income tax
 Except when sale is made to the government: the taxpayer (seller) has the
option to have his tax liability as ordinary income.
 Imposed on capital gains presumed to have been realized from the sale, exchange or
disposition of real property located in the Philippines classified as capital assets.
 Exemption to 6% CGT:
 If the proceeds (from such sale of residential property) will be used to acquire or
construct a new principal residence within 18 calendar months from the date of sale or
disposition. Subject to the following conditions.
 Historical cost or adjusted basis of the realty sold shall be carry over to the new
one.
 Taxpayer must duly notified the commissioner within the 30 days from date of
sale.
 Can only be availed once every 10 years
 Unutilized portion is subject of CGT ( see illustration in DL page 265)
o (Unutilized portion ÷ Selling Price) × FMV or Selling Price,
whichever is higher
o New Basis of New House = Cost of old house + Cost of New House

[Problem 53]

 Basis of Tax  Selling Price or Fair Market Value (whichever is higher)

 Final Tax: CGT = 6% of Selling Price or Fair Market Value of Asset Received (whichever is higher)
 Filing of CGT Return and Payment of Tax
o Within 30 days following each sale of real property classified as real property.

[Problem 51]

Installment Method:

3 Cases Where Income May be Reported in Installments (Sec. 49)

 Sales of Dealers in Personal Property.

 Casual Sales of Personal Property
o The selling price exceeds P1000
o The initial payment must not exceed 25% of the selling price
o The property sold is not a kind which would be includible in the inventory if on hand at the close of the taxable year.
 Sales of Real Property Considered as Capital Asset by Individuals.
o The final tax of 6% CGT can be paid on installments if the initial payment do not exceed 25% of the selling price
 In the year of Sale: (Initial Payment ÷ Contract Price ) x Final Tax
 In subsequent years: (Installments Received ÷ Contract Price ) x Final Tax

[Problem 52]
ACCTAX1 - Income Taxation
Gains and Losses from Disposition of Property

DEALINGS IN STOCKS AND SECURITIES

If a taxpayer is not a dealer in securities or being a dealer  the securities sold or exchanged were held as investment, the gain or loss arising from
the sale or exchange is treated as capital gain or capital loss.

Dealings by a Corporation in its Own Stock

o Issuance of shares at premium(from unissued shares)  Premium on capital stock is not income; hence not taxable
o Payment to corporation of its own stock  gain (loss) computed in the same manner as though the payment had been made in any other
property.
o Contributions by shareholders  not considered income

 Treasury Shares (Reacquisition of Issued Shares)  Treated as Sale  Subject to CGT

o Shares of stock (Domestic)  15% CGT
 Liquidation of Shares  Treated as Sale  Subject to Regular Tax

[Problem 54]

Sale or Retirement of Corporate Bonds

Book Value of Bonds xx

Redemption Price (xx)
Gain (Loss) on Redemption xx  subject to regular tax (Deductible up to the extent of capital gain);

[Problem 55]

Losses on Wash Sale (DL page 278-287)

o Wash sale – sale of securities where substantially identical securities are acquired or purchased within a 61-day period beginning 30 days
before the sale and ending 30 days after the sale.
o Non-deductibility of losses on wash sale (it’s a capital loss but is not deductible against capital gain)
o Substance over form
o Requisites:
o Sale or other disposition of stocks or securities resulted in a loss
o There was an acquisition, or contract or option for acquisition of stock or securities within 30 days before the date of
sale or 30 days after the sale.
o The stock or securities sold were substantially the same as those acquired within the 61-days
 Substantially identical  stock must be of the same class, or in the case of the bonds, the terms thereof
must be the same. There must be similarities on all important particulars.
o Does not apply in the case of a dealer in stock if the sale is made in the ordinary course of the business of such dealer; and short
sale transactions (in this case, the loss on wash sale is deductible)
o Treatment of Loss on Wash Sales (DL page 281-285)
o Formula for Non-Deductible Loss
No. of Shares Acquired Within 61 day period
o ×Loss = Non-deductible Loss
No. of Shares Sold
[Problem 56]

o Formula for Tax Basis of Re-acquired Shares (Stock or securities acquired in wash sales)
o Cost of Acquisition (Cost of New Share) xx
Add: Wash Sale Loss xx
New Tax Basis /Cost xx
OR
o Cost of Old Share xx
Add: Excess of Purchase Price of New Share xx
Over the selling price of the Old Share xx xx
New Tax Basis/Cost xx
ACCTAX1 - Income Taxation
Gains and Losses from Disposition of Property

CAPITAL GAINS TAX ON STOCK TRANSACTIONS

- Shares of Stock
o Foreign  Ordinary/regular rates
o Domestic
 15% CGT (final tax) Individual, Domestic Corporations
 5%/10% CGT (final tax)  Foreign Corporations (Resident & Non-resident)
 Exemptions from CGT:
 Gains derived by dealers in securities  this remain to be taxed as ordinary gain includible in gross income of
dealer in securities
 All other gains which are specifically exempt from the income tax under existing investment incentives and other
special laws.

- Tax Base  Gain

o Gain = Selling Price – Cost  (disregard FMV of the shares)
o General Rule:
 SP < FMV  Donation  Donor’s tax
 Exemptions: Properties subject to 6% CGT
- Allowable Methods:
o Specific Identification  default
o FIFO  if the shares which were sold is not identified
o Moving Average  if book of accounts where every transaction relating to purchases and disposals are recorded, is maintained.

[Problem 57]

- Installment sale of shares of stock not listed and traded in any local stock exchange (DL page 299-301)
o The final tax CGT can be paid on installments if the initial payment do not exceed 25% of the selling price
 In the year of Sale: (Initial Payment ÷ Contract Price ) x Final Tax
 In subsequent years: (Installments Received ÷ Contract Price ) x Final Tax
-

[Problem 58]

[Problem 59]