Chapter 12 - Dealings in Properties

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r 12 - Dealings in Properties
2. Short sale of properties . • Cha@ te

Short sale is a sale by a speculator of securities borrowed in anti . , TER 12: SELF-TEST EXERCISES
(CHAY
: i fall '©\pat,
decline in security value. When the security price falls, the specular,"l
buying at the lower price and replacing the borrowed securities he ,,,{9 sslon Questions
3. Failure to exercise a privilege or option to buy or sell property th ,,,,are ordinary assets with capital assets.
capital asset atty, 2" bpscuss the rules of taxation of gains and losses on ordinary assets and other
Loss for failure to exercise an option is not an expense, but a capita] capital assets.
What is selling price?
deductible against capital gain. However, the gain or loss realized by 1 1illl. • 3
.
dealers from trading stocl k options . an ord.mary gain
is . or Oss. secur1o,,
"Y 4· Enumerate and discuss the rules on tax basis.
1 · How do the rules on individual taxpayers and corporate taxpayers differ as to the
4. Security becoming worthless S. measurement of the net capital gain or loss? Explain.
This occurs when the issuer of a debt or equity security becomes bank 6. Discuss the basis of the 50% rule on other capital assets held long-term by
such that none is recoverable by the investor. Decline in market value is~~ individuals.
considered worthlessness. 7. Explain the limits on the carry-over of capital loss. h
8. At what particular securities are the ru es of was sa 1 es re 1 evant to regular
1
As a rule, loss on securities becoming worthless is a capital loss. However,ri:I". income tax?
banks, trust companies and dealers in securities, the same is an ordinaryltgs I 9. Discuss the rules on tax-free exchanges relevant to regular income tax.
deductible as "bad debts expense." j
10. Discuss how gain is recognized in tax-free exchanges and how basis is determined
5. Receipt of liquidating dividends j for the transferor and the transferee.
Liquidating dividends is viewed as consideration in exchange for ttr 1 11. Enumerate the transactions considered exchanges.
investment of the investor-shareholder. The difference between the proceeds
of the liquidating dividends and the cost of the investment is a capital gain c: T I True or False 1
1 Tax basis means cost or depreciated cost of the property.
loss which is subject to the rules of regular income tax and not to the 15% :
capital gains tax. (Sec. 8 of RR6-2008) [
T 2 The loss on the sale of stocks by a trust company is an ordinary loss.
T 3. The capital gain from the sale of domestic bonds and foreign stocks are subject to
6. The amount received in liquidation of a partnership is also deemed in regular income tax. . .
exchange of the partner's interest on the partnership. T 4. Capital loss is deductible to the extent of capital gains.
It should be noted that for a business partnership, the resultant capital gain« F
!
T S. The sale of foreclosed land by a bank is subject to regular income
loss from such liquidation is subject to capital gains tax. The capital gain« 1 6. Ordinary loss and capital loss are items of deduction r°m gross mco ·
T
loss from the liquidation of a general professional partnership is subject to 7. Tie loss on the sate of bonds by banks is an or"® "7,,,, gain is an exclusion
regular income tax. F 8. An ordinary gain is an item of gross income w 1 ea ne c

• Redemption of shares for cancellation or retirement by a corporation F

7 from gross income. . .. uals and corporate taxpayers.
considered exchange to an investor, but not to the redeeming corporation. F 10.
9. The holding period rule is relevant to mdi~d f th set is made in less than one
The gain is said to be short-term if the sa e O e as
Under RR6-2008, the gain on the redemption of its own stocks by a domes F year from its acquisition. : id d if the asset is held by individuals for
corporation for the purpose of cancellation is not subject to the capital gal: 11. 50% of the capital gain or loss 1s conSI ere
tax. Hence, gain or loss realized by the investor from the buy-back F one year or more. . th holding period rule if the taxpayer is an
0
corporate stocks, domestic or foreign, shall be subject to regular income tax. 12. Ordinary gains or losses are subject to e
F individual taxpayer. ks. ubject to capital gains tax.
8. Voluntary buy-back of shares to be held in treasury is considered excha 13. The gain or loss on the sale of any stoc •; s dinary gains.
th
to e investor, but not to the corporate issuer of the shares.
F O 0
14. Ordinary loss is deductible to the extent ~ me while a net capital loss is non-
Gains o I · n which T I5. A net ordinary loss is deductible from gross inco
. r iosses on voluntary share buy-back by the issuing corporatio ,i!J
Is not for the purr jf . . ] ains @ deductible.
. pose o cancellation shall be subject to the capita g ks.
cases of domestic stocks but to regular income tax in cases of foreign stoc

433
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 Chapter 12 - Dealings in Properties
True or False 2 Chapter 12 - Dealings in Properties
T 1. Obligations assumed on the property purchased form part of the b .
T 2. If assets are acquired by way of inheritance, their basis shall% ,"®thee,, A 3 Which is true regarding taxation of ordinary gain?
the point of death ofthe decedent. ""Fa@lr, · a. It is subject to regular tax regardless of the taxpayer.
T 3. The indicated gain in a tax-free exchange shall be recognized not t ~ b. Individual taxpayers are always subject to regular tax.
value of cash or properties received other than stocks. 0 exceed c. It is subject to capital gains tax.
T 4. The amount of net capital loss carry-over must not exceed the net . d. Itis taxable under either regular tax or capital gains tax.
year it was sustained. lhcorn, I.ii
F 5. If assets are acquired by way of donation, their basis shall be the fair . D 4, The gain arising from the sale of ordinary assets is
date of donation. '@luen a. Ordinary income c. Extraordinary gain
F 1
b. Regular income d. Ordinary gain
6. The net capital loss can be carried over to a period of three years from th
T is sustained. eti C 5. The gain arising from dealings in capital assets Is
7. The basis of properties received as boot in a tax-free exchange is their f. a. Capital income c. Capital gain
upon receipt. fairs
F 1 b. Extraordinary gain d. Regular income
8. Gains but not losses are recognized in tax-free exchanges.
T 9. When no other property is involved in a share-swap pursuant to a plan,f A 6. Statement 1: The gain on sale of ordinary assets is subject to regular income tax.
or consolidation, there is no gain to recognize. mer Statement 2: The gain on sale of capital assets is subject to capital gains tax.
F
10. Corporations are allowed to carry-over net capital loss for a period of one Which statement is correct?
only. 'pa
F a. Statement 1 c. Both statements
11. In initial acquisition of control, it is necessary that there are at least five pere b. Statement 2 d. Neither statement
who acquired control of a corporation so that the exchange is exempt from fnCl'III
F
tax. A 7. Which is not correct regarding rules in dealings in properties?
12. No gain can be recognized on a pure share-swap transaction which fs ill a. Ordinary loss is deductible only up to the extent of capita gams.
pursuant to a plan of merger or consolidation. b. Ordinary gains are taxable in full.
T
13. Stock splits and stock dividends cause a dilution in the cost per unit of stoxi c. Ordinary losses are deductible in full. . .
T which must be considered in subsequent gain or loss measurement. d. Capital loss is deductible only up to the extent of capital gams.
14. Capital gains within the 61-day period are recognized, but losses are defer'
F when there are acquisitions of identical securities in the same period . B 8. Which statement is incorrect?
15. When properties are sold for less than an adequate and full consideration, gin a. Capital loss is deductible from capital gain.
measured as the difference· between fair value and the tax basis of the proper! b. Capital loss can be deducted from ordinary gain.
disposed.
c. Ordinary loss is deductible from ordinary gain.
d. Ordinary loss is deductible from capital gain.
Multiple Choices: Theory- Part 1
D
1.
Which is correct regarding gains from capital assets'
D 9. Which is an incorrect statement regarding the taxability or deductibility of gains
a. Always subject to regular tax · or losses in dealings in properties?
b. Always subject to capital gains tax a. Ordinary gain is taxable in full.
b. Ordinary loss is deductible in full.
C. Subject to both regular tax and capital gains tax
C. Net capital gain is taxable in full. .I
d. Subject to either regular tax or capital gains tax d. Net capital loss is deductible in full.
D
. and I° sses areff:offset
""CE{"";;;""""re sear sos cs A 1 0. Statement 1: Ordinary gains ·t.
Statement 2: Capital gains and losses are o» se
b. Sale of office equipment
Which statement Is correct?
%""";":"®s-a a. Statement 1
b. Statement2
c. Both statements
d.None of these
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 Chapter 12 - Dealings in Properties
er 12 - Dealings in Properties
C 11 Which of the following is not included in the computation of taxable In Cha t
· a. Ordinary gains @allc oss
c. Net capita JC0me} A short-term holding period means
b. Ordinary loss d. Net capital gains
A", 12months or less. c.more than 12 months.
B b. less than 12 months. d. at least 12 months.
12. Which statement is true?
a. The taxability of ordinary gain depends upon the holding perts@ ,,
A 1 A long-term holding period means
taxpayer. ot }, 2. a. more than 12 months. c. 12 months or Jess.
b. Capital loss is deductible up to the extent of capital gain. b. less than 12 months. d. at least 12 months.
c. Ordinary loss is deductible only up to the extent of ordinary gain.
d. Capital loss is deductible up to the extent of ordinary gain. B 22. For individual taxpayers, what percentage of the capital gain or loss is considered
for capital assets held for 12 months?
C a. 50% c.25%
13. Statement 1: Net loss in dealing ordinary assets is deductible from gross inco
Statement 2: Net loss in dealing capital assets is not deductible from gross inc~~ b. 100% d.0%
Which statement is true? B 23. Which of the following properly depicts the percentage of gains considered In
a. Statement 1 is true. c. Both statements are true. dealings in properties?
b. Statement 2 is true. d. Neither statement is true. Short term Long- term
a. Individual 506 50%
A 14. Statement 1: The net gain in dealing ordinary asset is subject to regular tax.
b. Corporation 100% 100%
Statement 2: Net gain in dealing capital asset is an item of gross income subject to C. Individual 50% 100%
capital gains tax. 47 f+
d. Corporation 100% 50%
Which statement is true?
a. Statement 1 is true. c. Both statements are true.
C 24. What percentage of long-term capital gain shall be included in the computation of
b. Statement 2 is true. the net capital gain or loss of a corporate taxpayer?
d. Neither statement is true. a. 0% c.100%
A 15. The short-term holding period is b. 50% d. 200%
a. 12 months or less. c. up to 24 months.
b. less than 12 months. d. 24 months or Jess.
D 25. In the computation of the net capital gain or loss, what percentage of long-term }

capital losses is taken into consideration by an individual taxpayer:

C 16. Which statement Is true regarding the holding period rule?
a. 0% c. 100%
b. 200% d. 50%
a. Applicable only to corporate taxpayers
b. Applicable only to taxpayers engaged in business C 26. Which is incorrect in the determination of the net capital gain or loss for
c. Applicable only to individual taxpayers individuals?
d. Applicable to any taxpayer a. 100% of short-term capital gain
C b. 100% of short-term capital loss
17. The holding period rule applies to c. 100% of short-term ordinary gain
a. Domestic corporations G • • d. 50% of long-term capital gain
• Tatters [;"?'Pr"fesstonal
1
partnerships
(est tent foreign corporations A :. net cap!·ital loss carry over?
2 7. Which is incorrect regarding
C 18. To which of the following tax d ply? a. Applicable to corporate taxpayers
Re ·ide -4,, '8 <payer does the holding period assumption not ap
b. Applicable only for a period of one year engaged in business
ba.• Res!dent cr?zen
(esidentalien
c. Business partnership
d.Nc .,
. ton-resident citizen c. Applicable only to individual taxpayers not in business
d. Applicable only to individual taxpayers
C 19. For which of the following tax .
a. Taxabl {payers ts the holding period ignored?
D li iti n of the net capital loss carry over?
. e estates c. Corporations 28. Which is incorrect regarding the applical 10 Il ible if the succeeding year results
a. There is no net capital loss carry over a owa
b. Taxable trusts d. All of these
to a net capital loss.
436 437

j
 Chapter 12- Dealings in Properties
b. Carry over shall not exceed the net income in the year th chapter 12 - Dealings in Properties
sustained. °@pltal,,, Which of the following capital assets when sold h
c. Carry over shall apply up to the extent of available
succeeding year.
net @Pltalga,,[;' B 1o the rules of regular income tax? 5011,exchanged, or disposed is subject
a, Domestic stocks c. Stock rights and warrants
d. Net capital loss carry-over can be applied against available • b, Domestic bonds d. Real properties not used in business
O
the succeeding year. °"®/@ry ,,
g, Which capital asset is subject to capital gains tax?
C 29. What is the tax basis of properties received by way of gift? a. Domestic stocks held for sale
a. Fair value on the date of donation
C
b. Domestic bonds held as investment
b. Acquisition cost of the last donor who did not acquire the p c. Domestic stocks held as investments
c. Whichever is lower of A and B roperty by gih d. Domestic bonds held for sale
d. Whichever is higher of A and B
9, Which capital asset is not subject to regular tax?
B 30. What is the tax basis of properties received as inheritance? C a. Real property held for sale by a dealer
a. Tax basis in the hands of the decedent b. Foreign stocks
b. Fair value of the property on the date of succession c. Real property held as investment by a non-realty dealer
c. Whichever is lower of A and B d. Domestic stock held by a security dealer
d. Whichever is higher of A and B
10. Which statement is generally true?
A A. A purely employed taxpayer does not have ordinary assets.
Multiple Choices: Theory - Part 2
B. A self-employed taxpayer does not have capital assets.
B 1. All of the following are ordinary assets to a real property developer except a. Statement A c. Both statements A and B
a. Raw and undeveloped land intended to be sold as is
b. Statement B d. Neither statements A nor B
b. Mortgage receivables on properties sold
c. Land currently under development 11. Which of the following capital asset is the holding period rule applicable?
d. Raw land held for future development B a. Real properties not used in business
A 2. Which is an ordinary asset? b. Home furniture I
%
c. Domestic stocks sold directly to a buyer
a. Gold inventory d. All of these
c. Investment in stocks
b. Notes receivable
d. Accounts receivable
D 12. Which of the following is considered as capital assets?
B 3. Which is an ordinary asset? a. Fully depreciated properties
a. Home computer b. Land previously employed in business
c. Family residence
b. Office supplies c. Back-up and stand-by equipment
d. Personal clothing
C 4. Which is a capital asset? d. Assets not used in business for the last two years
a. Inventory of securities A 13. Mr. Godod acquired a Jot as a future plant site. For Jack of financing, the lot is
b. Parking lot c. Investment in foreign currencies currently vacant For taxation purposes, the lot should be classified as a/an
d. Office building
A a. ordinary asset c. real property.
5. Which ls a capital asset? b. capital asset d. personal property.
a. Home supplies
c. Domestic bonds of a security dealer
b. Farm supplies
d. Residential lot held for sale
A 14, P -jG ·s.
· 'urilicacion .4,
Asuncion, a bcok
oo put iblisher,'» received a lot as donation from a friend
l
She reserves the lot to
hc h
h ·is not engaged in
who
. the
e real
ilty business
·»
ouse Is
A 6. All of the following are ca . 1
a. Store supplies 3Pltal assets to a merchandising business excep! publication business.
. . f the Jot for taxation purposes?
b. Receivables from customers What is the appropriate classification 0
..
c. Personal car of the trader a. Ordinary asset c. Deep reciable property
d. Personal residence of the ta b. Capital asset d. Jnventory
xpayer
438 439
 Chapter 12- Dealings in Properties

C 15. Bantay Kagubatan, a non-profit and non-stock organization, has

chapter 12 - Dealings in Properties
devoted for its tax-exempt operations. For taxation purposes, thisa~u~ffl_ce bu1~-
a. ordinary asset. "@ing,,} C In the immediately preceding problem, what I th
3 · ultimately
b. either ordinary or capital asset at the discretion of the BIR exa '/® included in net income? ' a\ Is ie total net gain which will be

c. capital asset arnlner, a. P O c. P 50,000 200K - 150K

d. either ordinary or capital asset at the discretion of Bantay Kagubau, b. P 30,000 d. P 150,000

B 16. Which of the following constitutes a long-term holding period? B 4, Mr. Herman had the following dealings in capital assets:
a. An asset acquired on November 30, 2020 and was disposed f
28,2021 9ton Noes,
Short-term capital gain P 200,000 (200K-100K) +
Long-term capital gain 100,000
b. An asset acquired on March 28, 2020 and was disposed of on A . Short-term capital loss 100,000 [(100k-150k)/2
c. An asset acquired on March 13, 2020 and was disposed f Prtl 30, 20 Long-term capital loss 150,000
2021 °
on January
Compute the reportable net capital gain.
d. An asset acquired on November 28, 2020 was and disposed f
29,2020 ot on Noven» a. P50,000 c. P 40,000
b. P 75,000 d. P 25,000
D 17. Which of the following statements is incorrect regarding th . D 5. If Herman is a corporate taxpayer, compute the reportable net capital gain.
dealings in properties in the income tax return? 1e presentation y a. P75,000 c. P 40,000
a. Ordinary gains are presented as items of gross income. b. P25,000 d. P 50,000 200k+100k-100k-150k
b. Ordinary losses are presented as items of deduction.
c. Net capital gains are presented as items of gross income. C 6. A taxpayer had a P300,000 net income before the following dealings in properties:
d. Net capital losses are presented as items of deduction. Ordinary gain P 80,000
Capital gain 60,000
Multiple Choices: Problems - Part 1 Ordinary loss 90,000
A 1. An individual taxpayer had the following dealings in properties:
Capital loss 70,000
If the taxpayer is an individual, compute the taxable net income?
Capital gain P 150,000
a. P 300,000 c. P 290,000 300+(80k-90k)
Ordinary gain 200,000
b. P 280,000 d. P 260,000
Capital loss 120,000
Ordinary loss 150,000 B 7. Assuming the taxpayer is a corporation, compute the taxable income.
a. P 300,000 c P 280,000
Compute the total amount of gain to be included in gross income subject b. P290,000 d. P 260,000
progressive tax.
a. P 230,000
c. P 80,000 (150K-120K)+200K D 8. In the immediately preceding problem, what is the net capital loss carry over for
b. P 350,000 an Individual and a corporation respectively?
d.PO
D a. P 10,000; P10,000 c. P 5,000; PO 60k-70k
2. A taxpayer had the following dealings in properties: b. P5,000;P5,000 d.P 10,000; PO
Capital gain C 9. After three years, an individual taxpayer disposed of a capital asset, other than
Ordinary gain P 100,000 domestic stock or real property, with the following data:
Capital loss 200,000
Ordinary loss 120,000 Fair value P 2,000,000
150,000 Selling price 1,500,000
How much shall be included . . Cost 1,200,000
a. PO m gross income?
b. P50,000 c. P 200,000 What is the capital gain subject to regular tax?
d. P 300,000 a. P800,000 c.P 150,000 (1,500-1200)/2
b. P300,000 d.P 0
440 441
 Chapter 12 - Dealings in Properties lif!
I.4'}
1l 1 •

D 10. A taxpayer had the following dealings in properties:

Chapter 12 · Dealings in Properties }[!
Short-term capital gain P 200,000 200k+100k/2+50k+ A 15. Mldsayap Corporation reports the following dealings in capital assets: \l}
: ! fI
Long-term capital gain 100,000
150k-100k-150k/2= 2023 2024
50k-20k
I ,, I·
Short-term ordinary gain 50,000 l j:

I : Ii
Long-term ordinary gain . 150,000
275k Net income
Capital gains
P 10,000 P 80,000
30,000 50,000
Short-term capital loss 100,000 200k-120k=320k Capital loss 45,000 20,000
I }

I I
Long-term capital loss 150,000
compute the net capital gains in 2024.
Short-term ordinary loss 200,000
Long-term ordinary loss 120,000
a. P30,000 c. P 15,0000 .U
q8
\11
b. P 20,000 d. PO . i ·I
'I 11
Assuming that the taxpayer is an individual, compute respectively the total i,
of gross mcome and the total items of deductions from gross income.
D 16. Ms. Maui had the following dealings In properties: l
.I
I .
!
a. P 200,000; P 260,000 c. P 500,000; P 320,000 2023 2024 (60k-25k)-20k f
il
b. P 350,000; P 260,000 d. P 275,000; P 320,000 Net income P 20,000 P 80,000

D 11. Assuming that the taxpayer is ~ corporation, compute respectively the total ltQs
Capital gains 35,000 60,000 if
]
of gross mcome and the total items of deductions from gross income in regla
Capital loss 60,000
Compute the net capital gains in 2024.
25,000
,
'' ItI
L.,
mcometax.
200k+100k+50k a. P 60,000 c. P10,000
l
a. P 500,000; P 570,000 c. P 250,000; P 570,000 b. P 35,000 d.P15,000
b. P 500,000; P 320,000 d. P 250,000; P 320,000
+150k-100k-150k + I f
' I
=250k Multiple Choices: Problems -Part 2 if]
D ']
12. Two years after acquisition, a domestic corporation disposed of a real proper D 1. Mr. Mayamaya, a dealer of household appliances, made the following dispositions up
.. I
capital asset for P3,000,000 at a P300,000 discount from its fair value. T of properties during 2024: :'y
property was acquired for P2,000,000 when its fair value was P2,100,000. Date of
Properties Date of sale Gain {Loss}
p 50,000 x50%
acquisition
Compute the capital gains subject to regular tax. Leasehold right 2/27/2024
12/2/2021
a. p 3,000,000 C. P 1,000,000
Taxi franchise 7/10/2019 3/14/2024 100,000 x50%
b. P 1,300,000 d. p O Electric oven 80,000
6/15/2024 7/15/2024
A Residence 1/14/2023 7/3/2024 800,000
13. After three years of use, Mr. Kidapawan disposed of his malfunctioning fats]
equipment for Pl,000,000. The equipment was acquired for Pl,500,000 and ~ 1 Compute the net capital gains subject to regular tax.
carrying value of P800,000 on the date of sale. a. P955,000 c. P 155,000
b. P875,000 d. P 75,000
Compute the gain or (loss) to be included in the determination of regular Incom&
a. P 200,000 c. p 100,000 D2. The following data summarize the dealings in capital assets of an individual
b. (P 500,000) d.P O 1M-800k taxpayer.
2023 ~
A 14 Net income P 90,000 P120,000
· :dro, a realtor, was able to dispose his 2-hectare land inventory to a buyer a~
Short term capital gains 35,000 60,000
P;ee years. The lot has a fair value of P5,000,000 and was sold at a disco
Long term capital gains 40,000 25,000
00,000. The lot was purchased at P3,000,000.
4.5M-3M Short term capital loss 60,000 50,000
Compute the gain to b • . 20,000
a. p 1,500,000 recognized in regular income. Long term capital loss 80,000
(45)k 12.5k
b. P2,000,600 c.P 2,500,000 Compute the net capital gain (loss) in 2024.
'' dP 0 a. (P32,500) c P 12,500
b. P25,000 d. P 0
443
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 \
Chapter 12- Dealings in Properties
chapter 12 - Dealings in Properties
D 3. What is the 2024 net capital gain If the taxpayer is a corporatto 7
a. (P 32,500) c. P12,500 (60k+25k)-(50k+20k) : compute the net capital gain to be included 10
a. P5,000 c. p lO,OOO e
.
regular income.
b. P 25,000 d. P 15,000
b. P 15,000 d. P 30,000 10kx3
4. The following data may be relevant in establishing the net inco
c 2022 2023
me of Mr ±,
""«s, 9 Darrel exchanged his stocks in Queen Co •
Net income (loss) before dealings P 20,000 (P 70,000) ~ D Corporation pursuant to a plan of m b Oration for the stocks of Queendom
rp
erger etween Que dQ d
Capital gain 30,000 15,000 3 .ooo acquired his stocks for PlOO 000 wh . t . en an ueenom. Darrel
Capital loss 52,000 18,000 4.000 ace ana cvcendoave ail,,/,,%"j" os.ooo. me sores of
the date of exchange. '' 3ranc PI 10,000, respecttvely on
What is the net capital gain or loss in 2024?
a. P 11,000 c. P 34,000 What is the.basis of the Queendom shares received and the gain to be
b. P31,000 d. P 9,000 recognize in thie exchange?
a. P120,000; P20,000 c. PlOS,000; po
5. Mr. Batangas, not a dealer in properties, made the following dis . b. P 110,000; P20,000 d. Pl00,000; po
the year. posltJons
A
Property Holding period Gain (loss) D 10. Moana exchanged his MEG shares costing P80,000 and with fair value of Pl00,000
Land 5 years for SM shares with fair value of P120,000. MEG and SM are not parties to a merger
P 200,000
Car lyear and 8 months 30,000 50%
or consolidation. 120k-80k
Laptop 8 months (8,000) Compute the tax basis of the SM shares and the gain to be recognized In the
exchange.
Compute the net gain to be included in gross income subject to regular tax.
a. P 80,000; PO c. P 100,000; P 40,000
a. P7,000 as net capital gain 15000-8000 b. P 100,000; PO d. P 120,000; P40,000
b. P222,000 as net capital gain
c. P207,000 as net capital gain C 11. Krystal exchanged her PAL shares costing P 90,000 for P20,000 cash plus AirPhil i+.
d. P200,000 as ordinary gain and P7,000 as ordinary gain shares with fair value of Pl00,000 pursuant to a plan of merger between PAL and I
6· Mr. San Morales, a realty dealer, had the following dealings in properties in 202t Air Phil.
B '
Date of Compute the tax basis of the AirPhil shares and the gain to be recognized. i•

Properties acquisition Date of sale Gain (Loss) a. P 100,000; P O c. P 90,000; P 20,000

House and lot 2/25/2019 2/27/2024 P 400,000 b. P 100,000; P 20,000 d. P 90,000; P 30,000
C ommercial lot 8/12/2020
p 3/14/2024 (100,000)
ersonal car 7/18/2024 A 12. Pursuant to a plan of consolidation, Darlow exchanged his shares costing
Personal i-Phone / 9/12/2024 80,000 P400,000 for the shares of the new corporation with fair value of P360,000 plus
1 14/2023 7/3/2024 (40,000)
P90,000 cash.
Compute the ordinary gc' d · etJ'
a. P480,000;P0 am an the net capital gain subject to regular incom
c. P400,000; P40,000 (80k-40k/2)
Compute the tax basis of the new shares and the gain to be recognized in the
b. P400,000· P60 000
' ' d. P300,000; P60,000 exchange.
a. P 360,000; P 50,000 c. P 360,000; P 0
C " "; "®@moomtororataary toss? b. P 400,000; P 90,000 d. p 350,000; P 50,000
b. P40,000 c. P 100,000 B 13. Mr. Tomas invested in the stocks of OBA, a domestic corporation, by purchasing
d. P 140,000
8·
1,000 shares for P100,000 on July 1, 2019. DBA declared a PlO/share cash
On July 1, 2024, Davao . . Fa ~ ·
D corporation, by Corporation invested in the stocks of,, dividend on November 12, 2024 payable on January 12, 2024 for stockholders of
record December 12, 2024. On December 8, 2024, Mr. Tomas disposed of his
DEF easra.s s,kl}" g 9oo snares at P12/share on Decemle' ""»
share investment for a total consideration of P120,000.
Davao Corporation» ,,,,'."@end payable January 15, 2024. On Janua? I
t,

0,000 shares for P13/share. '

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444
 !I,.
Chapter 12 - Dealings in Properties I t.
I I .! .
!er 13 - Principles of Deductions 'fi!}

•
The transaction resulted to . Cha@
a. P20,000 capital gain subject to regular income tax. ! 'I! I!
b. P11,000 capital gain subject to capital gains tax. CHAPTER 13 I I I, 1
c. P20,000 capital gain subject to capital gains tax.
d. P11,000 capital gain subject to regular income tax.
PRINCIPLES OF DEDUCTIONS [;1d
D 14. Matutina had the following dealings during the year: Chapter Overview and Objectives I 4,
'I
- ·-·----,-----------•
l l'li
capital gain Short Term Long Ter .......................... ..
Sale of domestic stocks directly to a buyer P 40,000 P 50,000 This chapter provides a detailed discussion on the concept of business expense
I
Sale of domestic bonds directly to a buyer 40,000 20,000 and the different accounting procedures used to account for expenses. It also
discusses the general principles of deductions from gross income.
Ordinary gains
Sale of equipment 20,000 10,000 After this chapter, readers are expected to demonstrate mastery of the: "4
I,

l
I

Capital loss
Sale of foreign stocks
1. Disti nct1on of business expense from a personal expense
2. Concept of an expense and a capital expenditure
l!·ill!
10,000
Sale of domestic stocks directly to a buyer 10,000
10,000
3. Accounting rules of deduction of capital expenditures .ill
'{i
Ordinary loss
Sale of old machine 40,000
4. Mastery of the different depreciation methods and the special considerations
on deductions
5. Allocation of common expenses between taxable and non-taxable operations
#l
;1,
Matutina has a business income totaling PS00,000 including P18,000 divial 6. General principles of deductions !!11
income from a domestic corporation. Compute the total income of Matti
subject to regular tax.
7. Tax reporting of deductions l
: I !I.
a. P497,000 c. P522,000
8. Modes of claiming deductions from gross income
,I
I, I
b. PS17,000 d. P507,000 .'}4
.I
DEDUCTIONS FROM GROSS INCOME
B 15. In the immediately preceding problem, compute Matutina's net capital gains tax
Deductions from gross income pertain to business expenses incurred by a
due on the sale of domestic stocks directly to a buyer.
taxpayer engaged in business or engaged in the practice of profession.
a. P3,000 c. P5,000
b. P4,000 d. P8,000
What is a business?
A
WI:
16. Pursuant to a plan of consolidation, Mr. Dolphy exchange his share with tax Business means habitual engagement in a commercial activity involving the
regular sale of goods and services to customers or clients. In taxation, the term
of P1,000,000 for the share of another corporation with fair value of Pa00,8
plus P100,000 cash. Compute the capital loss to be recognized. business is generally used to include the exercise of a profession. Self-employment
a. PO c.Pl00,000 ls a business but employment is not a business.
b. P50,000 d. P200,000
D 17 Business Expense vs. Personal Expense
· In the immediately preceding problem, compute the tax basis of the proptJ1ic! Business expenses are costs of doing trade, business or practice of profession such
received by Mr. Dolphy.
as employee salaries, office utilities, supplies and rent, taxes, losses, bad debts,
a. P 800,000
c. P1,000,000 depreciation on business properties, research and development and the like.
b. P1,100,000
d. P 900,000
Personal . d th 1. • g and family expenses of individual taxpayers
expenses me1 u e evin£,, ·di? ti horn
such as family food personal recreation and transportation, me ica on, e
tentat sand utilities, tuition
' fees of depen d ts and
en'
other
»
similar expenses.

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