NOTRE DAME – SIENA COLLEGE OF POLOMOLOK

Brgy. Poblacion, Polomolok, South Cotabato

Tel No. (083) 500-8414
SERVICE EDUCATION DEPARTMENT
Passion for Truth and Compassion for Humanity

LEARNING MODULE IN INCOME TAXATION

First Semester, AY 2024-2025

LEARNING MODULE IN BAC 3: INCOME TAXATION

Module No. 4 Inclusive Dates September 14, 2024
Reference:
Tabag, E.D., Garcia, E.J. (2019) Income Taxation with Special Topics in Taxation based on NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN Law)
Adopted from: Amor A. Ilagan, Eunize E. Magsino, Daniel John F. Falo (Batangas State University)
MODULE 4
Co-ownership, Estates and Trust

Introduction
This module discusses what co-ownership is and the difference between estates and trust. It also includes topics such as income tax of an estate, deduction from estate’s
gross income, termination of judicial/extrajudicial settlement, taxation of trusts, classification of trust and filing of income tax returns. These topics will give students
knowledge and understanding about co-ownership, estates and trusts.

CO-OWNERSHIP
There is no co-ownership when two or more heirs or beneficiaries inherit an undivided property from a decedent, or when a donor makes a gift of an undivided
property in favor of two or more donees. Inheritance is subject to “Estate Tax” while Donation is subject to “Donor’s Tax”. Both taxes are not income taxes but
classified as “Transfer Taxes” which are discussed in Volume 2 (Transfer and Business Taxation). Nonetheless, incomes from such properties are subject to
income tax.

Co-Owners are taxed individually on their distributive share in the income of the co-ownership. Meaning, co-ownership itself is not taxable for the reason that the
activities of co-ownership are generally limited to the preservation of the common property and the collection of the income therefrom.

Inherited property remained undivided for more than (10) years and no attempt was ever made to divide the same among the co-heirs, nor was the property under
administration proceedings nor held in trust, the property should be considered as owned by an unregistered partnership, consequently, taxable as corporation.

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 ILLUSTRATION 1

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 INCOME TAX OF AN ESTATE
Income tax of an estate refers to the tax on income received by the estate during the period of administration or settlement. An “estate” is a mass of all the property,
rights, and obligations of a deceased person which are not extinguished by his death, including those which have accrued thereto since the opening of succession.
For instance, the parcel of land worth P60,000,000 in illustration 1, CASE B above is the estate of Noy. The passage of his property to his heirs upon his death is
subject to Estate tax (Refer to Volume 2- Business and Transfer Taxes).

TRANSFER TAX
A tax on gratuitous transfer of property either through gift/donation (subject to donor’s tax) or through inheritance (subject to estate tax). A transfer tax is not an
income tax because there is no taxable income realized from the passage of property to the heirs upon the death of the decedent.

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 ADMINISTRATION or SETTLEMENT PERIOD

Refers to the period when title to their properties left by a decedent is not yet finally transferred to the heirs/beneficiaries. At this period, the executor named by
the deceased in his “last will or testament”, if any, or the administrator appointed by the court, as the case may be, is temporarily in-charge of the administration
of the estate until such time that the estate is finally distributed to the rightful heirs. While under administration, the estate may earn income, thus, the corresponding
income tax should be paid.

Classification of Estates under settlement or administration

APPLICABLE TAX
The taxable income of the estate is computed in the same as an individual taxpayer. Consequently. The tax due is therefore computed using the graduated
income tax rates for individuals under Section 24(A) of the Tax Code (as amended under RA 10963 otherwise known as the “TRAIN LAW”).

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 DEDUCTION FROM ESTATE’S GROSS INCOME
Deduction from the estate’s gross income are the same items of deductions (business expenses) allowed for individual taxpayers under Section 34 of the Tax
Code. However, in addition to the usual allowance business expenses, the amount of income of the estate for the taxable year which is properly paid or credited
during such year to any legatee, heir, or determination of the estate’s taxable income. However, such amount of income distributed shall be included in the
determination of the taxable income of the legatee/heir/beneficiary. Shown below is the pro-forma computation of the taxable income of the estate and the
heirs/beneficiaries

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 TERMINATION OF JUDICIAL/EXTRAJUDICIAL SETTLEMENT
After the termination of judicial/extrajudicial settlement of the estate where the heirs still do not divide the property but instead contribute to the estate money,
property, or industry with intention to divide the profits between/among themselves, an unregistered partnership is created and the estate becomes liable for the
payment of corporate income tax.

TAXATION OF TRUSTS
Trust is a right on property, real or personal, held by one party for the benefit of another. It may be arranged inter-vivos or created by will under which title to a
property is passed to another for conservation or investment with the income therefrom and ultimately the corpus (principal) to be distributed in accordance with
the directions of the creator as expressed in the governing instrument.

PARTIES to a TRUST:
❖ Trustor- Person who establishes a trust.
❖ Trustee- One in whom confidence is reposed as regards property for the benefit of another person.
❖ Beneficiary- Person for whose benefit trust is created.
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 ❖ Fiduciary- any person or corporation that holds in trust an estate of another person or persons. A fiduciary may exist only if legal trust is created.

TAXABILITY OF INCOME OF TRUSTS

The income of a trust may be taxable to the trustee, beneficiary or grantor, as the case may be.

Taxable for the “Trustee” if:

The income of the trust is taxable to the “trustee” if the income is to be accumulated or held for future distribution, whether ordinary income or gain from sale of
assets included in the corpus of the trust.

Taxable to the “Grantor/Trustor” if:

❖ Under the term of trust, the title to any part of the corpus or principal of the trust may be revested to the grantor (Revocable Trust). The income of the corpus
or principal that may be revested to grantor shall be taxable to the grantor.
❖ The income of the trust may be held or distributed for the benefit of the grantor.
❖ Under the term of the trust, the income of the trust shall be applied for the benefit of the grantor.

Taxable to the Beneficiaries

The income of the trust is taxable to the beneficiaries if the income is to be distributed to the beneficiaries. In such a case, the beneficiaries include in their return
their distributive share in the net income of the trust. The distribution of the year’s income to an heir or beneficiary is a special item of deduction for the trust. At
the same time, the income distributed (actual or constructive) shall be treated as a special item of income to the heir/beneficiary.

Special Deductions:
1. Distribution of the year’s income to an heir or beneficiary; and
2. Amount collected by a guardian of an infant which is to be held or distributed as the court may direct.

Computation of Taxable Income

The trust’s taxable income is likewise computed in the same manner as an individual taxpayer, except that the basic personal exemption allowed is limited only
to P20,000 (Section 62-NIRC). The tax due is also based on the graduated rates provided under Section 24(A) of the Tax Code as shown in Table 2-2 of Chapter
2. Moreover, the calendar period shall be used as an accounting period for tax purposes. A trust is required to adopt the calendar year as its accounting period.

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 CLASSIFICATION OF TRUST
1. Ordinary Trust- the income and corpus of the trust do not revert to the grantor. The trust income is accumulated and held for distribution to the beneficiaries.
Under the Tax Code, ordinary trust is any of the following trusts:
➔ A trust where the income is accumulated or held for future distribution under the terms of a will trust.
➔ A trust where the income is to be distributed currently by the fiduciary to the beneficiaries.
➔ A trust where the income is accumulated for the benefit of unborn or unascertained person or persons with contingent interest.
➔ A trust where the income collected by a guardian of a infants held or distributed as the court may direct; and
➔ A trust where the income, is at the discretion of fiduciary may be either distributed to the beneficiaries or accumulated.

2. Revocable Trust (Section 63-NIRC)- a trust where at the any time, the power to revest in the grantor, title to any part of the corpus of the trust is vested:
❖ In the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus of the
income therefrom; or
❖ In any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom.

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 3. Employee’s Trust- income tax shall not apply to employees' trust which forms part of pension, stock bonus, or profit-sharing plan of an employer for the
benefit of some or all his employees [Section 60(B)-NIRC].

Requisites or conditions for exemption of employees’ trust

❖ The employee’s trust must form part of a pension, stock bonus, or profit-sharing plan of an employer for the benefit of some or all of his employees;
❖ Contributions are made to the trust by such employer, or employees, or both;
❖ The contributions are made for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust accordance with
such plan;
❖ Under the trust instrument, it is impossible at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the
corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees.

CONSOLIDATED INCOME TAX RETURNS (TWO OR MORE TRUSTS)

Where two or more trusts is created by the same trustor or grantor and the beneficiary is the same person, the following rules shall apply:
1. The taxable income of all the trusts shall be consolidated and the tax computed such consolidated income. The tax computed on the consolidated income shall
be apportioned to the different trusts, such that each trust shall have a share in the income tax on consolidated income.

2. Such proportion of sold tax shall be assessed and collected from each trustee which the taxable income of the trust administered by him bears to the
consolidated income of the several trusts. Each trust shall pay an income tax still due or payable computed as follows:

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 Filing of Income Tax Returns
The following persons acting in any fiduciary capacity shall file the income tax return for an estate or trust (Section 65-NIRC):
● Guardians
● Trustees
● Executors/administrators
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 ● Receivers
● Conservators
● All other persons or corporations acting in any fiduciary capacity

In case of two or more joint fiduciaries, return filed by one of them shall be a sufficient compliance with the requirements of the Tax Code. The return may be
filed in
● Authorized agent banks;
● Revenue District Officer;
● Collection agent;
● Duly authorized city or municipal Treasurer in which the taxpayer has his legal residence or principal place of business.

Learning Outcomes
At the end of the course, the student would be able to:
1. Gain knowledge and understand co-ownership, estates and trusts.
Graduate Attributes
o God-centered – manifest self-direction and maturity in one’s relationship with God as one goes through the process of learning
o Truth seeker – value independent and self-directed learning
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 TEACHING-LEARNING ACTIVITY QUIZ:
Part I. Use the following data for the next three (3) questions:
TLA No. 1: Problem Solving
On January 1, 2018, Francis established a trust found for the benefit of his In 2018, Mr. Mapagbigay created two (2) trust for his minor son, Lucky. During the
daughter, Princess. Francis appointed Atty. Lo Yer as the trustee the property year, the two-trust earned net income as follows
transferred to the trust is a piece of lot with a dormitory earning rental
income during the year the trust earned P10,000,000 revenues and incurred Trust 1 P4,000,000
expenses of P2,000,000 out of the trust’s income, Atty Lo yer gave Princess Trust 2 P6,000,000
P1,500,000. In the same year, Princess earned compensation income of
P1,850,000, net of withholding tax of P650,000. Each trust filed their own income tax return and paid the corresponding income tax due
as computed in their separate returns.
Determine the following.
1. Taxable income of the trust 1. Consolidated tax due of the trust
a. P 5,000,000 a. P 1,130,000
b. P 6,500,000 b. P 1,770,000
c. P 8,000,000 c. P 3,110,000
d. P 10,000,000 d. Nil

2. Additional income tax payable of trust 1

a. P 96,000
b. P 114,000
c. P 1,130,000
d. P 1,770,000

3. Additional income tax payable of trust 2

a. P 96,000
b. P 114,000
c. P 1,130,000
d. P 1,770,000

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 TEACHING-LEARNING ACTIVITY ANSWER SHEET

NAME: ______________________________________________________ COURSE & YEAR: _______________________

COURSE CODE: ______________________________________________ COURSE TITLE: _________________________
MODULE NUMBER: __________________________________________ DATE OF SUBMISSION: __________________

TLA No. 1: Problem Solving

On January 1, 2018, Francis established a trust found for the benefit of his daughter, Princess. Francis appointed Atty. Lo Yer as the trustee the property transferred to the
trust is a piece of lot with a dormitory earning rental income during the year the trust earned P10,000,000 revenues and incurred expenses of P2,000,000 out of the trust’s
income, Atty Lo yer gave Princess
P1,500,000. In the same year, Princess earned compensation income of P1,850,000, net of withholding tax of P650,000.

Determine the following.

1. Taxable income of the trust
a. P 5,000,000
b. P 6,500,000
c. P 8,000,000
d. P 10,000,000

QUIZ: Part I. Use the following data for the next three (3) questions:

In 2018, Mr. Mapagbigay created two (2) trust for his minor son, Lucky. During 2. Additional income tax payable of trust 1
the year, the two-trust earned net income as follows a. P 96,000
Trust 1 P4,000,000 b. P 114,000
Trust 2 P6,000,000 c. P 1,130,000
d. P 1,770,000
Each trust filed their own income tax return and paid the corresponding income
tax due as computed in their separate returns. 3. Additional income tax payable of trust 2
1. Consolidated tax due of the trust a. P 96,000
a. P 1,130,000 b. P 114,000
b. P 1,770,000 c. P 1,130,000
c. P 3,110,000 d. P 1,770,000
d. Nil

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