Flexión de tiempo-aspecto

In this regard, there is such a thing as no operating loss carry over. OPERATING LOSS are losses incurred in the course of trade or business of the taxpayer. Net operating loss may be carried over by the taxpayer, whether corporate or individual, to the next three (3) consecutive years provided that during that year, such taxpayer is not exempt from taxation and there must be no substantial change in ownership of the corporation, in the case of the corporation. Substantial change may arise if less than 75% of the outstanding capital stock or paid up capital stock is held by the same person.

Case: The BOI registered industries are allowed to carry over operating losses. This time, those losses that were incurred during that period of 16 years operation may be carried over to succeeding taxable year.

The rule that we have established is: expenses must be paid or incurred during the taxable year. You can claim those expenses as deduction during the year when the same were incurred or paid. The exception to this rule are net operating loss carry-over and net capital loss carry-over.

Meaning of Terms:

CAPITAL GAIN – gain from sale or exchange of capital asset.

CAPITAL LOSS – loss incurred from sale or exchange of capital asset.

NET CAPITAL GAIN – excess of capital gain over capital loss.

NET CAPITAL LOSS – excess of capital loss over capital gain.

Gains derived from dealings in property form part of Gross Income (Sec. 32 A. no. 3)

- This may include sale or exchange of goods or properties.

- If the property is sold for cash, that is considered as sale.

- If it property for another property, this may be classified as exchange.

There may be a gain in regard to exchange of property if the following concur:

1. The property received must have a fair market value;

2. The property disposed of must be substantially different from the property received.

- So, a like kind transactions are not taxable transactions.

- If a land has been substantially improved and then it is exchanged with another land, that may not be taxable. However, there is that BIR ruling that this is no longer applicable even if these are like kind transactions, it may be taxable. But Prof. Geronimo of Ateneo disagreed. He said, you cannot change that by BIR ruling. So, we can compromise that this will not apply to capital transactions but to ordinary transactions.

In determining the gain or loss in the sale or exchange of property, this is the basic formula:

“Amount received or realized LESS Cost or adjusted basis.”

How to determine the cost or adjusted basis?

*** It depends upon the manner of acquisition.

1. If it was acquired through purchase, it is the cost of the property.

Example:

I sell a property in the amount of P100,000. It is previously purchased the same at P60,000, this P60,000 is the cost of property.

2. If the property sold was previously acquired through inheritance, it is the fair market value (FMV) of the property at the time of the acquisition.

“At the time of acquisition” means at the time of the death of the decedent or testator.

3. If the property sold was acquired through donation, the basis shall be the same as if it would be in the hands of the donor.

Situation:

A, the donor donated property to B, the donee. Subsequently, such donated property was sold by the donee for P200,000. What must be the cost?

Answer:

The law says, the same basis in the hands of the donor. So, the donee should ask the donor the basis.

It is also that A, the donor acquired the property from another either through purchase or donation. So, you should ask A, the last donor, his basis.

Exception to the general rule:

If the basis is greater than the FMV of the property at the time of the donation/gift then, for the purpose of determining loss, the basis shall be such FMV.

4. If the property sold was acquired for less than an adequate consideration in money or money’s worth, the basis of such property is the amount paid by the transferee for the property.

Situation:

The seller acquired the property from A in the amount of P70,000. The FMV of said property is P100,000. So, the seller here is the transferee and A is the transferor. The seller sold the property at P200,000. What must be the cost?

Answer:

It is the amount paid by the transferee. And the amount paid by the transferee who subsequently sold the property is P70,000. So, he will have a gain of P130,000.

*** Remember, it is not the FMV of the property but the amount paid bv the transferee.

Suppose the property was acquired in a transaction where gain or loss is not recognized?

(NO GAIN, NO LOSS RECOGNIZED)

Before we answer that, we should know these transactions where the gain is not recognized (meaning it is not taxable) and the loss is not recognized (meaning, it is not deductible).

The basic rule is, in the sale or exchange of property if there is a gain, the gain taxable; If there is loss, the loss is deductible).

Exception to the basic rule (no gain or loss shall be recognized):

1. Transactions made pursuant to plan of merger or consideration. Sometimes, we call this

“ Tax Exempt Transactions” or “Transactions Solely in Kind”.

a. A corporation, party to merger or consolidation exchanges its properties solely for stock in corp., which is a party to the merger or consolidation.

Illustration:

Property

Corp. A Corp. B property for Stock

Stock

b. A stockholder of a corp. party to a merger or consolidation exchanges his stock solely for stock in another corp. party to that merger or consolidation.

Illustration:

Security or Stock

Stockholder --- Corp. 1. Stock for Stock 2. Securities for stock 3. Securities for Securities

Security or Stock

** Sometimes, we call the above-mentioned transactions as “Transactions solely in kind” or

“Tax Exempt Transactions”.

2. If a person alone or together with others or not exceeding four (4) (so, the total number should be five (5) exchanges his property for stock in a corp. and this person or persons, after this exchange, acquired controlling interest over that corp. This means that they acquired at least 15%

of the shares of stock of such corp.

- This is also a transaction solely in kind.

Question: Suppose these persons, at the time of transaction, already acquired controlling interest over such corp., is the transaction or exchange taxable?

Answer: Even if these persons acquired controlling interest at the time of the transaction, the rule is still applicable in which case that is still tax exempt.

Question: So, if these properties acquired under this tax exempt transactions are subsequently disposed of, how will you determine the basis?

Answer: The basis of the stock or properties acquired under this no gain, no loss recognized shall be the same basis in the hands if the transferor.

Suppose the property was acquired under transactions where gain is recognized and loss is not recognized? (GAIN RECOGNIZED, LOSS NOT RECOGNIZED)

Transaction solely in kind – this means that there are other consideration given other than those mentioned under transactions solely in kind (nos. 1 and 2 above, but cash is added).

Example: Corp. A party merger or consolidation transfers its cash and property to Corp. B, also a party to such merger or consolidation.

Corp. B, in exchange, transfers its stocks to Corp. A.

Illustration:

Property and Cash

Property: P50,000 Cash: P50,000 Corp. A Corp. B P100,000 Stock FMV – Stock: P100,000

Let us say that FMV of stock given by Corp. B is P100,000. The value of the property transferred by Corp. A is P50,000 while cash is also P50,000.

So if you add all of these, the amount received or realized is P200,000.

Now, you deduct the cost of the stock disposed of. Let us say that the cost of stock is P80,000.

So, Corp. B derived gain of P120,000. Is this taxable?

Answer:

YES, but only P100,000 is the amount that is taxable. This is so because of the limitation that it must not exceed the total cash and the FMV of the property. And if you add the FMV of the property and the total cash given, the total is P100,000.

Under the law, there is that limitation in transactions which involves not only the property but also cash. The gain is recognized or taxable but the taxable gain must not exceed the cash given and the FMV of the property which forms part of the consideration.

On the other hand, supposed the cost of stock disposed of or transferred to Corp. A is P250,000.

So, there is a loss of P50,000, is this recognized or deductible? NO.

If this property received under this transactions which is not solely in kind is subsequently disposed of, how do you determine the basis of that?

Answer: The basis of the property in the hands of the transferor less the FMV of the property, less cash received plus the gain recognized, if any, plus the dividend that may be treated as such, if there is any.

Basis in the hands of the transferor Less: FMV of the property

Cash received

Plus: Gain recognized, if any Dividend recognized, if any

Transactions were gain is recognized and loss is not recognized (meaning, if there is a gain, the gain is taxable and if the loss is not deductible) are: [W.I.R.N.]

1. Wash Sale

2. Illegal transactions

3. Those transactions involving Related taxpayers 4. Transactions Not solely in kind.