Question 1: in 2006, Mr. A inherited a row of apartments with a fair market value of P1 million. In the same year, the row of apartments generated rentals for Mr. A in the amount of P100,000. Discuss the income tax implication, if any, of A's receipt of the apartments and the rentals.
Answer: A's receipt of the apartment is not taxable income while his receipt of the rentals should be included as part of his gross income for 2006. Section 32(B)(3) excludes from gross income "[t]he value of property acquired by gift, bequest, devise or descent . . . ." However, "income from such property . . . shall be included in gross income."
Question 2: the employer of Mr. B implemented a retrenchment program which resulted in B's separation from service. B received a separation pay of P200,000. At the time of his separation from service, B was 51 years old and had been in the service of his employer for nine years. Is the separation pay taxable income to B? Explain.
Answer: No. Under Section 32(B)(6)(b), "[a]ny amount received by an official or employee . . . from the employer as a consequence of separation of such official or employee from the service of the employer . . . for any cause beyond the control of the said official or employee," is excludable from gross income. B's retrenchment, being a cause of separation beyond his control, accordingly exempts his separation pay from income tax. The condition for exclusion under Section 32(B)(6)(a) -- that the retiring official or employee has been in the service of the same employer for at least 10 years and is not less than 50 years of age -- is not applicable to separation from service beyond the control of the separated official or employee.
Question 3: C Corp. insured the life of D, C Corp.'s president. C Corp. paid the premiums. The policy states that should Mr. D die, the proceeds of the insurance shall be paid to C. Corp. Are the premium payments deductible from C Corp.'s gross income? Are the premium payments taxable income in the hands of D? Would your answers be the same if the policy states that the proceeds shall be paid to D's spouse?
Answer: The premium payments are not deductible from C Corp.'s gross income. Under Section 36(A)(4), no deduction shall be allowed in respect to "[p]remiums paid on any life insurance policy covering the life of any officer or employee . . . when the taxpayer is directly or indirectly a beneficiary under such policy." Since C Corp. is directly a beneficiary under D's life insurance policy, premiums paid by C thereon are not deductible. The premium payments are not taxable income to D considering that he has no economic benefit whatsoever from such premium payments or the life insurance policy.
The tax implications would be different if the proceeds are payable to D's spouse. D being the president of C Corp., the premium payments would constitute taxable fringe benefit to D. Under Section 33(B)(10), taxable "fringe benefits" include "[l]ife or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows." The premium payments are gross income to D as "[c]ompensation for services in whatever form paid . . ." under Section 32(A)(1). D received as compensation for services something of economic benefit which he had not previously had, namely, the obligation of the insurance company to pay money in the future to his designated beneficiaries (i.e., D's spouse) on the terms stated in the policy. U.S. v. Drescher, 179 F.2d 863 (1950). Since the premiums are taxable fringe benefit to D, the same are deductible from C Corp.'s gross income under Section 34(A)(1)(a)(i) which allows a deduction for a "reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee . . . ."
Answer: A's receipt of the apartment is not taxable income while his receipt of the rentals should be included as part of his gross income for 2006. Section 32(B)(3) excludes from gross income "[t]he value of property acquired by gift, bequest, devise or descent . . . ." However, "income from such property . . . shall be included in gross income."
Question 2: the employer of Mr. B implemented a retrenchment program which resulted in B's separation from service. B received a separation pay of P200,000. At the time of his separation from service, B was 51 years old and had been in the service of his employer for nine years. Is the separation pay taxable income to B? Explain.
Answer: No. Under Section 32(B)(6)(b), "[a]ny amount received by an official or employee . . . from the employer as a consequence of separation of such official or employee from the service of the employer . . . for any cause beyond the control of the said official or employee," is excludable from gross income. B's retrenchment, being a cause of separation beyond his control, accordingly exempts his separation pay from income tax. The condition for exclusion under Section 32(B)(6)(a) -- that the retiring official or employee has been in the service of the same employer for at least 10 years and is not less than 50 years of age -- is not applicable to separation from service beyond the control of the separated official or employee.
Question 3: C Corp. insured the life of D, C Corp.'s president. C Corp. paid the premiums. The policy states that should Mr. D die, the proceeds of the insurance shall be paid to C. Corp. Are the premium payments deductible from C Corp.'s gross income? Are the premium payments taxable income in the hands of D? Would your answers be the same if the policy states that the proceeds shall be paid to D's spouse?
Answer: The premium payments are not deductible from C Corp.'s gross income. Under Section 36(A)(4), no deduction shall be allowed in respect to "[p]remiums paid on any life insurance policy covering the life of any officer or employee . . . when the taxpayer is directly or indirectly a beneficiary under such policy." Since C Corp. is directly a beneficiary under D's life insurance policy, premiums paid by C thereon are not deductible. The premium payments are not taxable income to D considering that he has no economic benefit whatsoever from such premium payments or the life insurance policy.
The tax implications would be different if the proceeds are payable to D's spouse. D being the president of C Corp., the premium payments would constitute taxable fringe benefit to D. Under Section 33(B)(10), taxable "fringe benefits" include "[l]ife or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows." The premium payments are gross income to D as "[c]ompensation for services in whatever form paid . . ." under Section 32(A)(1). D received as compensation for services something of economic benefit which he had not previously had, namely, the obligation of the insurance company to pay money in the future to his designated beneficiaries (i.e., D's spouse) on the terms stated in the policy. U.S. v. Drescher, 179 F.2d 863 (1950). Since the premiums are taxable fringe benefit to D, the same are deductible from C Corp.'s gross income under Section 34(A)(1)(a)(i) which allows a deduction for a "reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee . . . ."
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