Computation of Gain or Loss | Partnership

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  Computation of gain or loss.  The gain from the sale or other disposition of property is the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss, is the excess of the basis or adjusted basis for determining loss over the amount realized therefrom. The amount realized from the sale or other disposition of property is the sum of money received plus the fair market value of the property (other than money) received. (Sec. ! #$, %&'.) The adjusted basis* of the property disposed of is its srcinal cost adjusted to the date of its disposition. The adjustment may consist of adding capital additions( e.g.,  improvements) made to the property and deducting capital recoveries ( e.g.,  depreciation). Basis of property sold or disposed of.  The basis of the property depends primarily on the manner in +hich the taxpayer acuired the property.&n computing the gain or loss from the sale or other disposition of property, real, personal or mixed, the basis is follo+s-() Property acquired by purchase . / &ts cost, i.e.,  the purchase price plus expenses of acuisition (see Sec. 01, 'egs.)2(3) Property which should be included in the inventory  . / &ts latest inventory value (see Sec. , %&'2 Sec. 01, 'egs.)2(0) Property acquired by devise, bequest or inheritance . / &ts fair market price or value as of the date of acuisition. ( Ibid .)Subseuent transfer by +ay of assignment of shareholdings beueathed by +ill, in exchange of real property of a corporation gives rise to a taxable transaction. Thegains realized on the transfer is subject to income tax, based on the di4erence bet+een the fair market value of the property received and the value of the shares of stocks, at the time of transfer (5&' 'uling %o. 61789, %ov. 8, 889.)2() Property acquired by gift or donation . / The same as it +ould be in the hands of the donor or the last preceding o+ner by +hom it +as acuired by gift, except that if each basis is greater than the fair market value of the property at the time of the gift, then for the purpose of determining the loss, the basis shall be such fair marketvalue (Sec. ! 5$, %&'.)2(6) Property (other than capital asset) acquired for less than an adequate considerationin money or money’s worth . / (a) The amount paid by the transferee for the property, or (b) the transferor:s adjusted basis at the time of the transfer, +hicheveris greater ( Ibid .)2 and  (1) Property acquired in a transaction where gain or loss not recognized . / The basis shall be that as de;ned in Section !(, 6) of the Tax ode. ( Ibid .2 see 5, infra. ) Measure of gain or loss from sale or in exchange of property. ()5y +ay of illustration, the measure of gain or loss from the sale of property is the di4erence bet+een the selling price of property sold and its cost. Thus-Selling price of the property  ess - ost of the property<ain from the saleorost of the property  ess - Selling price of the property=oss from the sale&f the cost or value of the property cannot be sho+n, then the +hole selling price shall be considered the gain. (>rlinda ortez 5rinker vs. oll., T# ase %o. 011, ?uly @, 868.)(3)The gain or loss in an exchange of property is measured by the di4erence bet+een the fair market value of the property received and the cost of the property given in exchange. (see Sec. , 'egs.) Thus-Aair market value of propertyreceived in exchange ess - ost or basis of property given in exchange <ain from the exchange orost or basis of property given in exchange ess - Aair market value of property received in exchange =oss from the exchange Gain or loss involving exchange or property. () !ssential di erence or similarity between property received and property disposed of immaterial.  / &n 5&' 'uling dated Barch 8, 8@ and reiterated in 5&' 'uling %o. 36!793 dated Sept. 38, 893, the ommission of &nternal 'evenue ruled that, under Section ! of the &ncome Tax 'egulations, for income to be realized in exchange of property, it is reuired that the property received in exchange must be essentially di4erent from the property disposed of. This means that there must be a change in  substance and not merely a change in form. onsidering that the parties to an exchange +ill not get something fundamentally and essentially di4erent from +hat they already had prior to the exchange, the parties are not subject to income tax as a result of the said transaction.Chile the provision of Section ! of the &ncome Tax 'egulations had been copied from the D.S. &ncome Tax 'egulations, the corresponding provision +hich it issupposed to implement does not exist in our %ational &nternal 'evenue ode. Aor this reason, the aforementioned rulings +ere abandoned by the 5ureau of &nternal 'evenue. (5&' 'uling %o. !10, Aeb. 38, 899.)(3) #act property received with mar$et value su%cient.  / &f the transaction is an exchange, it is suEcient for gain or loss to be recognized that the property received has a market value. &t is no longer necessary that the property received in exchangemust be essentially di4erent from the property disposed of.* (see 5&' 'ulings %o. !99, #pril , 899 and %o. 11, #pril 3, 89@.) Acquisition prior to March 1, 191. &f the property sold or exchanged +as acuired by purchase before Barch , 80, its cost is the basis for determining gain or loss from the sale or disposition thereof. (see Sec. ! 5$, %&'2 Sec. 0@, 'egs.) The gain or loss is determined by the follo+ing rules-()&f the Aair Barket Falue (ABF) of the property sold is in excess of ost, the taxable gain shall be the excess of the Selling Grice (SG) over the ABF of the property.&==DST'#T&H%-ostG3!,!!!SGG!,!!!ABF 0!,!!!ABF 0!,!!!SG !,!!!<ainG!,!!!(3)&f the SG is more than ost but less than ABF, no gain or loss is recognized.&==DST'#T&H%-ostG3!,!!!ABF 1!,!!!SG !,!!!%o gain or loss(0)&f the ABF is lo+er than ost, the deductible loss is the excess of ABF over SG.&==DST'#T&H%-ostG3!,!!!SGG1,!!!ABF !,!!!ABF!,!!!SG 1,!!!=ossG,!!!  ()&f the SG is more than ABF but less than ost, no gain or loss is recognized.&==DST'#T&H%-ostG3!,!!!ABF 1,!!!SG!,!!!%o gain or loss(6)&f the SG is more than ost but ost is eual or bigger than ABF, the taxable gain is the excess of SG over ost.&==DST'#T&H%-ostG3!,!!!SGG!,!!!ABF !,!!!ost 3!,!!!SG !,!!!<ainG3!,!!!(1)&f the SG is less than ost but the ABF is eual or bigger than ost, the deductible loss is the excess of ost over SG.&==DST'#T&H%-ostG3!,!!!SGG!,!!!ABF 0!,!!!ost 3!,!!!SG !,!!!=ossG!,!!!&n all of the above rules, the date of the ABF is as of Barch , 80. Acquisition on or after March 1, 191. &n the case of property acuired on or after Barch , 80, the cost or basis depends upon the mode of acuisition as follo+s-() &y purchase . / the cost thereof2(3) &y gratuitous title . / (a) Inheritance . / the fair market price or value at the date of acuisition2 and(b) 'ift or donations transferred for less than adequate and full consideration in money or money’s worth . / the same as it +ould be in the hands of the donor or transferor. (Sec. ! 5$, %&'.) !ead ustment of interest in a general professional partnership.
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