BIR Ruling

April 28, 1966 Miss Esperanza Hilado c/o Philippine Air Lines P.O. Box 954 Manila M a d a m : This refers to your letter dated March 29, 1966 stating the following: "In accordance with the Supreme Court Decision under G.R. No. L-18559 dated June 30, 1964, the Philippine Air Lines, Inc. was declared a Government owned and controlled corporation, therefore the PAL employees should work forty (40) hours a week only. Inasmuch as previous to the decision all PAL employees were required to work on Saturdays from July, 1957 to Sept. 7, 1961, the period covered by the above ruling. LLpr "By virtue of the above decision, Philippine Air Lines, Inc. was ordered by the Court to pay the corresponding amount to all employees covered by the decision for services rendered on Saturdays during the above period in question. However, when payments were made to the employees on installments the Court requested the PAL Management to withhold 25% of the total amount due from each backpay recipients and to be deposited to them representing the attorneys' fees, hence each employee received only the net amount. "When PAL prepared the withholding statements forms W-2 for its employees the total gross amount of the backpay was reported thereon as part of the salaries received during the year 1965 and the corresponding tax was also withheld. "Since the 25% of the total amount of the backpay was not paid directly to the corresponding employees but was outright withheld and deposited to the Courts, we would like to request an opinion from your Office whether these amounts in question should not be considered as part of the income of the PAL employees for the year 1965." cdpr In reply, I have the honor to inform you that for income tax purposes, the amount equivalent to 25% of the total amount of back salaries paid to each of the PAL employees referred to in the aforequoted query, which was withheld and deposited by that Company in court as 'attorneys' fees, is not, for purposes of the withholding tax, deductible from said back salaries in the computation of the tax to be withheld by the employer. However, it appearing that the legal expense have been incurred in relation to the production or collection of the back salaries, the same way be claimed as deduction from the gross income of each covered employee. (Par. 12, 311, Prentice-Hall, Vol. 2, 1963 ed.) Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue