BIR Ruling [DA-485-03]

December 10, 2003 BIR RULING [DA-485-03] 32 (B) (6) (b); 057-83 Atty. Angelo Patrick F. Advincula Counsel for Rosalia Villaruel, et al. 16th Floor, Strata 200 Building Emerald Avenue, Pasig City S i r : This refers to your letter dated December 22, 2000 requesting for a certification that the backwages due to your clients namely. 1. Mary Lou V. Manatlao 2. Cristina D. Nalda 3. Teresita F. Peralta 4. Asuncion C. Ilagan 5. Herminio L. Cepillo 6. Delia Mortera 7. Evelyn P. Melgar 8. Rosalia J. Villaruel 9. Eden C. Encinares 10. Gloria R. Cousart 11. Thelma A. Padilla 12. Roberto L. Manuson 13. Nida L. Penaranda 14. Soledad B. Afroilan 15. Emma A. Pangusan by reason of the termination of their employment with the Integrated Bar of the Philippines is exempt from tax. It is represented that on April 30, 1999, the Honorable Supreme Court in A.C. No. 4826, entitled " In the Matter of the Petition to Remove Atty. Jose A. Grapilon, etc., Rosalia Villaruel, et al., Complainants versus Jose A. Grapilon et al . " rendered judgment directing the separation of your clients in lieu of reinstatement as follows: "WHEREFORE, the motion for a reconsideration of the Court's resolution dated 27 January 1999, is partly granted by allowing respondents to pay complainants their separation pay in lieu of reinstatement. In all respects, the resolution of the Court is maintained." and that on 17 October 2000, the Supreme Court in A.C. No. 4826 directed the payment of your client's backwages from the time of their suspension with pay until the finality of the 30 April 1999 Resolution. In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of said official or employee is exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for nor initiated by him. The above-mentioned provision requires the presence of two (2) conditions in order that the benefits may be granted tax exemption, namely: (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. As amply stated in the resolution, the proceedings have evidently created an intolerable atmosphere as well as uneasiness and tension, between and among your clients and the complainant and other employees of the IBP National Office. Thus, in a number of cases, the Court has allowed the payment of separation pay, in lieu of reinstatement of dismissed employees, when reinstatement is no longer feasible, expedient or practical due to strained relations. ETIHCa In the case of "Commissioner of Internal Revenue v. Joseph G.R. Robillard & Margaret H. Robillard" (C.A. 308 F. 2d 518, 519) it was held that income received by a taxpayer in 1957 as "back pay" or additional pay for services rendered to his employer for the period from July 1, 1955 through December 1956 which, indubitably, would have been paid prior to 1957 except for the intervention of an event similar in nature to a dispute as to the liability of the employer to pay the remuneration in question, is entitled to a special treatment and was properly allocable to the taxable years 1955 and 1956. Accordingly, having been denied payment of their payment of their wages when they were due because of circumstances not of their own making and, therefore, beyond their control, the aforementioned employee comes within the scope of the inequity for which this ruling is precisely designed to remedy. Thus considering that such back wages, allowances and benefits constitute remuneration for services that would have been performed by the said employees in the year when the same should have been actually received, or during the period of their suspension from the service, it is felt that a liberal construction of the statute is called for in this particular case if only to protect said employees who, in fact, had been deprived of the payment of their wages and other forms of remuneration, from the payment of a tax heavier than what should have been imposed if their employer had promptly met its obligation. Moreover, salaries, commissions, tips, director's fees, and other forms of compensation are income in the year received, and not in the year earned. (par. 717, p. 231, U.S. Master Tax Guide (1969) Thus, a taxpayer whose income is from salary or the like, is required to file his income tax return on the cash basis. Under Section 44 of the Tax Code of 1997, if the taxpayer is an individual, the net income shall be computed on the basis of the calendar year. All items of income shall be included in gross income or gross compensation income, as the case may be, for the taxable year in which received by the taxpayer except those expressly excluded and already subjected to the final income tax, and exemptions as well as deductions taken accordingly, pursuant to Sections 24, 33 and 34 and in relation to Section 45, all of the Tax Code of 1997. In view of the foregoing considerations, this Office is of the opinion as it hereby holds that said employees should report as income and pay their corresponding income taxes thereon by allocating or spreading their back wages, allowances and benefits through the years from the time of their suspension to actual separation because they opted for separation instead of reinstatement. Said backwages are subject to the withholding tax on wages. (BIR Ruling No. 057-3 dated April 12, 1983). IHaCDE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group