Taxability of Damages and Legal Interest Included in a Judgment

May 18, 1967 BIR RULING NO. 021-67 Mr. Florencio Carlos 2406 Juan Luna M a n i l a S i r : This refers to your letter dated July 28, 1966 requesting a ruling based on the query stated as follows: lexlib "A friend filed a Complaint for Damages against his neighbor, claiming that the fire that started and which spread and destroyed his house and personal belongings was the result of the neighbor's gross negligence. After some ten years litigation, the neighbor was sentenced by the Court to pay him P9,000.00 as compensation for his burned house and other personal belongings plus legal interest thereon from the filing in Court of the Complaint. Accordingly, his neighbor paid him P9,000.00 for his burned properties, and P5,400, as legal interest." "Query: Is may friend obliged to pay INCOME TAX on the P5,400, that he received as interest, but really as compensation for his deprivation of the use of his properties during the last ten years?" In reply, I have the honor to inform you that it is a well settled rule that interest included in a judgment is a taxable as ordinary income. (Nichol vs. U.S. 48 F. Supp. 662 (Ct. Cl., 1943) Ollie Beverly Rose, 8 TC 854; Comm. vs. Estate of Goldberger, 213 F (2d) 78 (CA 3rd; 1954) In view thereof, this Office believes and so holds that the sum of P5,400.00 received by your friend as legal interest is includible in his gross income and hence taxable. It may further be stated that the damages he recovered in the amount of P9,000.00 for the destruction of his property constitute a return of capital and taxable only to the extent that the damages exceed the basis of the property. (Mertens, Law of Federal Income Taxation, Vol. I, Chap. 6 A-page 30) Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue