BIR Ruling No. 040-64

May 27, 1964 BIR RULING NO. 040-64 2nd Indorsement Returned to the Chief, Withholding Tax Section, thru the Revenue Operations Head (Assessment), Bureau of Internal Revenue, Manila, the entire docket bearing on the income tax case of Mr. FELIPE C. MERCADO of 413 M. Leyva St., Mandaluyong, Rizal, for the year 1962, which was referred to this Office for a ruling on the question of whether or not the amount of P18,027.25 representing back wages from 1958 to 1962 but paid and received by subject taxpayer only in 1962, should be spread through the years 1958 to 1962, or considered as taxable income for the year 1962. cdta The records of this case show that Mr. Felipe C. Mercado filed one revised income tax return, for the year 1962, declaring therein as gross income his back wages from 1958 to 1962 in the total amount of P18,027.25. In the same return, Mr. Mercado claimed an exemption in the total amount of P35,000, allegedly representing his personal and additional exemptions for five years, that is, from 1958 to 1962 (See Schedule "B" & "D", pp. 7 & 8, docket) Income tax returns, whether for individuals or for corporations, associations, or partnerships, are required to be made and their income computed for each calendar year ending on December 31st of every year. (Sec. 37, Tax Code as implemented by Sec. 169, Rev. Regs. No. 2) All items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer and exemptions as well as deductions taken accordingly pursuant to Section 39 of the Tax Code as implemented by Sections 38 to 170 of the Income Tax Regulations. It is well settled that a taxpayer whose income is from salary or the like is required to file his income tax return on cash basis. cdt In general, income should not be construed as being received by taxpayers on the cash basis prior to the date of its actual receipt. The cash method ignores the time of earning income; it is immaterial whether it has been earned in previous years. The doctrine that payments of compensations are income to a taxpayer on a cash basis in the year of receipt, as distinguished from the year in which the compensation is earned, has been too firmly embodied in our income tax law to permit any question. The cash basis is usually applicable to recipients of fees, salaries, wages, etc. (Vol. 2 Mertens Law of Federal Income Taxation, pp. 188, 190 and 258) (BIR Ruling No. 443, s. 1959, dated Sept. 15, 1959). Consequently, being a cash basis taxpayer, Mr. Mercado should report his total income of P18,027.25 in 1962, which is the year of its actual receipt. In other words, the amount of P18,027.25 should not be spread through the years 1958 to 1962 but considered as taxable income for 1962 or the year of actual receipt. Were we to sanction the use of the spreading method claimed, we would be tolerating a violation of the law or rule that the taxpayer must report his income in the year it is received. Under the practice advocated, a taxpayer would be encouraged to hide his income because in any case, if his unreported income would be discovered afterwards the said income, although appearing in one year, would be distributed over a period or years. In other words, we will have a rule, as advocated by subject taxpayer, that would not discourage the hiding of taxable income because any discovery of any unreported income would always be allowed to be distributed over a period of years. (William Li Yao vs. Collector of Internal Revenue, G.R. No. L-11875, Dec. 28, 1963) Moreover, personal exemptions of an individual are allowed in the nature of a deduction from the amount of his net income. (Sec. 23, N.I.R.C.) As the net income of subject taxpayer is computed with respect to a fixed period which is the calendar year 1962, only his personal and additional exemptions corresponding to 1962 or the year in which he filed the required tax return may be claimed and allowed. Accordingly, Mr. Mercado is not entitled to a carry-over of his personal and additional exemptions for prior years in which he did not file income tax returns, to the year in which he is required to file a return of income. (BIR Ruling 208, s. 1960 dated April 11, 1960) cdti (SGD.) BENJAMIN N. TABIOS Acting Commissioner of Internal Revenue