Denial of Request for Tax Exemption of Separation Benefits Received by Employee with Traumatic Arthritis

December 7, 2000 BIR RULING NO. 067-00 32 (B) 000-00 Atty. Arthur Lluch Padilla Counsel for Mr. Marcial Ibaez Second Floor, Pamar Building Del Pilar Street, Iligan City S i r : This refers to your letter dated November 22, 1999 requesting in behalf of your client, Marcial M. Ibaez, Sr., for a reconsideration from this Office denying his request that the separation benefits to be paid to him be exempt from income tax pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. TaCSAD Documents submitted show that on November 1, 1989, Marcial M. Ibaez, Sr., 42 years old, sustained fracture dislocation of the right tarso-metatarsal joint while on duty as leadman; that this turned out to a failing health and made him to go on sick leave that lasted for nine (9) months; that in the middle of 1994, he started complaining of recurring back pains, pain and swelling of his affected foot; that he was given a medication and advised to rest; that it recurred again in September 1996 and x-ray report revealed osteoporosis of the right ankle bones; that assigning him to another job will not guarantee that the pain and discomfort will not recur; that he was placed on medical retirement effective July 1, 1997; and that an Orthopedic Surgeon in Cebu City who managed his case found him to be suffering from " traumatic arthritis ." 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 due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee shall not be included in the gross income and shall be exempt from taxation under Title II of the Tax Code. In order to avail of the above tax exemption, the "serious illness" must be one which affects the employee's performance of his duties and endangers his life if he continues working as provided under Revenue Memorandum Order (RMO) No. 25-91. After a careful perusal of the medical records of Mr. Ibaez, the BIR National Office Chief of Medical, Dental and Welfare Division found that his illness is a plain and simple arthritis in layman's terms regardless of the highly technical medical terms used to make the condition seem more serious that what it really is. It is called traumatic arthritis because in this case, it was brought about by an unfortunate accident at a younger age of 42, in contrast with the degenerative arthritis of the elderly. On the other hand, osteoporosis or bone destruction is part of the normal aging process and all of us will develop this in time. Accordingly, Mr. Ibaez can either still engage in other gainful employment and/or his medical condition is not expected to deteriorate or cause death if he continues to be engaged in his present employment. Such being the case, your request for tax exemption on Mr. Ibaez' separation pay is denied for lack of legal basis as his illness is not sufficient to warrant exemption from income tax and consequently from withholding tax, pursuant to Section 32(B)(6)(b) of the Tax Code of 1997 as implemented by RMO No. 25-91. This serves as our final stand on the above subject matter. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue