Separation Pay to Be Received by Employees Resulting from Dissolution of Law Firm Exempt from All Taxes

May 20, 1985 BIR RULING NO. 073-85 29 (c) (7) (B) 125-84 073-85 Gentlemen : This refers to your letter dated March 27, 1985 requesting a ruling as to whether the separation pay to be received by the employees of Poblador, Azada, Tomacruz and Cacanindin Law Offices as a result of its dissolution is subject to tax. It is represented that the employees will be paid their respective separation pay upon their termination from the service of the aforementioned law firm which was dissolved due to the death of its Senior Partner, Atty. Honorio Poblador, Jr. and the withdrawal from the partnership by Atty. Cipriano Azada. In reply, I have the honor to inform you that pursuant to Section 29(c)(7)(B) of the Tax Code as amended, any amount received by an official or employee or by his heirs from his employer as a consequence of separation by 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 said official or employee is exempt from taxes regardless of age or length of service . The phrase "for any cause beyond the control of the 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 or initiated by him. In other words, the separation must not be of his own making or choice. (Sec. 2(b)(2), Revenue Regulations No. 6-82 October 1, 1982) The separation of the employees from the service of the law firm as a result of its dissolution falls within the purview of said phrase. Such being the case, the separation pay to be received by such employees are exempt from all taxes and consequently, from the withholding tax prescribed by Section 91, Chapter XI, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82. supra . It is, however, understood that this tax exemption does not include the law firm's payment for salary and cash equivalent of accumulated vacation and sick leaves, if any, of its employees. aisadc Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner