When Benefits Received by an Employee Separated from Service are Exempt from Taxation

May 15, 1991 BIR RULING NO. 085-91 25 (b) (7) (2) (7) (2) 085-91 Gentlemen : This refers to your letter dated August 8, 1990 protesting against the assessment of this Office in the total amount of P10,138,789.14 representing deficiency withholding tax, inclusive of increments, on compensation paid to Atty. Cesar U. Querubin, for the calendar year 1989, under Assessment No. FAS-1-89-90-00-2488 dated July 9, 1990. cdta Investigation disclosed that Atty. Cesar U. Querubin was hired as President/Chief Executive of Boston Bank of the Philippines (Boston Bank), effective January 19, 1988, for a period of at least five (5) years, with an annual compensation of P1,050,000.00 (based on P70,000.00 per month, for fifteen (15) months); that as such President of Boston Bank, Atty. Cesar U. Querubin would be entitled to all employment benefits from the Bank, including annual merit and cost of living increases, performance bonuses and/or profit sharing; that on September 19, 1989, Atty. Querubin tendered an irrevocable resignation as President and Director of Boston Bank allegedly due to health reasons; that as a result Atty. Querubin's resignation, he was paid by Boston Bank a lump sum amount of P7,500,000.00, and in addition, two (2) Mercedes Benz Cars, models '83 and '86, were sold to him by Boston Bank for a consideration of P1.00 each; and that the fair market value of the two cars, as ascertained by our revenue officer, are P650,000.00 and P1,100,000.00 respectively. Furthermore, Atty. Querubin, on September 21, 1989, executed a Release, Waiver and Quit claim discharging the Bank of any obligation/liability arising, wholly or partially, from his employment and resignation. On September 21, 1989, you confirmed that the payment of P7,500,000.00 to Atty. Querubin is a non-taxable event pursuance to Section 23 (b) (7) (B) of the Tax Code. However, you undertook to assume responsibility for the payment of any tax liability in the event that the Bureau of Internal Revenue rules otherwise. On the theory, that the payments (i.e. cash and cars) constitute compensation income to Atty. Querubin, this Office issued against Boston Bank the aforementioned deficiency withholding tax assessment pursuant to Section 21 (a) in relation to Section 72(a), both of the Tax Code. It is your conception that the separation benefits of P7,500,000.00 were granted pursuant to Section 23 (b) (7) (B) of the National Internal Revenue Code, and should not form part of the taxable compensation of Atty. Querubin. Hence, your position that the assessment is without legal and factual basis. In reply, please be informed that this Office finds your contention to be without merit. According to Section 23 (b) (7) (B) of the Tax Code, as amended, 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 gross income and shall be exempt from taxation under Title II, Chapter 4 of the same Code. The above-cited provision exempts from payment of income tax the amounts received by an official from his employer as a consequence of his separation from the service of his employer due to, among others, sickness or for any cause beyond his control. To be able to avail to the benefits of the provisions, however, the following necessary conditions must be met: 1. The employee is separated from the service of the employer due to death, sickness or other physical disability or for any other cause; 2. That the cause for such separation was beyond the control of the employee; 3. That, as a consequence of such separation, the employer pays benefits to the official or employee or his heirs; 4. That the exclusion/exemption is confined to the amount in consideration of the separation, and not to any additional amount. To elucidate further, 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. In this case, however, the severance of the employer-employee relationship between the Boston Bank and Atty. Querubin was due to the voluntary action of Atty. Querubin. He resigned of his own volition. Hence, it cannot be said that his separation from the service of Boston Bank was for cause that was beyond his control. But even assuming for the sake of argument that the proximate cause of his resignation and eventual separation from the services of Boston Bank was due to a cause which was beyond his control, we nevertheless take the view that Atty. Querubin or the Boston Bank, for that matter, failed to come up with substantial evidence to support the conclusion that the separation benefits received by Atty. Querubin was exempt from tax. Except for the self-deserving declaration of Atty. Querubin that he was resigning due to health reasons and the results of the medical examination performed on him for the purpose of insurance coverage and which was secured more than eighteen (18) months prior to his resignation, no other relevant evidence was submitted to reasonably and adequately support the conclusion sought for Atty. Querubin or the Bank. The income tax due on the lump sum amount paid to Atty. Querubin is considered as beneficial payment and an additional compensation to the recipient, hence, taxable income. The difference between the fair market value and the selling price of two cars received by Atty. Querubin from the Boston Bank is treated, in view of the circumstances surrounding the case, not as a gift but as an additional compensation to the employee. Where an employer transfers property to an employee for an amount less than its fair market value regardless of whether the transfer is in the form of a sale or exchange, the difference between the amount the employee pays for the property and its fair market value is in the nature of compensation and is taxable to the employee. (Michies Federal Tax Handbook, 39th Edition, Vol. 1). Moreover, we are privy to the information that the resignation of Atty. Querubin was due to causes other than ill health which is interpreted to mean a deliberate and conscious attempt to evade payment of taxes. Such bad faith cannot in any way be tolerated or countenanced. In view of the foregoing considerations, this Office is of the opinion as it hereby holds that the separation payments received by Atty. Querubin consisting of: the lump sum amount given to him as a result of the cancellation of his employment contract with the Boston Bank, which is equivalent to P7,500,000.00; the beneficial payment or the income tax due on the lump sum amount paid to Atty. Querubin; and the difference between the fair market value and the selling price of the two cars received by Atty. Querubin from the Bank plus the amount of P746,990.00 received by him per Annual Return of Income Tax Withheld (BIR Form No. W-2 filed by Boston Bank for 1989), are compensation for services rendered for the Boston Bank which are subject to income tax and consequently, to the withholding tax under Section 21 (a) in relation to Section 72 (a), Chapter X, Title II of the Tax Code, as implemented by Revenue Regulations No. 6-82, as amended. cdtech In addition to the basic deficiency tax required to be paid, the penalty/surcharge of 50%, instead of 25%, of the said deficiency tax is herein imposed upon the taxpayer for the willful neglect to faithfully disclose and reflect the true facts surrounding the separation of Atty. Querubin from the services of the Bank. (Section 248, Tax Code as amended). The said penalty shall therefore form part of the tax and the entire amount shall be subject to the 20% interest mandated by Section 249 of the Tax Code, as amended. You are, therefore, requested to pay to this Office, through the Legislative, Ruling and Research Division, the amount of P12,374,522.13 as deficiency withholding tax, inclusive of increments within thirty (30) days from receipt of the assessment notice; otherwise, we will be constrained to enforce collection thereof by summary remedies provided for by law. This constitutes the final decision of the Office in this case. Very truly yours, (SGD.) JOSE U. ONG Commissioner