Entitlement to Deductions from the Remuneration Paid for Services as Conservator of the Interworld Assurance Corporation, as Insurance Company in Distress

March 19, 1992 BIR RULING NO. 087-92 71 000-00 087-92 Atty. Gregorio D. Aquino, Jr. 24-F Judge J. Luna Street San Francisco del Monte, Quezon City S i r : This refers to your letter dated November 19, 1991 requesting for a ruling on whether or not you are entitled to claim deductions from the remuneration paid for your services as conservator of the Interworld Assurance Corporation, as insurance company in distress. You represented that on August 14, 1985, you were appointed by the Insurance Commissioner as Conservator of Interworld Assurance Corporation, an insurance company in financial distress; that as such Conservator, you drew payment for your services from the Interworld Assurance Corporation; that your services, however, were subsequently terminated on August 15, 1989; that for the taxable year 1988, you claimed a total deduction of P73,005.65 from your business and professional income of P120,000.00; and finally, that upon audit, our revenue examiner disallowed the deduction to the extent of P58,005.65 on the ground that you are not entitled to claim deductions since for the taxable year involved, your income was in the nature of compensation income. In reply, please be informed that section 71 of the Tax Code, as amended, provides that the term "employee" refers to any individual who is the recipient of wages and includes an officer, employee, or elected official of the Government of the Philippines or any political subdivision, agency or instrumentality thereof. The term "employee" also includes an officer of a corporation. On the other hand, the term "employer" means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that, among others, if the person for whom the individual performs or performed any services does not have control of the payment of the wages for such services, the term "employer" [(except for the purposes of subsection (a) [of Section 71] means the person having control of the payment of such wages. "Wages", as the term is defined in the Tax Code, means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash. From this definition is excepted casual labor not in the course of the employer's trade or business, among others. Considering the foregoing, it is the opinion of this Office as it hereby holds that a conservator is neither an employee of the Insurance Commissioner who appointed him nor of the insurance company in distress which paid for his services. In fact, the Conservator acts as an independent contractor whose professional judgment is being relied upon during the period that a distressed company is under conservatorship. This being the case, any income derived by such conservator is considered as business income from which may be deducted ordinary and necessary expenses as may be allowed under Section 29 of the Tax Code, as amended. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue