Damages from a Breach of Contract

September 20, 1990 BIR RULING NO. 184-90 30 169-84 184-90 Gentlemen : This refers to your letter dated August 20, 1990 requesting in effect a ruling confirming your opinion that liquidated damages to be paid to you by Intel Philippines Mfg., Inc. for breach of contract is exempt from income tax. It is represented that on May 20, 1983, Intel Phils. Mfg., Inc., entered into a contract of lease with you (lessor) whereby it was agreed, among others, that the lessee will construct a 3 to 4-storey building on your land; that the lessee failed to comply with the said undertaking; and that you and the aforenamed lessee agreed to a proposed amended contract of lease whereby it was agreed that you will be paid liquidated damages for actual and compensating damages you suffered as a result of the aforementioned breach of contract. In reply, please be informed that damages from a breach of contract constitute taxable income to the recipient thereof in the year received only to the extent that such damages constitute a loss of anticipated profits and non-taxable to the extent that the same represent a return of capital or investment. (BIR Ruling dated September 8, 1954) Such being the case, and since the liquidated damages to be paid to you by Intel Philippines Mfg., Inc. for the breach of your contract of lease do not represent a return of capital or investment but constitute a loss of anticipated profits, they are therefore, considered taxable income in the year received. Accordingly, your request for exemption has to be, as it is hereby denied for lack of legal basis. Very truly yours, (SGD.) JOSE U. ONG Commissioner