Special Treatment Accorded to Employee-Taxpayer Denied Payment of His Wages

November 10, 1986 BIR RULING NO. 238-86 039 057-83 238-86 Gentlemen : This refers to your letter dated September 16, 1986 requesting a ruling as to whether the backwage for 13 years and other benefit such as transportation allowances (3 years), monthly, representation allowance (3 years), guaranteed bonus (1983-1985), unpaid bonus for 1982, unpaid monthly allowance (February and March 1983) other than the moral and exemplary damages and attorney's fee which were awarded to your employee, Mr. Domingo Belmonte who was found to have been dismissed without just cause and ordered reinstated pursuant to the decision of the Labor Arbiter in re: Case No. NLRC-NCR-5-2291-83 dated November 11, 1983 and upheld by the Supreme Court with some modifications on May 21, 1986, are subject to income and withholding taxes. cdtech In reply thereto, please be informed that such back wages, allowances and benefits are subject to the withholding tax on wages. Under Section 38 of the Tax Code, if the taxpayer is an individual, the net income shall be computed on the basis of the calendar year. All items of income shall be included in gross income or gross compensation income, as the case may be for the taxable year in which received by the taxpayer except those expressly excluded and already subjected to the final income tax, and exemptions as well as deductions taken accordingly pursuant to Sections 21, 28 and 29 in relation to Section 39 all of the Tax Code, as amended. Salaries, commissions, tips, director's fees, and other forms of compensation are income in the year received, and not in the year earned. (Par. 717, p. 231, US Master Tax Guide (1969). Thus, a taxpayer whose income is from salary or the like is required to file his income tax return on the cash basis. However, considering that such back wages, allowances and benefits constitute remunerations for services that would have been performed by the said employee for your Bank prior to the year (1986) when actually received, or during the period of his dismissal from the service which no less than the Supreme Court has in effect, affirmed to be illegal, it is felt that a liberal construction of the statute is called for in this particular case if only to protect an employee who, in fact, had been deprived of the payment of his wages and other forms of remunerations, from the payment of a tax heavier than what should have been imposed if his employer had promptly met its obligation. In the case of "Commissioner of Internal Revenue v. Joseph G.R. Robillard & Margaret H. Robillard" (C.A., 308 F. 2d 518, 519) it was held that income received by a taxpayer in 1957 as "back pay" or additional pay for service rendered to his employer for the period form July 1, 1955 through December 1, 1956 which, indubitably, would have been paid prior to 1957 except for the intervention of an event similar in nature to a dispute as to the liability of the employer to pay the remunerations in question, is entitled to a special treatment and was property allocable to taxable years 1955 and 1956 . Accordingly, having been denied payment of his wages when they were due because of circumstances not of his own making and, therefore, beyond his control, the aforenamed employee comes within the scope of the inequity for which this ruling is precisely designed to remedy. In view of the foregoing considerations, this Office is of the opinion as it hereby holds that Mr. Domingo Belmonte should report as income and pay his income taxes thereon by allocating or spreading his back wages, allowances and benefits through the years, 1983, 1984 and 1985. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue