Tax Exemption of Separation Benefits Paid to Employees Who Were Involuntarily Separated from the Service

December 18, 1992 BIR RULING NO. 362-92 28 (b)(7) (B) 43-92 362-92 Rodrigo, Cuevas & De Borja Unit T-5C, 3rd Floor Milelong Bldg., Amorsolo St. Makati, Metro Manila Attention: Atty . Orlando A . Cuevas Gentlemen : This refers to your letter dated July 14, 1992, stating that your clients, Mr. Ernesto G. Pabalan and Mr. Tolentino C. Arguelles, pilots of Philippine Airlines (PAL), were separated from their service due to July 5, 1991 reorganization of PAL's Flight Operation Department which rendered the positions of your clients redundant and are therefore abolished, as contained in the annexed memorandum from the Vice-President-Flight Operations to the Management, Flight Deck Crew dated November 4, 1991. The pilots affected by the reorganization were offered alternative positions, however, the positions offered to your clients were downgraded and the corresponding salaries were substantially reduced. Faced in a no option situation and financial crises, your clients acceded to the said reorganization which offered corresponding benefits. Based on the foregoing representations, you now request a ruling as to whether the separation benefits to be received by your clients, Mr. Ernesto G. Pabalan and Mr. Tolentino C. Arguelles, administrative checkpilots of the Philippine Airlines, who were involuntarily separated from the service are exempt from income tax. prcd In reply, please be informed that under Section 28 (b) (7) (B) of the Tax Code, as amended, any amount received by an official or employee 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 of the Tax Code. In view thereof, the separation benefits of your clients, Mr. Ernesto G. Pabalan and Mr. Tolentino C. Arguelles, are not subject to income tax and consequently to the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended by B.P. Blg. 135 and implemented by Revenue Regulations No. 6-82 as amended. This exemption however, is understood not to include the company's payment of salaries and bonuses to Mr. Pabalan and Mr. Arguelles. cdll Very truly yours, JOSE U. ONG Commissioner of Internal Revenue