BIR Ruling [UN-098-94]

March 23, 1994 BIR RULING [UN-098-94] Ma. Angela B. Olegario Fertilizer & Pesticide Authority 6th Floor, Raha Sulayman Building Benacidez St., Makati Metro Manila Gentlemen : This refers to your letter dated March 22, 1994 requesting for a ruling on the taxable year within which to report the salaries you earned for the period February 1989 to April 1991, but which you will only be receiving in 1994. It is represented that as an employee of the Fertilizer and Pesticide Authority (FPA), you were awarded a scholarship through the National Economics Development Authority; that as a consequence, you pursued a Masters Degree in New Zealand from February 11, 1989 to April 18, 1991; that during this period and for reasons beyond your control, you were not paid your salary since payment was stopped by the FPA; that you were able to file your income tax return for the said period; that upon your return in April 1991, you represented with NEDA and the FPA-Department of Agriculture for the collection of such backpay; that while the amount of P150,281.40 has been approved for payment, the Department of Budget and Management (DBM) has yet to release the Notice of Cash Allocation to your agency. In reply, please be informed that Section 38 of the Tax Code, as amended provides in part that: "[t]he amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer , unless, under methods of accounting permitted under Section 37, any such amounts are to be properly accounted for as of a different period. . . ." (Emphasis supplied). Under such provision, what matters is not when the income was earned, but when the income was received. Thus, 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, U.S. Master Tax Guided (1969)). A taxpayer whose income is from salary of the like, as in your case, is required return his income on the cash basis . The foregoing notwithstanding, this Office has previously ruled that an employee can allocate or spread his backpay and other benefits over the corresponding years when they were actually earned when such employee had been "denied payment of his wages . . . because of circumstances not his own making, and therefore, beyond his control. "(BIR Ruling 039/057-83/238-86 dated November 10, 1986.) Such a situation was deemed iniquitous, and accordingly the taxpayer was accorded a special treatment. Considering therefore the special circumstances of your case, this Office is of the opinion as it hereby holds that the amount of P150,281.40, which shall be paid to you as remunerations for the period February 1989 to April 1991 when you were on official scholarship in New Zealand, can be properly allocated or spread through the corresponding years when you were not able to receive your salary. It should, however, be understood that your employer shall deduct and withhold upon such income payments a tax determined in accordance with the prevailing rules for computing withholding taxes during each corresponding taxable year. (BIR ruling No. 238-86 dated November 10, 1986). cd Very truly yours, ALICIA P. CLEMENO Head Revenue Executive Assistant Office-in-Charge (Legal Service)