BIR Ruling [UN-345-95]

September 26, 1995 BIR RULING [UN-345-95] Ms. Edelita F. Reyes Vice President for Administration Pamantasan Ng Lungsod Ng Maynila Intramuros, Manila M a d a m : This refers to your letter dated July 31, 1995 stating that in Resolution No. 92-814 dated June 25, 1992 issued by the Civil Service Commission (CSC) in the case of "Pamantasan ng Lungsod ng Maynila Faculty Organization, et. al., versus Pamantasan ng Lungsod ng Maynila, et. al" for Illegal Dismissal and Unfair Labor Practice Acts, CSC directed the Pamantasan ng Lungsod ng Maynila (PLM) to reinstate the sixteen complainants to their former or equivalent positions and pay them back salaries and other benefits from the time of their illegal termination until their actual reinstatement; and that in connection with the payment of back salaries and other benefits of complainants, their counsel, Atty. Ramon T. Jimenez, in letter dated July 26, 1995 stated that withholding tax shall not be deducted by PLM on the amount to be paid as back wages and other benefits, the same being in the concept of actual damages which are to be excluded from gross income and consequently not subject to income tax. In connection therewith, you are requesting a ruling as to whether the backwages and other benefits due to the sixteen faculty members are exempt from income tax and consequently from the withholding tax on wages. In reply thereto, please be informed that 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, directors 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 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 backwages, allowances and benefits constitute remunerations for services that would have been performed by said sixteen faculty members of PLM prior to the year (1995) when actually received , or during the period of their dismissal from the service which the Civil Service Commission has ruled to be illegal, it is felt that a liberal construction of the statute is called for in this particular case if only to protect employees who, in fact, had been deprived of the payment of their wages and other forms of remuneration, from the payment of a tax heavier than what should have been imposed if their 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, 159) it was held that income received by a taxpayer in 1957 as "back pay" or additional pay for services rendered to his employer for the period from 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 remuneration in question, is entitled to a special treatment and was properly allocable to taxable years 1955 and 1956 . Accordingly, having been denied payment of their wages when they were due because of circumstances not of their own making and, therefore, beyond their control, the aforenamed employees come 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 each of the said sixteen faculty members should report as income and pay their respective income taxes thereon by allocating or spreading their back wages, allowances and benefits through the years from their illegal dismissal to their actual reinstatement (BIR Ruling No. 057-83 dated April 12, 1983). aisadc Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)