BIR Ruling [UN-347-95]

September 27, 1995 BIR RULING [UN-347-95] Jimenez & Associates Law Offices Suite 1407 Aurora Tower, Araneta Center Cubao, Quezon City Attention: Atty . Ramon T . Jimenez Gentlemen : This refers to your letter dated July 31, 1995 stating that sixteen (16) complainants, former faculty members of the Pamantasan Ng Lungsod Ng Maynila (PLM) namely; Estelita Pineda, Vicente Banagale, Salvacion Rodriguez, Anita Leyson, Eleanor Jimenez, Ma. Zelda Reyes, Belinda Santos, Lordeo Poquiz, Rolando Austria, Jonathan Manzano, Manolo Hina, Nemencio Cabatuando, Alfredo Razon, Virgilio Zamora, Roberto Amores and Jose Mejia, whose illegal termination has been sustained by the Civil Service Commission in its Resolution No. 92-814 dated June 25, 1992, and affirmed by the Supreme Court in its decision dated February 22, 1995; that the Civil Service Commission in its Resolution No. 92-814 dated June 25, 1992 directed PLM Management to reinstate the aforementioned employees 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 you are of the opinion that the back salaries and other benefits are in the concept of actual damages for the period from May 31, 1990 to June 9, 1995 and therefore not subject to withholding tax on wages. In reply thereto, please be informed that as stated in CSC Resolution No. 92-814 dated June 25, 1992 the amounts to be received by the aforementioned sixteen (16) complainants are back salaries and other benefits from the time of their illegal termination until their actual reinstatement and not actual damages. 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, 519) 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. Said backwages, are subject to the withholding tax on wages [BIR Ruling No. 057-83 dated April 12, 1993]. However, pursuant to Section 3 of Revenue Regulations No. 2-95 implementing Republic Act No. 7833 otherwise known as "An Act to Exclude the Benefits Mandated pursuant to R.A. No. 6686 and P.D. 851, as amended, and other Benefits from the Computation of Gross Compensation Income" the following benefits shall be excluded from the gross compensation income, viz.: a) 13th month pay equivalent to the mandatory one (1) month basic salary of officials and employees of the Government (whether national or local), including government-owned and controlled corporations and of private offices received after the 12th month pay beginning CY 1994; and b) Other benefits such as christmas bonus given by private offices to their officials or employees, productivity incentive bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials or employees of both Government or Private offices in an amount not exceeding Twelve Thousand Pesos (P12,000.00) for one (1) calendar year. The above-stated exclusions [(a) and (b)] shall cover benefits paid or accrued beginning January 1, 1994 but shall be limited only to an amount not exceeding Twelve Thousand Pesos (P12,000.00) in the case of the "other benefits" contemplated under paragraph (b) above, provided, however, that when added to the 13th month pay, the total amount of tax exempt benefits shall not exceed Thirty Thousand Pesos (P30,000.00). aisadc Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)