CTA Case No. 4345 (Decision)

REPUBLIC OF THE PHILIPPINI6 COURT OF TAX APPEALS QUEZON C ITY MARCOS F . CATALAN, Petitioner~ - versus - C.T.A. CASE NO. 4 3 45 THE COMMISSIONER OF INTERNAL REVENUE, 11/1! I CJ I }{ - ..... �-� .,_ Respondent. - - _, - - - ~�t DEC I I0N .is a simple claim for- r-efund by petitioner covering the amount of repr-esenting income withheld the accumulated unused vacation and sick leave credits of petitioner who retired from the government s e r-v i c e . It appean;; from the records of the case that petitioner has retired from Philippine National Bank under the provisions of Republic Act No. 1616~ as amended~ on March 3~ 1987. Upon hi s retirement~ petitioner was entitled to the payment of the money va 1ue <Jf his accumulated unused vacation and sick le.::\v~~ cn?dits in the amount of P172~149 . 28 . �rhe afTHJUn t <J �f F'28 ~ 271 . 53 was Wi thhe 1d as income ta~�( fro m the said amount. On September 15~ 1988~ peti ticme t- for-ma 1 1y f i.l ed ~--Ji th respondent a c 1 a i m

DEC I S ION CTA CASE NO . 4 3 45 2 �for� the l~efund of the 1-'lithheld amount. However~ respondent f ai 1ed to act on the said c 1 aim be �fon? the expiration of the two-year pr-escriptive period~ hence~ petitioner instituted this Petition for Review on March 2~ 1989. Petitioner ad v ance the following reason s in support of his claim for refund= a. The commutation (or payment of the money value) of unused leave credits is part of the retirement benefits of an employee retiring under the provisions of R.A . No. 1616~ as amended. b . Pr-esidential Decree No. 220 specifically provides that "provisions of any exisiting law to the contrary no twit hs tanding ~ ?9..!==..:t~. L ... ................._...?..�.!.<;:!:!r;i,J;y _ 9.J?..D.�.!..ftt.?.. ,.......r..:J?..t,i,.r.?..m..~nt......9.r::.�t.~\lt.!J?..? ., . . .R?.o_2..:t..P.o.�. ~n 9 .. ...... Pt.bf?..t:........?.J m.JJ. 9.r....-...P?.J1..~.:f.:t.J:._~-........r:.~_C:: .?...t..Y..?..9.__,__gy r:~ t.;i, L :i...O.Q. ....~.r.DPJP.YJ?.~?.........9.0.c::l . ......Y~.PCI.~g..r.?.. ~ 1-'J he the r- received from Philippine or foreign government agencies and other institutions~ private or pub l ic~ ?.b.~J1.. 9.~ ~J:!J~mP.t._.....f.r::.9..m....tb.~.. . ..P.9.Y.m.~..o. t......... 9..f .....1.o..c;:gr.rl?...........t~.:.�.~ . II (Underscoring supplied.) c. Since commutati'on of unu s ed leave ct- edit~;; .is gr�anted under the GSIS Lai-'J (C.A. No. 1986~ as amended by R.?L No. 1616) and thet- efor-e is a 1so a GS I 8 retirement benefit~ which is not included in gross income and is exempt from ta:-:ation~ undet- Section 28(b)(7) o �f the Nationa l Internal Revenue Code. Petitioner further cited previous decisions by . . . . . . t h i s c Clu r- t s u c h as l;..f.r.~o. . _.r.~ ~ T. J::~9.?...t..�.rl?. .c::l~___y� .! ........... b.?. CTA Case No . 3809 ~ February 4 ~ 1987 and f.~l9..C~r::Lc:..:i,.P........ ~-~ .--P.~o.t.9?. ....Y.?...~. . 54()

DEC I S ION CTA CASE NO. 4 3 45 - 3- No. 4004~ November 18~ 1987~ wherein the court ruled on the entitle ment of retirees to the refund of the taxes withheld from the accumulated vacation and sick leave credits. Respondent on his part admits the basic facts nar-rated in the Petition for Review. However~ he raises questions that the Castaneda case is sti 11 pending resolution by the Supreme Court while the Santos case has been resolved only in a minute resolution by the Supreme Court. He reiterated his stand that the money value of vacation and sick leaves are part of compensation for services rendered and therefore subject to income tax. This case was withdrawn by the petitioner in view of the adverse opinion by the Supreme Court in the case of Justice Oscar Victoriano~ G.R. 831765~ August 10~ .1989 holdi.ng his terminal leave subject to .income t;aN but with permission of this Court was reinstated in view of the subsequent favorable opinion of the Supre me Co u rt in the administrative case of Mr. Bernar d o F. Z.ialcita~ A.M. 90-6-0 1 5-SC~ August 23~ 1990. The issue presented f or resolution of this Court is whether Ot- not the money value of the 54.1

DECISION CTA CASE NO. 4345 - 4- accumulated vacation and sick leave credits are subject to income tax. This Court has consistently ruled in the case c i ted of ~.f..C~.IJ.. _.e .~-- .Ga.. �.:t.~ng_Q_P.L ..Y...?_~____I.h.~.... G9..ffi!!l.t?.? .!90..?..r:......9..f. G9._fl1f.D.:i,..? .?..J-. 9D.?.r::. ...... 9f. .....In..t .!E.!.r.JJa 1 Re.Y.�?11.Ue ~ that the money va 1ue of the term ina 1 1eave credits of retiring government employees are exempted from income tax. We cited in support of this stand Commonwealth Act No. 186~ as amended by R.A. 1616~ Presidential Decree No. 220 and Section 29(b)(7) of the National Internal Revenue Code (now Section 28(b)(7)). Thi s Court was affirmed by the Supreme Court in both instances in the cases of C,:_qmm..is�l.J~.D.!?.L . .9..f...__J. O.t..�r..!l.a..l s. B�.v...?.n.l:!f?....._.....Y.?....~. .. .........:-.r�..b..~;~... ........c.:..Q.q_ r.. t..............9. :f... .. ___BI1.Qf?..a..J.�._ ____a._IJ..9. .... ... tr..?...o. G.~.? .t_a..O..l?.'.9. ~. ~ , G.R. No. 96016 dated October 17 ~ 1991 and G.9Jf.!JT1J,..?..?J..9.!l?..r:...__g__f ......J.n .t..!E..r..D.. ~. L......R.f?..Y_f::!.!J_qf?._..._.Y...? ..~-- ....G.9 .h!.r...L .9..f. I~.lLJ~.P.P.?..~J.? ......~.n.9.....F.lP.r.go.J;;J.9.....~...~---�~o...tg?_~ G. R. No. 81 3 6 2 dated July 4~ 1988. The affirmation by t h e Supreme Court of the Castaneda case was in confirmation of an earlier decision by the Court of Appeal s in C.A. - G.R. SP No. 20482 dated September 2 6~ 1990 1 ike11-lise sustaining the pos .i tion taken by the Ta:-: Court on the mer .j. ts of the c 1aim for refund of Efren Castaneda.

DECISION CTA CASE NO. 4345 - 5- The Supreme Cour-t in another cas e invo 1v ing administrative s ettlement of the claim of Bern a rdo F. Zialcit a ~ Deputy Clerk of Court~ or-dered the Fiscal Management & Budget Office the refund of the ta >: withheld �from his terminal leave. The court holds that the terminal leave pay can never be cons idered part of his salary subject to the payme nt of in c ome ta:�: but fa 11 s under the phrase "other similar benefits received by r-etiring employees and worker-s"~ within the meaning of Section 1 o �f F'. D. 220 and therefor-e e:�:empt from income ta:�:. It is in this case that the SL1pr-eme Court diff e rentiated the case of Zialcita wi~h the case of Jus tice Vic tor iano. While the c ase of Zialcita involves payment of terminal leave by r�ea s on of compulsory r-etirement~ in the case of Victor-iano~ the terminal leave pay he received when he a pplied for optional r-etirement had been conver-ted into vacation and sick leave 1-'Ji th commutation of salary which forms part of his regular- salary subject to income The conversion and commutation were done because before the effectivity of his optional r-etirement on December 1982~ he \-'liaS appointed Ac t.ing Commi s sioner of the Land Registration Commission on

DECISION CTA CASE NO . 4 3 45 - 6- November 19~ 1982. In still another recent administrative case of C:..QJTJIJ.l..:i.. ~.?.A.Q.D..!'?.r.~ . ....!?...t......!::\..1. ~. ~ G. R. No. 96032 ~ 31 July 1991 ~ the Court e:-:plained the rationale behind the employee's entitlement to an e)�:emption from withholding (income ) tax on his ter minal leave pay~ as �follc::>ws: ")oD: commutation of leave ct-edits~ more common l y known as terminal leave~ is applied for by an officer or employee who retires~ resigns or is separated from the service through no fault of his own. (Manual on Leave Administration Course �for Effectiveness publishe d by t he Civil Service Com m ission~ p ages 16-17) . In the e>:erc:;ise of sound personnel pol icy~ the Government recognizes that for most public servants~ retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided . Termi.na l leave payments at- e given not only at the same time but also for t he same pol icy considerations governing retirement benefits." In fine~ not being p art of t h e gross salary or income of a govern ment officia l or employee but a retirement benefit~ terminal leave pay is not subject to income tax . WHEREFORE, in view of th i s clea r and consistent pronouncement by the Supreme Court , respondent is hereby ordered to refund to petitioner the amount of P28,271 . 53 representing

DECISION CTA CASE NO. 4 3 45 - 7- err oneous ly withheld tax from the money value of his terminal leave . SO ORDERED . Quezon City~ Metro Manila~ No v e mber 11 , 1991. ~...s;; (;2 .. ~ ERNESTO D. ACOSTA Associate Judge WE CONCUR: ~-W Presiding Judge CDNe~c ~DAQUIN ;ssociate Judge CERTIFICATION I hereby certify that this decision was reached after due consultation a mo n g the mem bers of the Court of Tax Appeals in accordance with Section 13~ Article VIII of the Constitution. ~~ ALEX Z. REYES Presiding Judge Court of Tax Appeals