RE: REQUEST OF ATTY. BERNARDO ZIALCITA FOR RECONSIDERATION OF THE ACTION OF THE FINANCIAL AND BUDGET OFFICE.

On August 23, 1990,
a resolution of the Court En Banc was issued regarding the amounts claimed by
Atty. Bernardo F. Zialcita on the occasion of his
retirement.  The resolution states, among
others:

“The terminal leave pay of Atty. Zialcita
received by virtue of his compulsory retirement can never be considered a part
of his salary subject to the payment of income tax but falls under the phrase
‘other similar benefits received by retiring employees and workers’, within the
meaning of Section 1 of PD No. 220 and is thus exempt from the payment of
income tax.  That the money value of his
accrued leave credits is not a part of his salary is further buttressed by Sec.
3 of PD No. 985, otherwise known as ‘The Budgetary Reform Decree on Compensation
and Position Classification of 1976’ particularly Sec. 3 (a) thereof, which
makes it clear that the actual service is the period of time for
which pay has been received, excluding
the period covered by terminal leave.“

The dispositive
portion provides:

“Accordingly, the Court Resolved to (1) ORDER the Fiscal
Management and Budget Office to REFUND Atty. Zialcita
the amount of P59,502.33 which was deducted from his terminal leave pay as withholding tax; and
(2) DECLARE that henceforth no withholding tax shall be deducted by any Office
of this Court from the terminal leave pay benefits of all
retirees similarly situated including those who have already retired and from
whose retirement benefits such withholding taxes were deducted.  Sarmiento, J., is
on leave.”

On September
18, 1990, the
Commissioner of Internal Revenue, as intervenor-movant
and through the Solicitor General, filed a motion for clarification and/or
reconsideration with this Court.

After careful
deliberation, the Court resolved to deny the motion for reconsideration and
hereby holds that the money value of the accumulated leave credits of Atty.
Bernardo Zialcita are not taxable for the following
reasons:

1) Atty. Zialcita
opted to retire under the provisions of Republic Act 660, which is incorporated
in Commonwealth Act No. 186. Section 12(c) of CA 186 states:

“xxx
Officials and employees retired under this Act  shall be entitled to the commutation of the
unused vacation leave and sick leave, based on the highest rate received, which
they may have to their credit at the time of retirement.”

Section
28(c) of the same Act, in turn, provides:

“(c)    Except as herein
otherwise provided, the Government Service Insurance System, all benefits
granted under this Act, and all its forms and documents required of the members shall be exempt
from all types of taxes, documentary stamps,
duties amd contributions, fiscal or municipal, direct
or indirect, established or to be established; xxx.” (Emphasis supplied)

Applying the two
aforesaid provisions, it can be concluded that the amount received by Atty. Zialcita as a result of the conversion of these unused
leaves into cash is exempt from income tax.

2) The commutation of leave
credits is commonly known as terminal leave.  (Manual on Leave Administration Course for
Effectiveness, published by the Civil Service Commission, p. 17) 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. 
(supra, p. 16) 
Since terminal leave is applied for by an officer or employee who has already
severed his connection with his employer
and who is no longer working, then it follows that the terminal leave pay,
which is the cash value of his accumulated leave credits, is no longer
compensation for services rendered.  It
can not be viewed as salary.

3) Executive Order No. 1077,
Section 1, provides:

“Any officer or employee of the government who retires or
voluntarily resigns or is separated from the service through no fault
of his own and whose leave benefits are not covered by special
law, shall be entitled to the commutation of all the accumulated vacation
and/or sick leaves to his credit, exclusive of Saturdays, Sundays and holidays,
without limitation as to the number of days of vacation and sick leaves that he
may accumulate.” (Underlining supplied)

Meanwhile, Section 28(b)
7(b) of the National Internal Revenue Code (NLRC) states:

“Sec. 28(b) – Exclusions from gross
income – The following items shall not be included in gross income and shall be
exempt from taxation under this Title:

xxx                                    xxx                               xxx

(7)    Retirement
benefits, pensions, gratuities, etc.

xxx                                    xxx                               xxx

(b)     Any amount received by
an official or employee or by his
heirs from the employer 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.” (Underlining supplied)

In the case of Atty. Zialcita, he
rendered government service from March
13, 1962 up to February
15, 1990.  The next day, or
on February 16, 1990, he
reached the compulsory retirement age of 65 years.  Upon his compulsory retirement, he is
entitled to the commutation of his accumulated leave credits to its money value.  Within the purview of the above-mentioned
provisions of the NIRC, compulsory retirement may be considered as a “cause
beyond the control of the said official
or employee“. Consequently, the amount that he received by
way of commutation of his accumulated leave credits as a result of his
compulsory retirement, or his terminal leave pay, falls within the enumerated
exclusions from gross income and is therefore not subject to tax.

4.  The terminal leave pay
of Atty. Zialcita may likewise be viewed as a “retirement
gratuity received by government officials and employees” which is also
another exclusion from gross income as provided for in Section 28(b), 7(f) of
the NIRC.  A gratuity is that paid to the
beneficiary for past services rendered purely out of generosity of the giver or
grantor.  (Peralta v. Auditor General,
100 Phil, 1051 [1957]) It is a mere bounty given by the government in
consideration or in recognition of meritorious services and springs from the
appreciation and graciousness of the government.  (Pirovano v. De la Rama Steamship Co., 96 Phil. 335, 357 [1954]) When a
government employee chooses to go to work rather than absent himself and
consume his leave credits, there is no doubt that the government is thereby
benefited by the employee’s uninterrupted and continuous service.  It is in cognizance of this fact that laws
were passed entitling retiring government employees, among others, to the
commutation of their accumulated leave credits. 
That which is given to him after retirement is out of the Government’s
generosity and an appreciation for his having continued working when he could
very well have gone on vacation.  Section
286 of Revised Administrative Code, as amended by RA 1081, provides that “whenever
any officer, employee or laborer of the Government of the Philippines shall
voluntarily resign or be separated from the service through no
fault of his own, he shall be entitled to
the commutation of all accumulated vacation and/or sick leave
to his credit: 
xxx.” (Underlining supplied) Executive Order No. 1077, mentioned
above, later amended Section 286 by removing the limitation on the number of
leave days that may be accumulated and explicitly allowing retiring
government employees to commute their accumulated leaves.  The commutation of accumulated leave credits
may thus be considered a retirement gratuity, within the import of Section
28(b), 7(f) of the NIRC, since it is given only upon retirement and in
consideration of the retiree’s meritorious services.

It is clear that the law
expresses the government’s appreciation for many years of service already
rendered and the clear intention to reward faithful and often underpaid workers
after the official relationship had been terminated.

5) Section 284 of the Revised
Administrative Code grants to a government employee 15 days vacation leave and
15 days sick leave for every year of service. 
Hence, even if the government employee absents himself and exhausts his
leave credits, he is still deemed to have worked and to have rendered
services.  His leave benefits are already
imputed in, and form part of, his salary which in turn is subjected to
withholding tax on income.  He is taxed
on the entirety of his salaries without any deductions for any leaves not
utilized.  It follows then that the money
values corresponding to these leave benefits both the used and unused have
already been taxed during the year that they were earned.  To tax them again when the retiring employee
receives their money value as a form of government concern and appreciation
plainly constitutes an attempt to tax the employee a second time.  This is tantamount to double taxation.

The Commissioner of Internal Revenue seeks, in the alternative,
to be clarified with respect to the following:

a.  the
applicability of the August 23, 1990
Resolution to other government officials and employees; and

b.  to those who have
already retired and from whose retirement benefits withholding taxes have been
deducted, whether or not the deducted taxes are refundable even without a
written request for refund from the taxpayer-retiree.

The case of Atty. Bernardo Zialcita
(entitled Administrative Matter No. 90-6-015-SC) is merely an administrative
matter involving an employee of
this Court who applied for
retirement benefits and who questioned
the deductions on the benefits given to him. 
Hence, our resolution applies only to employees of the Judiciary.  If we extend the effects of the aforementioned resolution to all other
government employees, in the absence of an actual case and controversy, we
would in principle be rendering an advisory opinion.  We cannot foresee at this time and for all
cases all factors bearing upon the rights of government workers of varying
categories from diverse offices.  The
authorities concerned will have to determine and rule on each case as it
arises.  “Similarly situated”
is a most ambiguous and undefined term whose application cannot be fixed in
advance.

With respect to the need
for a written request for
refund, we rule that Atty. Zialcita need no longer
file a formal request for refund since the August 23, 1990 Resolution, which
principally deals with his case, already binds the intervenor-movant
Commissioner of Internal Revenue. 
However, with respect to other retirees allegedly similarly situated and
from whom withholding taxes on terminal leave pay have been deducted, we rule
that these retirees should file a written request for refund within two years
from the date of promulgation of this resolution.  Fiscal considerations do not allow that this
matter be left hanging for an indefinite period while retirees make up their
minds as to whether or not they are entitled to refunds.

The Chief of the Finance
Division of this Court likewise seeks clarification with respect to the
applicability of our August 23, 1990 Resolution to the following employees of
this Court:

a) those who avail of optional retirement;
and

b) those who resign or are separated from
the service through no fault of their own.

The two groups mentioned
above are also entitled to terminal leave pay in accordance with Section 286 of the Revised Administrative Code, as amended by RA
1081.  In the light of our ruling that to
tax terminal leave pay would result in the taxation of benefits given
after and as direct consequences of retirement and would, in effect, constitute
double taxation, we rule that this resolution also applies to those who avail
of optional retirement and to those who resign or are separated from the
service through no fault of their own.

The Court understands the
urgent need of Government to tap all possible sources of revenue because of its
heavy expenditures and the failure of actual income to cover all
disbursements.  However, the solution is
not the levying of taxes on benefits and gratuities which by law are not
supposed to be taxed.  The remedy is to
either amend the retirement law subject, of course, to constitutional
constraints or to institute vastly improved and effective tax collection
efforts.

All salaried workers
and wage earners, whether in the public or the private
sector, are taxed to the last centavo of their incomes throughout the entirety
of their working lives.  The same cannot
be said of factory workers, leaders of industry, merchants, self-employed
professionals, movie stars, fishing magnates, bus and jeepney
operators, vice lords, theatre owners, and real estate lessors,
to name only a few.  A middle or lower
echelon employee who retires after thirty or forty years of service helplessly
sees his retirement pensions or benefits unavoidably and rapidly decrease in
value in only a few years even as his cost of living, age, health, and other
personal circumstances call for increased expenditures.  We fail to see the logic in viewing with
eager eyes for purposes of tax revenues the fruits of a working lifetime of
labor simply because fixed salaries and retirement benefits are so visible and
so convenient to levy upon.  Retirees who
are most deserving of compassion and who can least carry the multifarious
burdens of Government should not be so readily encumbered on a strained
interpretation of the law.

WHEREFORE, the Court Resolved to (1) DENY with
FINALITY the motion for reconsideration of the intervenor-movant
and the Solicitor General; and (2) DECLARE (a) that the August 23, 1990
Resolution on A.M. No. 90-6-015-SC specifically applies only to employees and
officers of the Judiciary who retire, resign or are separated through no fault
of their own; and (b) that retirees and former employees of the Judiciary,
except Atty. Zialcita, from whose terminal leave pay
withholding taxes have been deducted, must file a written claim for
refund with the Commissioner of Internal Revenue within two years from the date
of promulgation of this resolution.

SO ORDERED.

Fernan, C.J., Narvasa,
Herrera, Cruz, Paras, Feliciano, Gancayco,
Padilla, Bidin, Sarmiento,
Cortes, Aquino, Medialdea, and Regalado, JJ., concur.