Law School Noob: [CASE DIGEST] Re: Request of Atty. Bernardo Zialcita for Reconsideration of the Action of the Financial and Budget Office (A.M. No. 90-6-015-SC)

Monday, January 3, 2022

[CASE DIGEST] Re: Request of Atty. Bernardo Zialcita for Reconsideration of the Action of the Financial and Budget Office (A.M. No. 90-6-015-SC)

October 18, 1990

FACTS:

In an en banc ruling in August 1990, the Supreme Court earlier resolved that the terminal leave pay by virtue of Atty. Bernardo Zialcita’s retirement and leave credit cash conversions were not part of his salary and thus not subject to income tax.

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."

In the same ruling, the Supreme Court ordered the Fiscal Management and Budget Office to refund the amount deducted from Atty. Zialcita's terminal pay amounting to P59,502.33.

The SC also declared 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.

The Commissioner of Internal Revenue (CIR) subsequently filed a Motion for Reconsideration.

ISSUE:

Whether the monetary value of the accumulated leave credits of Atty. Bernardo Zialcita are taxable. – NO.

HELD:

The SC held that the money value of the accumulated leave credits of Atty. Bernardo Zialcita are not taxable for the following reasons:

Atty. Zialcita opted to retire under the provisions of Republic Act 660, which is incorporated in Commonwealth Act No. 186. Section 28(c) of CA 186 provides that "all benefits granted under this Act, and all its forms and documents required of the members shall be exempt from all types of taxes."
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.
Upon Atty. Zialcita's compulsory retirement, he is entitled to the commutation of his accumulated leave credits to its money value.
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 NLRC. A gratuity is that paid to the beneficiary for past services rendered purely out of generosity of the giver or grantor.
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. 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.

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