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Commissioner of Internal Revenue vs Melchor

Javier, Jr.
In 1977, Victoria Javier received a $1 Million
remittance in her bank account from her sister CONWI vs CTA 213 SCRA 83
abroad, Dolores Ventosa. Melchor Javier, Jr., the
husband of Victoria immediately withdrew the said
amount and then appropriated it for himself.
Petitioners are employees of Procter and Gamble
Later, the Mellon Bank, a foreign bank in the U.S.A. (Philippine Manufacturing Corporation, subsidiary of
filed a complaint against the Javiers for estafa. Procter & Gamble, a foreign corporation).During the
Apparently, Ventosa only sent $1,000.00 to her sister years 1970 and 1971, petitioners were assigned to
Victoria but due to a clerical error in Mellon Bank,
other subsidiaries of Procter & Gamble outside the
what was sent was the $1 Million.
Philippines, for which petitioners were paid US dollars
Meanwhile, Javier filed his income tax return. In his as compensation.
return, he place a footnote which states: Petitioners filed their ITRs for 1970 and 1971,
Taxpayer was recipient of some money received from computing tax due by applying the dollar-to-peso
abroad which he presumed to be a gift but turned out conversion based on the floating rate under BIR
to be an error and is now subject of litigation. Ruling No. 70-027. In 1973, petitioners filed amened
ITRs for 1970 and 1971, this time using the par value
The Commissioner of Internal Revenue (CIR) then
assessed Javier a tax liability amounting to P4.8 of the peso as basis. This resulted in the alleged
Million. The CIR also imposed a 50% penalty against overpayments, refund and/or tax credit, for which
Javier as the CIR deemed Javier’s return as a claims for refund were filed.
fraudulent return. CTA held that the proper conversion rate for the
purpose of reporting and paying the Philippine
ISSUE: Whether or not Javier is liable to pay the 50%
income tax on the dollar earnings of petitioners are
the rates prescribed under Revenue Memorandum
HELD: No. It is true that a fraudulent return shall Circulars Nos. 7-71 and 41-71. The refund claims were
cause the imposition of a 50% penalty upon a denied.
taxpayer filing such fraudulent return. However, in
this case, although Javier may be guilty of estafa due
to misappropriating money that does not belong to
Whether or not petitioners' dollar earnings are
him, as far as his tax return is concerned, there can be
receipts derived from foreign exchange transactions
no fraud. There is no fraud in the filing of the
return. Javier’s notation on his income tax return can
be considered as a mere mistake of fact or law but not Ruling:
fraud. Such notation was practically an invitation for No. For the proper resolution of income tax cases,
investigation and that Javier had literally “laid his income may be defined as an amount of money
cards on the table.” The government was never coming to a person or corporation within a specified
defrauded because by such notation, Javier opened time, whether as payment for services, interest or
himself for investigation. profit from investment. Unless otherwise specified, it
It must be noted that the fraud contemplated by law means cash or its equivalent. Income can also be
is actual and not constructive. It must be intentional thought of as flow of the fruits of one's labor.
fraud, consisting of deception willfully and Petitioners are correct as to their claim that their
deliberately done or resorted to in order to induce dollar earnings are not receipts derived from foreign
another to give up some legal right. exchange transactions. For a foreign exchange
transaction is simply that — a transaction in foreign
exchange, foreign exchange being "the conversion of
an amount of money or currency of one country into
an equivalent amount of money or currency of
another." When petitioners were assigned to the

foreign subsidiaries of Procter & Gamble, they were Section 27(B) of the NIRC imposes a 10%
earning in their assigned nation's currency and were preferential tax rate on the
ALSO spending in said currency. There was no income of (1) proprietary non-
conversion, therefore, from one currency to another. profit educational institutions and (2) proprietary
The dollar earnings of petitioners are the fruits of non-profit hospitals. The only qualifications for
their labors in the foreign subsidiaries of Procter & hospitals are that they must be proprietary and non-
Gamble. It was a definite amount of money which profit. “Proprietary” means private, following the
came to them within a specified period of time of two definition of a “proprietary educational institution” as
years as payment for their services. “any private school maintained and administered
by private individuals or groups” with a government
Commissioner of Internal Revenue vs. St Luke's permit. “Non-profit” means no net income or asset
Medical Center accrues to or benefits any member or specific
Facts: person, with all the net income or asset devoted to
St. Luke’s Medical Center, Inc. (St. Luke’s) is the institution’s purposes and all its activities
a hospital organized as a non-stock and non-profit conducted not for profit.
corporation. St. Luke’s accepts both paying and non- “Non-profit” does not necessarily
paying patients. The BIR assessed St. Luke’s mean “charitable.” In Collector of Internal Revenue v.
deficiency taxes for 1998 comprised of deficiency Club Filipino Inc. de Cebu, this Court considered as
income tax, value-added tax, and withholding tax. non-profit a sports club organized for recreation and
The BIR claimed that St. Luke’s should be liable for entertainment of its stockholders and members. The
income tax at a preferential rate of 10% as provided club was primarily funded by membership fees and
for by Section 27(B). Further, the BIR claimed that St. dues. If it had profits, they were used for overhead
Luke’s was actually operating for profit in 1998 expenses and improving its golf course. The club was
because only 13% of its revenues came non-profit because of its purpose
from charitable purposes. Moreover, the hospital’s and there was no evidence that it
board of trustees, officers and employees directly was engaged in a profit-making enterprise.
benefit from its profits and assets.
The sports club in Club Filipino Inc. de
On the other hand, St. Luke’s maintained Cebu may be non-profit, but it was not charitable.
that it is a non-stock and non-profit institution for The Court defined “charity” in Lung Center of the
charitable and social welfare purposes exempt from Philippines v.
income tax under Section 30(E) and (G) of the NIRC. It Quezon City as “a gift, to be applied consistently
argued that the making of profit per se does not with existing laws, for the benefit of an indefinite
destroy its income tax exemption. number of persons, either by bringing their minds and
Issue: hearts under the influence of education or religion, by
assisting them to establish themselves in life or [by]
The sole issue is whether St. Luke’s is liable for otherwise lessening the burden of government.”
deficiency income tax in 1998 under Section 27(B) of However, despite its being a tax exempt institution,
the NIRC, which imposes a preferential tax rate of 10^ any income such institution earns from activities
on the income of proprietary non-profit hospitals. conducted for profit is taxable, as expressly provided
in the last paragraph of Sec. 30.
To be a charitable institution, however, an
Section 27(B) of the NIRC does not remove the
organization must meet the
income tax exemption of proprietary non-profit
substantive test of charity in Lung Center. The is
hospitals under Section 30(E) and (G). Section 27(B)
sue in Lung Center concerns exemption from real
on one hand, and Section 30(E) and (G) on the
property tax and not income tax. However, it provides
other hand, can be construed together
for the test of charity in our jurisdiction. Charity is
without the removal of such tax exemption.
essentially a gift to an indefinite number of persons

which lessens the burden of their properties, real or personal, or from any of
government. In other words, charitable institutio their activities
ns provide for free goods and services to the conducted for profit regardless of the dispositio
public which would otherwise fall on the shoulders n made of such income, shall be subject to tax
of government. Thus, as a matter of efficiency, the imposed under this Code.
government forgoes taxes
In short, the last paragraph of Section 30
which should have been spent to address public
provides that if a tax exempt charitable institution
needs, because certain private entities already
conducts “any” activity for profit, such activity is not
assume a part of the burden. This is the rationale for
tax exempt even as its not-for-profit
the tax exemption of charitable institutions. The
activities remain tax exempt.
loss of taxes by the government is compensated by
its relief from doing public works which would have Thus, even if the charitable institution must
been funded by appropriations from the Treasury be “organized and operated exclusively” for
charitable purposes, it is nevertheless allowed to
The Constitution exempts charitable
engage in “activities conducted for profit” without
institutions only from real property taxes. In the
losing its tax exempt status for its not-for-profit
NIRC, Congress decided to extend the exemption to
activities. The only consequence is that the
income taxes. However, the way Congress crafted
“income of whatever kind and character”
Section 30(E) of the NIRC is materially different from
of a charitable institution
Section 28(3), Article VI of the Constitution.
“from any of its activities conducted for profit, r
Section 30(E) of the NIRC defines the egardless of the disposition made of such income,
corporation or association that is exempt from shall be subject to tax.” Prior to the introduction of
income tax. On the other hand, Section 28(3), Article Section 27(B), the tax rate on such income from for-
VI of the Constitution does not define a charitable profit activities was the ordinary corporate rate under
institution, but requires that the institution “actually, Section 27(A). With the introduction of Section 27(B),
directly and exclusively” use the property for a the tax rate is now 10%.
charitable purpose.
The Court finds that St. Luke’s is a
To be exempt from real property taxes, corporation that is not “operated exclusively” for
Section 28(3), Article VI of the Constitution requires charitable or social welfare purposes insofar as its
that a charitable institution use the revenues from paying patients are concerned. This
property “actually, directly and exclusively” for ruling is based not only on a strict interpretation of a
charitable purposes. provision granting tax exemption, but also on the
clear and plain text of Section 30(E) and (G). Section
To be exempt from income taxes, Section
30(E) and (G) of the NIRC requires that an institution
30(E) of the NIRC
be “operated exclusively” for charitable or social
requires that a charitable institution must be “or welfare purposes to be completely exempt from
ganized and operated exclusively” for charitable
income tax. An institution under Section 30(E) or (G)
purposes. Likewise, to be exempt from income taxes,
does not lose its tax exemption if it earns income
Section 30(G) of the NIRC requires that the institution
from its for-profit activities. Such income from for-
be “operated exclusively” for social welfare.
profit activities, under the last paragraph of Section
However, the last paragraph of Section 30 of 30, is merely subject to income tax, previously at the
the NIRC qualifies the words “organized and operated ordinary corporate rate but now at the preferential
exclusively” by providing that: 10% rate pursuant to Section 27(B).

Notwithstanding the provisions in the St. Luke’s fails to meet the requirements
preceding paragraphs, the income of whatever kind under Section 30(E) and (G) of the NIRC to
and character of the foregoing organizations from any be completely tax exempt from all its income.
of However, it remains a proprietary non-profit hospital

under Section 27(B) of the NIRC as long as it does not Article XIV, Section 4 (3) of the Constitution and
distribute any of its profits to its members and such Section 30 (H) of the Tax Code
profits are reinvested pursuant to its corporate
“the income of whatever kind and character
purposes. St. Luke’s, as a proprietary non-profit
of [a non-stock and non-profit educational Commented [WU1]: De la salle
hospital, is entitled to the preferential tax rate of 10%
institution] from any of [its] properties, real or
on its net income from its for-profit activities.
personal, or from any of (its] activities conducted for
St. Luke’s is therefore liable for deficiency profit regardless of the disposition made of such
income tax in 1998 under Section 27(B) of the NIRC. income, shall be subject to tax imposed by this Code.”
However, St. Luke’s has good reasons to rely on the
letter dated 6 June 1990 by the BIR, which opined that The Commissioner posits that a tax-exempt
St. Luke’s is “a corporation for purely charitable and organization like DLSU is exempt only from property
social welfare purposes” and thus exempt from tax but not from income tax on the rentals earned
income tax. from property. Thus, DLSU's income from the leases
of its real properties is not exempt from taxation even
In Michael J. Lhuillier, Inc. v. Commissioner
if the income would be used for educational
of Internal Revenue, the Court said that “good faith
and honest belief that one is not subject to tax on the
basis of previous interpretation of government DLSU stresses that Article XIV, Section 4 (3)
agencies tasked to implement the tax law, are of the Constitution is clear that all assets and
sufficient justification to delete the imposition of revenues of non-stock, non-profit educational
surcharges and interest.” institutions used actually, directly and exclusively for
educational purposes are exempt from taxes and
WHEREFORE, St. Luke’s Medical Center, Inc. is
ORDERED TO PAY the deficiency income tax in
1998 based on the 10% preferential income tax
rate under Section 27(8) of the National Internal ISSUE: Whether DLSU's income and
Revenue Code. However, it is not liable for revenues proved to have been used actually, directly
surcharges and exclusively for educational purposes are exempt
and interest on such deficiency income tax under from duties and taxes.
Sections 248 and 249 of
the National Internal Revenue Code. All other pa
rts of the Decision and Resolution of the Court of RULING: YES.
Tax Appeals are AFFIRMED.
The requisites for availing the tax
COMMISSIONER OF INTERNAL REVENUE, vs. DE LA exemption under Article XIV, Section 4 (3), namely:
SALLE UNIVERSITY, INC. (1) the taxpayer falls under the classification non-
stock, non-profit educational institution; and (2) the
G.R. No. 196596, November 09, 2016 income it seeks to be exempted from taxation is used
actually, directly and exclusively for educational
The Commissioner submits the following purposes.
A plain reading of the Constitution would
show that Article XIV, Section 4 (3) does not require
DLSU's rental income is taxable regardless of how
that the revenues and income must have also been
such income is derived, used or disposed of. DLSU's
sourced from educational activities or activities
operations of canteens and bookstores within its
related to the purposes of an educational institution.
campus even though exclusively serving the
The phrase all revenues is unqualified by any
university community do not negate income tax
reference to the source of revenues. Thus, so long as
the revenues and income are used actually, directly
and exclusively for educational purposes, then said

revenues and income shall be exempt from taxes and

Thus, when a non-stock, non-profit

educational institution proves that it uses its revenues
actually, directly, and exclusively for educational
purposes, it shall be exempted from income tax, VAT,
and LBT. On the other hand, when it also shows that
it uses its assets in the form of real property for
educational purposes, it shall be exempted from RPT.

We further declare that the last paragraph of

Section 30 of the Tax Code is without force and effect
for being contrary to the Constitution insofar as it
subjects to tax the income and revenues of non-stock,
non-profit educational institutions used actually,
directly and exclusively for educational purpose. We
make this declaration in the exercise of and
consistent with our duty to uphold the primacy of the
Constitution. We stress that our holding here pertains
only to non-stock, non-profit educational institutions
and does not cover the other exempt organizations
under Section 30 of the Tax Code.

For all these reasons, we hold that the

income and revenues of DLSU proven to have been
used actually, directly and exclusively for
educational purposes are exempt from duties and