Comm. Of Internal Revenue vs. St. Luke’s Medical Center, Inc.

(G.R. No. 195909-195960; Sept. 26, 2012)

Facts: St. Luke’s (respondent) is a hospital organized as a non-stock and non-profit

organization. Sometime in 2002, BIR assessed St. Luke’s deficiency taxes
amounting to P76M for 1998 which was subsequently reduced to P63M during trial
in the CTA. St. Luke’s protested and filed an administrative protest with BIR but was
not acted by the latter within the 180 period thus reaching to the CTA.

According to BIR, Section 27B of the NIRC imposing a 10% preferential tax
rate applies to St. Luke’s. Its reason is that it amends the exemption on non-profit
hospitals and which prevails over the exemption on income tax granted under
Section 30 (E and G) for non-stock, nonprofit charitable institution and civic
organizations promoting social welfare. It further claimed that St. Luke’s was
actually operating for profit because only 13% came from charitable purposes and
that it had a total revenue of P1.73B from patient services in 1998.

Meanwhile, St. Luke’s contended that its operating income only totaled P334
M (less the operating expenses) and out of that P218M (65%) made up its free
services and further claimed that its income does not inure to the benefit of anyone.
Furthermore, it argued that it falls under the exception provided under Sec. 30 (E)
and (G) of NIRC and making of profit per se does not destroy its tax exemption.

CTA En Banc ruled in favor of St. Luke’s exemption under Sec. 30 and
reiterated its earlier fiding in another case identifying St. Luke’s as a charitable
institution. CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City,
which states that "a charitable institution does not lose its charitable character and
its consequent exemption from taxation merely because recipients of its benefits
who are able to pay are required to do so, where funds derived in this manner are
devoted to the charitable purposes of the institution . . . ." (The generation of
income from paying patients does not per se destroy the charitable nature of St.
Luke's.)

Issue: WON St. Luke’s is liable for deficiency income tax under Sec. 27 (B) of the
NIRC which imposes a 10% preferential rate.

Held: Petition partly granted. YES, St. Luke’s is liable under Sec. 27 (B) of the NIRC.

Under Sec. 30 (E) of the NIRC provides that a charitable institution must be: (1)
non-stock corporation or association; (2)ORGANIZED EXCLUSIVELY for charitable
purposes; (3) OPERATED EXCLUSIVELY for charitable purposes; (4) No part of its
net income or asset shall inure to the benefit of any member , officer or any person.
Under the last paragraph of Sec. 30 of the NIRC if a tax exempt charitable
institution conducts "any" activity for profit, such activity is NOT TAX EXEMPT
even as its not-for-profit activities remain tax exempt. It simply means that even if
a charitable institution organized and operated exclusively for charitable purposes is
nevertheless allowed to engage in “activities conducted for profit” without losing its
tax exempt status for its no-for-profit activities. However, as a consequence
"income of whatever kind and character" of a charitable institution "from
any of its activities conducted for profit, regardless of the disposition
made of such income, shall be subject to tax." (Sec. 30, last par.).
Therefore, services rendered to paying patients are activities conducted for profit
and thus taxable under Sec. 27 (B) of the NIRC.

St. Luke's fails to meet the requirements under Section 30 (E) and (G) of
the NIRC to be completely tax exempt from all its income. However, it
remains a proprietary non-profit hospital under Section 27 (B) of the NIRC
as long as it does not distribute any of its profits to its members and such profits are
reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-
profit hospital, is entitled to the preferential tax rate of 10% on its net
income from its for-profit activities.

Notes:

1. TEST OF CHARITY - as a gift, to be applied consistently with existing laws,

for the benefit of
an indefinite number of persons, either by bringing their minds and
hearts under the influence of education or religion, by assisting them to
establish themselves in life or [by] otherwise lessening the burden
of government." (In other words, charitable institutions provide for
free goods and services to the public which would otherwise fall on
the shoulders of government.)
2. Solely is synonymous with EXCLUSIVELY. (Lung center of the Phil.)
3. Proprietary- means private.
4. Non-profit- no net income accrues to the benefit of any person and with all
its income devoted to the institutions purpose and all its activities
CONDUCTED NOT FOR PROFIT.