CIR v St. Luke’s Medical Center, Inc.

GR 195909 September 26, 2012

FACTS:
St. Luke’s Medical Center is a hospital organized as a non-stock and non-profit
corporation. In 2002, the BIR assessed that St. Luke’s has a tax deficiency of P76 million for
1998. This was soon reduced to P68 million. St. Luke’s filed a protest to the BIR but the
protest was unacted. Thus, St. Luke’s protested to the Court of Tax Appeals.
The BIR argued in the CTA that Sec.27(B) of the NIRC imposes a 10% preferential
tax rate on the income of proprietary, non-income hospitals, which includes St. Luke’s. The
BIR claimed that St. Luke’s was operating for profit in 1998, because only 13% of its
revenues came from charitable purposes. St. Luke’s, on the other hand, argued that it is a
non-stock and non-profit institution for charitable and welfare purposes, and hence exempt
from tax. It also argued that profit-making per se does not invalidate the tax exemption.
The CTA ruled that St. Luke’s is only liable to pay P5.5 million, since this is the
taxable part of the income which did not come from charitable activities. It ruled that St.
Luke’s is covered by the tax exemption under Sec 30 [E] and [G] of the NIRC, and hence it
cannot be taxed for services rendered to its clients, whether paying or non-paying. Aggrieved,
CIR filed the present petition to the SC, claiming that St. Like’s should pay the preferential
tax rate of 10%.
ISSUES:
- W/N St. Luke’s is liable to pay the deficiency income tax under the 10% preferential
tax rate under Sec 27(B) of the NIRC (YES)
LEGAL DOCTRINE:
- Sec 27(B) subjects the income of two type of institutions to a 10% tax rate:
proprietary non-profit educational institutions, and proprietary non-profit hospitals.
Proprietary means private, while non-profit means no net income accrues to or
benefits any specific person. It must be noted that non-profit does NOT necessarily
mean charitable.
- Charitable institutions provide free goods and services to the public which would
otherwise fall on the shoulders of government. They are not ipso facto entitled to tax
exemption. It can only be exempt if it uses the property for a charitable purpose.
- Under Sec. 30 of the NIRC, a charitable institution must be organized exclusively for
charitable purposes and operated exclusively for charitable purposes. This means
that any profit must be devoted altogether to the charitable object of the institution.
o Under the 1987 Constitution, to be exempt from real property taxes, the
charitable institution must use the property actually, directly, and exclusively
for charitable purposes
APPLICATION TO THE CASE AT BAR:
- In 1998, St. Luke’s made a revenue of P1.73 billion from paying clients. Clearly
revenues from paying patients are income received from activities conducted for
PROFIT
- While St. Luke’s may claim that 65% of its operating income in 1998 is for charity
expenditures, still, if 35% are used to provide services to paying clients, then it cannot
be said that the income is used actually, directly, and exclusively for charitable
purposes.
- Hence, St. Luke’s is liable to pay a preferential tax rate of 10% on its net income from
non-profit activities. They are liable to pay deficiency income tax.