Herrera v Quezon City Board of Assessment (1961)

Herrera v Quezon City Board of Assessment GR No L-15270, September 30, 1961

FACTS:
In 1952, the Director of the Bureau of Hospitals authorized Jose V. Herrera and Ester Ochangco Herrera to establish
and operate the St. Catherine’s Hospital. In 1953, the Herreras sent a letter to the Quezon City Assessor requesting
exemption from payment of real estate tax on the hospital, stating that the same was established for charitable and
humanitarian purposes and not for commercial gain. The exemption was granted effective years 1953 to 1955. In
1955, however, the Assessor reclassified the properties from “exempt” to “taxable” effective 1956, as it was
ascertained that out of the 32 beds in the hospital, 12 of which are for pay-patients. A school of midwifery is also
operated within premises of the hospital.

ISSUE:
Whether St. Catherine’s is exempt from realty tax

RULING:
Yes. The admission of pay-patients does not detract from the charitable character of a hospital, if all its funds are
devoted exclusively to the maintenance of the institution as a public charity.
The exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of said
purpose – a school for training nurses, a nurses’ home, etc. 
Bishop of Nueva Segovia vs. Provincial Board of Ilocos Norte

FACTS:

The Roman Catholic Apostolic Church represented by the Bishop of Nueva Segovia, possessed
and owned a parcel of land in the municipality of San Nicolas, Ilocos Norte, 4 sides of which
face the public streets. On south side is the church yard, the convent and an adjacent lot used
as vegetable garden. At the center is the rest of the yard and the church on the north is an old
cemetery with two of its walls still standing, and a portion were formally stood a tower.
As required by the Provincial Board, plaintiff paid under protest on July 3, 1925 the land tax on
the lot adjoining the convent which formerly was the cemetery. Plaintiff filed action for recovery
of sum paid by to the Provincial Board by way of land tax, alleging that the collection of tax is
illegal. The Lower Court absolved the Provincial Board and declared that the tax collected on
the lot was legal. Both parties appealed from this judgment.

ISSUE:   WON Plaintiff is exempted in the payment of land tax?

HELD:    YES.

The exemption from payment of land tax of a convent refers to the home of the party who
resides over the church and who has to take care of himself in order to discharge his duties. It is
therefore include not only the land actually occupied by the church, but also the adjacent ground
destined for the ordinary and incidental uses of the occupant. Except in large cities where
density of the population and the development of commerce require the use of larger tracts of
land for buildings, a vegetable garden belongs to a house and in the present case, its use is
limited to the necessities of the priest, which comes under exemption.

As regards to the lot which formerly was the cemetery, while it is no longer used as such,
neither is it used for commercial purposes and according to the evidence, is now being used as
a lodging house by the people who participate in religion festivities, which constitutes an
incidental use in religious functions, which also comes within the exemption.

The judgment appealed from is reversed in all its part and it is held that both lots are exempt
from land tax and the defendants are ordered to refund to plaintiff whatever was paid as such
tax, without any special pronouncement as to cost. So Ordered.

CIR v CA & YMCA (1998)

Digest #1

CIR v CA & YMCA

GR No 124043, October 14, 1998

FACTS:
In 1980, YMCA earned an income of 676,829.80 from leasing out a portion of its premises to small shop owners, like
restaurants and canteen operators and 44,259 from parking fees collected from non-members. On July 2, 1984, the
CIR issued an assessment to YMCA for deficiency taxes which included the income from lease of YMCA’s real
property. YMCA formally protested the assessment but the CIR denied the claims of YMCA. On appeal, the CTA
ruled in favor of YMCA and excluded income from lease to small shop owners and parking fees. However, the CA
reversed the CTA but affirmed the CTA upon motion for reconsideration.

ISSUE:
Whether the rental income of YMCA is taxable

RULING:
Yes. The exemption claimed by YMCA is expressly disallowed by the very wording of then Section 27 of the NIRC
which mandates that the income of exempt organizations (such as the YMCA) from any of their properties, real or
personal, be subject to the tax imposed by the same Code. While the income received by the organizations
enumerated in Section 26 of the NIRC is, as a rule, exempted from the payment of tax in respect to income received
by them as such, the exemption does not apply to income derived from any of their properties, real or personal or
from any of their activities conducted for profit, regardless of the disposition made of such income. 

Digest #2

Facts:
The main question in this case is: “is the income derived from rentals of real property owned by Young Men’s
Christian Association of the Philippines (YMCA) – established as “a welfare, educational and charitable non-profit
corporation” – subject to income tax under the NIRC and the Constitution? In 1980, YMCA earned an income of
P676,829 from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators and
P44k form parking fees.

Issue:
Whether or not the rental income of the YMCA taxable

Ruling:
Yes. The exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of then
Sec. 27 of the NIRC; court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any
convoluted attempt at construction. The said provision mandates that the income of exempt organizations (such as
YMCA) from any of their properties, real or personal, be subject to the tax imposed by the same Code. Private
respondent is exempt from the payment of property tax, but nit income tax on rentals from its property. 
Posted by Victor Morvis 
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LUNG CENTER OF THE

PHILIPPINES vs. QUEZON CITY
AND CONSTANTINO P. ROSAS, IN
HIS CAPACITY AS CITY
ASSESSOR OF QUEZON CITY
G.R. No. 144104, June 29, 2004

Facts:

1. The petitioner Lung Center is a non-stock and non-profit entity.

2. It is the registered owner of a parcel of land. Erected in the middle lot is a hospital known
as the Lung Center of the Philippines. A big space at the ground floor is being leased to
private parties, for canteen and small store spaces, and to medical or professional
practitioners who use the same as their private clinics for their patients whom they charge
for their professional services.
3. Almost one-half of the entire area on the left side of the building along Quezon Avenue is
vacant and idle, while a big portion on the right side, at the corner, is being leased for
commercial purposes to a private enterprise known as the Elliptical Orchids and Garden
Center.
4. The petitioner accepts paying and non-paying patients. It also renders medical services
to out-patients, both paying and non-paying. Aside from its income from paying patients, the
petitioner receives annual subsidies from the government.
5. Both the land and the hospital building of the petitioner were assessed for real property
taxes in the amount of P4,554,860 by the City Assessor of Quezon City.
6. The petitioner filed a Claim for Exemption from real property taxes with the City
Assessor, predicated on its claim that it is a charitable institution. The petitioner’s request
was denied,

Issues

1. Whether the petitioner is a charitable institution

2. Whether the real properties of the petitioner are exempt from real property taxes

Ruling

First issue: petitioner is a charitable institution within the context of the 1973 and 1987
Constitutions.

To determine whether an enterprise is a charitable institution/entity or not, the elements

which should be considered include the

1. Statute creating the enterprise,

2. Its corporate purposes,
3. Its constitution and by-laws,
4. The methods of administration,
5. The nature of the actual work performed,
6. The character of the services rendered,
7. The indefiniteness of the beneficiaries, and
8. The use and occupation of the properties.

In the legal sense, a charity may be fully defined 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 otherwise lessening the burden of government.

 
The word “charitable” is not restricted to relief of the poor or sick. The test of a charity
and a charitable organization are in law the same. The test whether an enterprise is
charitable or not is whether it exists to carry out a purpose reorganized in law as
charitable or whether it is maintained for gain, profit, or private advantage.

Under P.D. No. 1823, the petitioner was organized for the welfare and benefit of the
Filipino people principally to help combat the high incidence of lung and pulmonary
diseases in the Philippines.

Hence, the medical services of the petitioner are to be rendered to the public in general
in any and all walks of life including those who are poor and the needy without
discrimination. After all, any person, the rich as well as the poor, may fall sick or be
injured or wounded and become a subject of charity.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
out-patient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which
it is intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution.

In this case, the petitioner adduced substantial evidence that it spent its income,
including the subsidies from the government for its patients and for the operation of the
hospital. It even incurred a net loss in 1991 and 1992 from its operations.

Second Issue: those portions of its real property that are leased to private entities are
not exempt from real property taxes as these are not actually, directly and exclusively
used for charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The effect of an exemption is
equivalent to an appropriation. Hence, a claim for exemption from tax payments must
be clearly shown and based on language in the law too plain to be mistaken.

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically
provides that the petitioner shall enjoy the tax exemptions and privileges: The Lung
Center of the Philippines shall be exempt from the payment of taxes, charges and fees
imposed by the Government or any political subdivision or instrumentality thereof with
respect to equipment purchases made by, or for the Lung Center.

It is plain as day that under the decree, the petitioner does not enjoy any property tax
exemption privileges for its real properties as well as the building constructed thereon. If
the intentions were otherwise, the same should have been among the enumeration of
tax exempt privileges under Section 2.

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus: Charitable

institutions, churches and parsonages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly and
exclusively used for religious, charitable or educational purposes shall be exempt from
taxation.

The tax exemption under this constitutional provision covers property taxes only. What
is exempted is not the institution itself . . .; those exempted from real estate taxes are
lands, buildings and improvements actually, directly and exclusively used for religious,
charitable or educational purposes.”

In light of the changes in the Constitution, the petitioner cannot rely on our ruling in
Herrera v. Quezon City Board of Assessment Appeals which was promulgated on
September 30, 1961 before the 1973 and 1987 Constitutions took effect.

 
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to
the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that
(a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY
and EXCLUSIVELY used for charitable purposes.

“Exclusive” is defined as possessed and enjoyed to the exclusion of others; debarred

from participation or enjoyment; and “exclusively” is defined, “in a manner to exclude;
as enjoying a privilege exclusively.” If real property is used for one or more commercial
purposes, it is not exclusively used for the exempted purposes but is subject to taxation.

The words “dominant use” or “principal use” cannot be substituted for the words
“used exclusively” without doing violence to the Constitutions and the law. Solely is
synonymous with exclusively.

What is meant by actual, direct and exclusive use of the property for charitable
purposes is the direct and immediate and actual application of the property itself to the
purposes for which the charitable institution is organized. It is not the use of the income
from the real property that is determinative of whether the property is used for tax-
exempt purposes.

Accordingly, the portions of the land leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from such taxes. On the other
hand, the portions of the land occupied by the hospital and portions of the hospital used
for its patients, whether paying or non-paying, are exempt from real property taxes.

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LUNG CENTER OF THE PHILIPPINES VS QUEZON CITY

Posted by kaye lee on 5:15 PM

G.R. No. 144104, June 29, 2004 [Constitutional Law - Article

VI: Legislative Department; Taxation ]

FACTS:
Petitioner is a non-stock, non-profit entity established by virtue
of PD No. 1823, seeks exemption from real property taxes when
the City Assessor issued Tax Declarations for the land and the
hospital building. Petitioner predicted on its claim that it is a
charitable institution. The request was denied, and a petition
hereafter filed before the Local Board of Assessment Appeals of
Quezon City (QC-LBAA) for reversal of the resolution of the
City Assessor. Petitioner alleged that as a charitable institution,
is exempted from real property taxes under Sec 28(3) Art VI of
the Constitution. QC-LBAA dismissed the petition and the
decision was likewise affirmed on appeal by the Central Board
of Assessment Appeals of Quezon City. The Court of Appeals
affirmed the judgment of the CBAA.

ISSUE:
1. Whether or not petitioner is a charitable institution within the
context of PD 1823 and the 1973 and 1987 Constitution and
Section 234(b) of RA 7160.

2. Whether or not petitioner is exempted from real property

taxes.

RULING:
1. Yes. The Court hold that the petitioner is a charitable
institution within the context of the 1973 and 1987 Constitution.
Under PD 1823, the petitioner is a non-profit and non-stock
corporation which, subject to the provisions of the decree, is to
be administered by the Office of the President with the Ministry
of Health and the Ministry of Human Settlements. The purpose
for which it was created was to render medical services to the
public in general including those who are poor and also the rich,
and become a subject of charity. Under PD 1823, petitioner is
entitled to receive donations, even if the gift or donation is in the
form of subsidies granted by the government.

2. Partly No. Under PD 1823, the lung center does not enjoy any
property tax exemption privileges for its real properties as well
as the building constructed thereon.
The property tax exemption under Sec. 28(3), Art. VI of the
Constitution of the property taxes only. This provision was
implanted by Sec.243 (b) of RA 7160.which provides that in
order to be entitled to the exemption, the lung center must be
able to prove that: it is a charitable institution and; its real
properties are actually, directly and exclusively used for
charitable purpose. Accordingly, the portions occupied by the
hospital used for its patients are exempt from real property taxes
while those leased to private entities are not exempt from such
taxes.
Lung Center of the Philippines v. Quezon City GR NO: 144104
(2004)
FACTS:

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity by virtue of
Presidential Decree No. 1823. It is the registered owner of a parcel of land. Erected in the middle of
the aforesaid lot is a hospital known as the Lung Center of the Philippines. A big space at the ground
floor is being leased to private parties, for canteen and small store spaces, and to medical or
professional practitioners who use the same as their private clinics for their patients whom they charge
for their professional services. Almost one-half of the entire area on the left side of the building is
vacant and idle, while a big portion on the right side is being leased for commercial purposes to a
private enterprise known as the Elliptical Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients,
both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual
subsidies from the government.

Both the land and the hospital building of the petitioner were assessed for real property taxes in the
amount of ₱4,554,860 by the City Assessor of Quezon City. Accordingly, Tax Declarations were issued
for the land and the hospital building, respectively.

The petitioner filed a Claim for Exemption from real property taxes with the City Assessor, predicated
on its claim that it is a charitable institution. The petitioner’s request was denied, and a petition was,
thereafter, filed before the Local Board of Assessment Appeals of Quezon City (QC-LBAA, for brevity)
for the reversal of the resolution of the City Assessor. The petitioner alleged that under Section 28,
paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred that
a minimum of 60% of its hospital beds are exclusively used for charity patients and that the major
thrust of its hospital operation is to serve charity patients. The petitioner contends that it is a
charitable institution and, as such, is exempt from real property taxes. The QC-LBAA rendered
judgment dismissing the petition and holding the petitioner liable for real property taxes.

The QC-LBAA’s decision was, likewise, affirmed on appeal by the Central Board of Assessment Appeals
of Quezon City (CBAA, for brevity) which ruled that the petitioner was not a charitable institution and
that its real properties were not actually, directly and exclusively used for charitable purposes; hence,
it was not entitled to real property tax exemption under the constitution and the law. The petitioner
sought relief from the Court of Appeals, which rendered judgment affirming the decision of the CBAA.

ISSUES:

a) whether the petitioner is a charitable institution within the context of Presidential Decree No. 1823
and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and

b) whether the real properties of the petitioner are exempt from real property taxes.

RATIO:

a) Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the
provisions of the decree, is to be administered by the Office of the President of the Philippines with
the Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and
benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary
diseases in the Philippines.

As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether out-patient, or confined in
the hospital, or receives subsidies from the government, so long as the money received is devoted or
used altogether to the charitable object which it is intended to achieve; and no money inures to the
private benefit of the persons managing or operating the institution.

b) Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that
those portions of its real property that are leased to private entities are not exempt from real property
taxes as these are not actually, directly and exclusively used for charitable purposes.

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used
for religious, charitable or educational purposes shall be exempt from taxation.

The tax exemption under this constitutional provision covers property taxes only.33 As Chief Justice
Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: ". . . what is
exempted is not the institution itself . . .; those exempted from real estate taxes are lands, buildings
and improvements actually, directly and exclusively used for religious, charitable or educational
purposes."

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160
(otherwise known as the Local Government Code of 1991) as follows:

SECTION 234. Exemptions from Real Property Tax. – The following are exempted from payment of the
real property tax:

...

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-
profit or religious cemeteries and all lands, buildings, and improvements actually, directly, and
exclusively used for religious, charitable or educational purposes.

We note that under the 1935 Constitution, "... all lands, buildings, and improvements used ‘exclusively’
for … charitable … purposes shall be exempt from taxation."36 However, under the 1973 and the
present Constitutions, for "lands, buildings, and improvements" of the charitable institution to be
considered exempt, the same should not only be "exclusively" used for charitable purposes; it is
required that such property be used "actually" and "directly" for such purposes.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption,
the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable
institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes. "Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a
privilege exclusively."40 If real property is used for one or more commercial purposes, it is not
exclusively used for the exempted purposes but is subject to taxation.41 The words "dominant use" or
"principal use" cannot be substituted for the words "used exclusively" without doing violence to the
Constitutions and the law.42 Solely is synonymous with exclusively.

What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct
and immediate and actual application of the property itself to the purposes for which the charitable
institution is organized. It is not the use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.44

The petitioner failed to discharge its burden to prove that the entirety of its real property is actually,
directly and exclusively used for charitable purposes. While portions of the hospital are used for the
treatment of patients and the dispensation of medical services to them, whether paying or non-paying,
other portions thereof are being leased to private individuals for their clinics and a canteen. Further, a
portion of the land is being leased to a private individual for her business enterprise under the business
name "Elliptical Orchids and Garden Center." Indeed, the petitioner’s evidence shows that it collected
₱1,136,483.45 as rentals in 1991 and ₱1,679,999.28 for 1992 from the said lessees.

Accordingly, we hold that the portions of the land leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from such taxes.45 On the other hand, the
portions of the land occupied by the hospital and portions of the hospital used for its patients, whether
paying or non-paying, are exempt from real property taxes.

DISPOSITIVE PORTION:

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent Quezon City
Assessor is hereby DIRECTED to determine, after due hearing, the precise portions of the land and the
area thereof which are leased to private persons, and to compute the real property taxes due thereon
as provided for by law.

CIR vs St. Luke's 2012

FACTS: St. Luke’s Medical Center, Inc. is a hospital organized as a non-stock and non-profit corporation.
The BIR assessed St. Luke’s deficiency taxes for 1998, comprised of deficiency income tax, value-added
tax, withholding tax on compensation and expanded withholding tax. St. Luke’s filed an administrative
protest with the BIR against the deficiency tax assessments. The BIR did not act on the protest within the
180-day period under Section 228 of the NIRC. Thus, St. Luke’s appealed to the CTA.

BIR’s contentions: The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary nonprofit hospitals, should be applicable to St. Luke’s.
According to the BIR, Section 27(B), introduced in 1997, “is a new provision intended to amend the
exemption on non-profit hospitals that were previously categorized as non-stock, non-profit corporations
under Section 26 of the 1997 Tax Code x x x.” It is a specific provision which prevails over the general
exemption on income tax granted under Section 30(E) and (G) for non-stock, non-profit charitable
institutions and civic organizations promoting social welfare. The BIR claimed that St. Luke’s was actually
operating for profit in 1998 because only 13% of its revenues came from charitable purposes. Moreover,
the hospital’s board of trustees, officers and employees directly benefit from its profits and assets.

St. Luke’s contention: St. Luke’s contended that the BIR should not consider its total revenues, because
its free services to patients was P218,187,498 or 65.20% of its 1998 operating income. St. Luke’s also
claimed that its income does not inure to the benefit of any individual. St. Luke’s maintained that it is a
non-stock and non-profit institution for charitable and social welfare purposes under Section 30(E) and
(G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption.

ISSUE/S: Whether St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC,
which imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals.

RULING: There is no dispute that St. Luke’s is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke’s from paying taxes. This only refers to
the organization of St. Luke’s. Even if St. Luke’s meets the test of charity, a charitable institution is not
ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property “actually, directly and exclusively” for charitable
purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be “organized and operated exclusively” for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) of the NIRC requires that the institution be “operated exclusively” for
social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words “organized and operated
exclusively.”
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code

In short, the last paragraph of Section 30 provides that 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. This paragraph qualifies the requirements in Section 30(E) that the “[n]on-stock corporation
or association [must be] organized and operated exclusively for x x x charitable x x x purposes x x x.” It
likewise qualifies the requirement in Section 30(G) that the civic organization must be “operated
exclusively” for the promotion of social welfare.
Thus, even if the charitable institution must be “organized and operated exclusively” for charitable
purposes, it is nevertheless allowed to engage in “activities conducted for profit” without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the “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.”

In 1998, St. Luke’s had total revenues of P1,730,367,965 from services to paying patients. It cannot be
disputed that a hospital which receives approximately P1.73 billion from paying patients is not an
institution “operated exclusively” for charitable purposes. Clearly, revenues from paying patients are
income received from “activities conducted for profit.” Services to paying patients are activities conducted
for profit. They cannot be considered any other way. There is a “purpose to make profit over and above
the cost” of services.

The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social
welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only
on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of
Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated
exclusively” for charitable or social welfare purposes to be completely exempt from income tax. An
institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit
activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject
to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to
Section 27(B).

CIR v. ST. LUKE'S

COMMISSIONER OF INTERNAL REVENUE, Petitioner VS ST. LUKE’S MEDICAL CENTER INC.,
Respondent

G.R. No. 203514

February 13, 2017

FACTS:

The respondent St. Luke’s Medical Center, Inc. (SLMC) received a tax payment assessment from the
Large Taxpayers Service-Documents Processing and Quality Assurance Division of the Bureau of
Internal Revenue Audit Result/Assessment Notice on December 14, 2007. Based on the assessment the
respondent SLMC has a deficiency income tax under Section 27 (B) of the 1997 National Internal
Revenue Code (NIRC), as amended for the taxable year 2005 in the amount of P78, 617,434.54 and for
taxable year 2006 in the amount of P57, 119,867.33.

In response to the received assessment from NIRC on January 14, 2008, SLMC filed with the petitioner
Commission on Internal Revenue (CIR) an administrative protest assailing the assessments. The SLMC
alleged that they are exempted from paying the income tax since SLMC is a non-stock, non-profit,
charitable and social welfare organization under Section 30 (E) and (G) of the 1997 NIRC as amended.

However, on April 25, 2008, SLMC received the petitioner CIR’s Final Decision on the Disputed
Assessment dated April 9, 2008 increasing the deficiency income from P78, 617, 434.54 to
P82,419,522.21 for taxable year 2005 and from P57,119,867.33 to P60, 259,885.94 for taxable year
2006.

The aggrieved SLMC elevated the matter to Court of Tax Appeal (CTA) finding the decision that SLMC is
not liable for the deficiency income tax under Section 27 (B) of the 1997 NIRC, as amended and exempt
from paying the income under Section 30 (E) and (G) of the same code.

Consequently, the CIR moved for reconsideration but the CTA Division denied which the CIR prompted to
file a petition for review before the CTA En Banc which eventually denied and affirmed the first decision of
the CTA Division.

Moreover, the CIR filed an instant petition contending that the CTA erred in exempting SLMC from
payment of income tax, where the CIR petition is partly granted. SLMC ordered to pay the deficiency
income tax in 1998 based on the 10% preferential income tax. The CIR argues that under the doctrine of
Stare Decisis SLMC is subject to 10% income tax under Section 27 (B) of the 1997 NIRC, and liable to
pay the compromise penalty. SLMC argues that the income derives from operating a hospital is not
income from activities conducted for profit. And the case should be dismissed since payment to BIR for
the basic taxes due for taxable years 1998, 2000-2002 and 2004-2007 has been made.

ISSUES:

1. Whether or not SLMC is liable for income tax under Section 27 (B) of the 1997 NIRC.

2. Whether or not SLMC is not liable for compromise penalty.

3. Whether or not the petition is rendered moot by payment made by SLMC on April 30, 2013.

HELD:

1. Yes. Based on Section 27 (B) of the NIRC imposes 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only
 qualifications for hospitals are they must be proprietary and non-profit. Proprietary means private,
following the definition of a proprietary educational institution, as any other private school maintained and
administered by private individuals or groups with government permit. While non-profit means no net
income or asset accrues to or benefits any member or specific person with all the net income or asset
devoted to the institution’s purposes and all its activities conducted not for profit.

2. Yes. Under Sections 248 and 249 of the 1997 NIRC the imposition of surcharges and interests were
deleted on the basis of good faith and honest belief on the part of SLMC that it is not subject to tax so
therefore, SLMC is not liable to pay the compromise penalty.

3. Yes. The payment of basic taxes made by the SLMC has become moot even the court agrees with the
CIR that the payment confirmation from the BIR is not competent proof as presented by SLMC due to no
specific taxable period for payments that it covers. However, the court finds sufficient proof of payment
based on the Certification of Payment issued by the Large Taxpayers Service of the BIR since CIR never
question for its documents authenticity. The court dismissed the petition and lowered the basic taxes for
taxable year 2005 and 2006, in the amounts of P49, 919,496.40 and P41, 525,608.40.

CIR V DLSU G.R. 196596 Nov. 9 2016

Facts
In 2004, the Bureau of Internal Revenue (BIR) issued a letter
authorizing it’s revenue officers to examine the book of accounts of
and records for the year 2003 De La Salle University (DLSU) and later
on issued a demand letter to demand payment of tax deficiencies for:

1. Income tax on rental earnings from restaurants/canteens and

bookstores operating within the campus;
2. Value-added tax (VAT) on business income; and
3. Documentary stamp tax (DST) on loans and lease contracts for
the years 2001,2002, and 2003, amounting to  P17,303,001.12.

DLSU protested the assessment that was however not acted upon, and
later on filed a petition for review with the Court of Tax Appeals(CTA).
DLSU argues that as a non-stock, non-profit educational institution, it
is exempt from paying taxes according to Article XIV, Section 4 (3) of
 the Constitution (All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties.)

The CTA only granted the removal of assessment on the load

transactions. Both CIR and DLSU moved for reconsideration, the
motion of the CIR was denied. The CIR appealed to the CTA en banc
arguing that DLSU’s use of its revenues and assets for non-educational
or commercial purposes removed these items from the exemption,
that a tax-exempt organization like DLSU is exempt only from property
tax but not from income tax on the rentals earned from
property. Thus, DLSU’s income from the leases of its real properties is
not exempt from taxation even if the income would be used for
educational purposes.
DLSU on the other hand offered supplemental pieces of documentary
evidence to prove that its rental income was used actually, directly and
exclusively for educational purposes and no objection was made by
the CIR.

Thereafter, DLSU filed a separate petition for review with the CTA En

Banc on the following grounds:

1. The entire assessment should have been cancelled because it

was based on an invalid LOA;
2. Assuming the LOA was valid, the CTA Division should still have
cancelled the entire assessment because DLSU submitted evidence
similar to those submitted by Ateneo De Manila University (Ateneo) in
a separate case where the CTA cancelled Ateneo’s tax assessment; and
3. The CTA Division erred in finding that a portion of DLSU’s rental
income was not proved to have been used actually, directly and
exclusively for educational purposes.
4. That under RMO No.43-90, LOA should cover only 1 year, the
LOA issued by CIR is invalid for covering the years 2001-2003

The CTA en banc ruled that the case of Ateneo is not applicable
because it involved different parties, factual settings, bases of
assessments, sets of evidence, and defenses, it however further
reduced the liability of DLSU to P2,554,825.47

CIR argued that the rental income is taxable regardless of how such
income is derived, used or disposed of. DLSU’s operations of canteens
and bookstores within its campus even though exclusively serving the
university community do not negate income tax liability. Article XIV,
Section 4 (3) of the Constitution must be harmonized with Section 30
(H) of the Tax Code, which states among others, that the income of
whatever kind and character of [a non-stock and non-profit
educational institution] from any of [its] properties, real or personal, or
from any of (its] activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed by
this Code.
that a tax-exempt organization like DLSU is exempt only from property
tax but not from income tax on the rentals earned from property.
Thus, DLSU’s income from the leases of its real properties is not
exempt from taxation even if the income would be used for
educational purposes.

DLSU argued that Article XIV, Section 4 (3) of the Constitution is clear
that all assets and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational
purposes are exempt from taxes and duties. Under the doctrine of
constitutional supremacy, which renders any subsequent law that is
contrary to the Constitution void and without any force and
 effect. Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax
the income of whatever kind and character of a non-stock and non-
profit educational institution from any of its properties, real or
personal, or from any of its activities conducted for profit regardless of
the disposition made of such income, should be declared without
force and effect in view of the constitutionally granted tax exemption
on “all revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes.“
that it complied with the requirements for the application of Article
XIV, Section 4 (3) of the Constitution.

Issue:

1. Whether DLSU is taxable as a non-stock, non-profit educational

institution whose income have been used actually, directly and
exclusively for educational purposes.
2. Whether the entire assessment should be void because of the
defective LOA

Held:

1. First issue:
1. A plain reading of the Constitution would show that Article
XIV, Section 4 (3) does not require that the revenues and income must
have also been sourced from educational activities or activities related
to the purposes of an educational institution. The phrase all
revenues is unqualified by any 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 duties.
2. Revenues consist of the amounts earned by a person or
entity from the conduct of business operations. It may refer to the sale
of goods, rendition of services, or the return of an investment.
Revenue is a component of the tax base in income tax, VAT, and local
business tax (LBT). Assets, on the other hand, are the tangible and
intangible properties owned by a person or entity. It may refer to real
estate, cash deposit in a bank, investment in the stocks of a
corporation, inventory of goods, or any property from which the
person or entity may derive income or use to generate the same. In
Philippine taxation, the fair market value of real property is a
component of the tax base in real property tax (RPT). Also, the landed
cost of imported goods is a component of the tax base in VAT on
importation and tariff duties. 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.
3. The last paragraph of Section 30 of the Tax Code 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.
2. Second Issue:
1. No.“A Letter of Authority LOA should cover a taxable period
not exceeding one taxable year. The practice of issuing LOAs covering
audit of unverified prior years is hereby prohibited. If the audit of a
taxpayer shall include more than one taxable period, the other periods
or years shall be specifically indicated in the LOA.”
2. The requirement to specify the taxable period covered by
the LOA is simply to inform the taxpayer of the extent of the audit and
 the scope of the revenue officer’s authority. Without this rule, a
revenue officer can unduly burden the taxpayer by demanding
random accounting records from random unverified years, which may
include documents from as far back as ten years in cases
of fraud audit.
3. The assessment for taxable year 2003 is valid because this
taxable period is specified in the LOA. DLSU was fully apprised that it
was being audited for taxable year 2003. While the assessments for
taxable years 2001 and 2002 are void for having been unspecified on
separate LOAs as required under RMO No. 43-90.