Chamber of Real Estate and Builders’ Associations, Inc., v. The H the corporation commenced its operations.

its operations. Secondly, the law allows

on. ExecutiveSecretary Alberto Romulo, et al

G.R. No. 160756. March 9, 2010

Facts:

Petitioner Chamber of Real Estate and Builders’ Associations, Inc. (CR

EBA), an association of real estatedevelopers and builders in the
Philippines, questioned the validity of Section 27(E) of the Tax Code
which imposes the minimum corporate income tax (MCIT) on
corporations. Under the Tax Code, a corporation can become subject
to the MCIT at the rate of 2% of gross income, beginning on the 4 th
taxable year immediately following the year in which it
commenced its business operations, when such MCIT is greater than
the normal corporate income tax. If the regular income tax is
higher than the MCIT, the corporation does not pay the MCIT. CREBA
argued, among others, that the use of gross income as MCIT base
amounts to a confiscation of capital because gross income, unlike net
income, is not realized gain. CREBA also sought to invalidate the
provisions of RR No. 2-
98, as amended, otherwise known as the Consolidated Withholding
Tax Regulations, which prescribe the rules and procedures for the
collection of CWT on sales of real properties
classified as ordinary assets, on the grounds that these regulations:

 Use gross selling price (GSP) or fair market value(FMV) as

basis for determining the income tax on the sale of real
estate classified as ordinary assets, instead of the entity’s net
taxable income as provided for under the Tax Code;
 Mandate the collection of income tax on a per transaction
basis, contrary to the Tax Code provision which imposes
income tax on net income at the end of the taxable period;
 Go against the due process clause because the government
collects income tax even when the net income has not
yet been determined; gain is never assured by mere receipt
of the selling price; and
 Contravene the equal protection clause because the CWT is
being charged upon real estate enterprises, but not on other
business enterprises, more particularly, those in the
manufacturing sector, which do business similar to that of a
real estate enterprise.

Issues:

(1) Is the imposition of MCIT constitutional?

(2) Is the imposition of CWT on income from sales of real properties

classified as ordinary assets constitutional?

Held:

1) Yes. The imposition of the MCIT is constitutional. An income tax is

arbitrary and confiscatory if it taxes capital, because it is income, and
not capital, which is subject to income tax. However, MCIT is imposed
on gross income which is computed by deducting from gross sales the
capital spent by a corporation in the sale of its goods, i.e., the cost of
goods and other direct expenses from gross sales. Clearly, the capital
is not being taxed. Various safeguards were incorporated into the law
imposing MCIT.

Firstly, recognizing the birth pangs of businesses and the reality of the
need to recoup initial major capital expenditures, the MCIT is imposed
only on the 4th taxable year immediately following the year in which

1
the carry-forward of any excess of the MCIT paid over the normal
income tax which shall be credited against the normal income tax
for the three immediately succeeding years. Thirdly, since certain
businesses may be incurring genuine repeated losses, the law
authorizes the Secretary of Finance to suspend the imposition of
MCIT if a corporation suffers losses due to prolonged labor dispute,
force majeure and legitimate business reverses.
(2) Yes. Despite the imposition of CWT on GSP or FMV, the income
tax base for sales of real property classified as ordinary assets
remains as the entity’s net taxable income as provided in
the Tax Code, i.e., gross income less allowable costs and deductions.
The seller shall file its income tax return and credit the taxes withheld
by the withholding agent-buyer against its tax due. If the tax due is
greater than the tax withheld, then the taxpayer shall pay the
difference. If, on the other hand, the tax due is less than the tax
withheld, the taxpayer will be entitled to a refund or tax credit. The use
of the GSP or FMV as basis to determine the CWT is for purposes of
practicality and convenience. The knowledge of the
withholding agent- buyer is limited to the particular transaction in
which he is a party. Hence, his basis can only be the GSP or FMV
which figures are reasonably known to him. Also, the collection of
income tax via the CWT on a per transaction basis, i.e., upon
consummation of the sale, is not contrary to the Tax Code which calls
for the payment of the net income at the end of the taxable period.
The taxes withheld are in the nature of advance tax payments by a
taxpayer in order to cancel its possible future tax obligation. They are
instalments on the annual tax which may be due at the end of the
taxable year. The withholding agent-buyer’s act of collecting the tax at
the time of the transaction, by withholding the tax due from the
income payable, is the very essence of the withholding tax method of
tax collection. On the alleged violation of the equal protection clause,
hospital’s board of trustees, officers and employees directly benefit
from its profits and assets.
On the other hand, St. Luke’s maintained that it is a non-stock and
non-profit institution for charitable and social welfare purposes exempt
from income tax 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:
The sole issue is 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:
Section 27(B) of the NIRC does not remove the income tax
exemption of proprietary non-profit hospitals under Section 30(E) and
(G). Section 27(B) on one hand, and Section 30(E) and (G) on the
other hand, can be construed together
without the removal of such tax exemption.
Section 27(B) of the NIRC imposes a 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 that they must be proprietary and non-profit. “Proprietary” means
private, following the definition of a “proprietary educational institution”
as
“any private school maintained and administered by private individ
2
the taxing power has the authority to make reasonable
classifications for purposes of taxation.
Inequalities which result from singling out a particular
class for taxation, or exemption, infringe no
constitutional limitation. The real estate industry is, by itself, a
class and can be validly treated differently from other business
enterprises.
What distinguishes the real estate business from other
manufacturing enterprises, for purposes of the imposition of the CWT,
is not their production processes but the prices of their goods sold and
the number of transactions involved. The income from the sale of
a real property is bigger and its frequency of transaction limited,
making it less cumbersome for the parties to comply with the
withholding tax scheme. On the other hand, each manufacturing
enterprise may have tens of thousands of transactions with several
thousand customers every month involving both minimal and
substantial amounts.
CIR v St. Luke’s Medical Center
Facts:
St. Luke’s Medical Center, Inc. (St. Luke’s) 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, and withholding tax. The BIR
claimed that St. Luke’s should be liable for income tax at a preferential
rate of 10% as provided for by Section 27(B). Further, 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
In other words, charitable institutions provide for free goods
and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to address
public needs, because certain private entities already assume a part of
the burden.
This is the rationale for the tax exemption of charitable institutions.
The loss of taxes by the government is compensated by its relief from
doing public works which would have been funded by appropriations
from the Treasury.
The Constitution exempts charitable institutions only from real
property taxes. In the NIRC, Congress decided to extend the
exemption to income taxes. However, the way Congress crafted
Section 30(E) of the NIRC is materially different from Section 28(3),
Article VI of the Constitution. (Emphasis supplied)
uals or groups” with a government permit. “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.
“Non-profit” does not necessarily mean “charitable.” In Collector of
Internal Revenue v. Club Filipino Inc. de Cebu, this Court considered as
non-profit a sports club organized for recreation and entertainment of its
stockholders and members. The club was primarily funded by
membership fees and dues. If it had profits, they were used for
overhead expenses and improving its golf course. The club was non-
profit because of its purpose and there was no evidence that it was
engaged in a profit-making enterprise.
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it
was not charitable.
The Court defined “charity” in Lung Center of the
Philippines v.Quezon City 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.” However,
despite its being a tax exempt institution, any income such institution
earns from activities conducted for profit is taxable, as expressly
provided in the last paragraph of Sec. 30.
To be a charitable institution, however, an organization must meet the
substantive test of charity in Lung Center. The issue in Lung Center c
oncerns exemption from real property tax and not income tax.
However, it provides for the test of charity in our jurisdiction. Charity is
essentially a gift to an indefinite number of persons which lessens the
burden of government.
3
Section 30(E) of the NIRC defines the corporation or association that is
exempt from income tax. On the other hand, Section 28(3), Article VI of
the Constitution does not define a charitable institution, but requires
that the institution “actually, directly and exclusively” use the
property for a charitable purpose.(Emphasis supplied)
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. (Emphasis supplied)
To be exempt from income taxes, Section 30(E) of the NIRC
requires that a charitable institution must be “organized and operat
ed 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.(Emphasis supplied)
However, the last paragraph of Section 30 of the NIRC qualifies the
words “organized and operated exclusively” by providing that:
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. (Emphasis supplied)
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.
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.” Prior to the
introduction of Section 27(B), the tax rate on such income from for-
profit activities was the ordinary corporate rate under Section
27(A). With the introduction of Section 27(B), the tax rate is now
10%. (Emphasis supplied)
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). (Emphasis supplied)

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.

St. Luke’s is therefore liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC. However, St. Luke’s has good reasons to
rely on the letter dated 6 June 1990 by the BIR, which opined that St.
Luke’s is “a corporation for purely charitable and social welfare
purposes” and thus exempt from income tax.

In Michael J. Lhuillier, Inc. v. Commissioner 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 agencies
tasked to implement the tax law, are sufficient justification to delete the
imposition of surcharges and interest.”

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 Revenue Code. However, it is not liable for
surcharges
and interest on such deficiency income tax under Sections 248
and 249 of the National Internal Revenue Code. All other parts of
the Decision and Resolution of the Court of Tax Appeals are
AFFIRMED.