ANPC vs. BIR

Membership fees, assessment dues, and fees of similar nature collected by clubs organized and operated exclusively for pleasure, recreation, and other non-profit purposes do not constitute "the income of recreational clubs from whatever source" subject to income tax, nor do they form part of the "gross receipts" subject to VAT, as they are capital contributions for maintenance and operations rather than income or consideration for services rendered.

The Bureau of Internal Revenue issued Revenue Memorandum Circular (RMC) No. 35-2012 on August 3, 2012, clarifying that recreational clubs organized for pleasure and recreation are subject to income tax and VAT on membership fees and dues. The Circular relied on the doctrine of casus omissus, noting that the 1997 National Internal Revenue Code (NIRC) omitted recreational clubs from the list of tax-exempt corporations previously found in the 1977 Tax Code. The Association of Non-Profit Clubs, Inc. (ANPC), representing various member clubs, challenged the circular after the Bureau failed to act on their position paper requesting that membership fees and dues be excluded from the tax coverage.

• On August 3, 2012, the Bureau of Internal Revenue issued RMC No. 35-2012, entitled "Clarifying the Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation, and Other Non-Profit Purposes," addressed to all revenue officials and employees.
• The Circular declared that recreational clubs are subject to income tax under the 1997 NIRC on "income from whatever source, including but not limited to membership fees, assessment dues, rental income, and service fees."
• The Circular also declared that "the gross receipts of recreational clubs including but not limited to membership fees, assessment dues, rental income, and service fees are subject to VAT."
• The BIR justified the income tax provision based on the doctrine of casus omissus pro omisso habendus est, noting that the 1997 NIRC omitted the previous exemption for recreational clubs found in Section 21(h) of the 1977 Tax Code.
• For the VAT provision, the BIR relied on Section 105 of the 1997 NIRC, which states that even non-stock, non-profit organizations are liable for VAT on the sale of goods or services.
• On October 25, 2012, ANPC and representatives of its member clubs met with Atty. Elenita Quimosing, Chief of Staff of the BIR Operations Group, to discuss the Circular's effects.
• On November 12, 2012, ANPC submitted a position paper to the BIR requesting the non-application of RMC No. 35-2012 to membership fees, assessment dues, and similar fees collected exclusively from members to defray club expenses.
• After two years without BIR action, and with member clubs being subjected to income tax and VAT assessments, ANPC filed a petition for declaratory relief before the RTC on September 17, 2014, arguing the Circular was invalid, unjust, oppressive, confiscatory, and violated due process.

• The BIR exceeded its rule-making authority by interpreting that payments of membership fees, assessment dues, and service fees constitute "income" subject to income tax and a "sale of service" subject to VAT.
• Membership fees and assessment dues are not income but capital, as they constitute contributions to and replenishment of funds for the maintenance and operations of club facilities, held in trust by the clubs.
• Because these fees are dedicated to capital maintenance and preservation, no gain is realized from their collection, which is essential for an amount to constitute "income."
• There is no sale of service when members pay dues; consequently, there is no transaction subject to VAT under Section 105 of the 1997 NIRC.

• ANPC violated the doctrine of hierarchy of courts by directly filing a petition for review on certiorari before the Supreme Court instead of appealing to the Court of Appeals.
• ANPC failed to exhaust administrative remedies because it should have first elevated the matter to the Secretary of Finance for review under Section 4, Title I of the 1997 NIRC before seeking judicial recourse.
• RMC No. 35-2012 is a valid interpretative rule that merely amplifies existing law by clarifying that Congress intended to subject recreational clubs to income tax and VAT by omitting them from the list of exempt entities in the 1997 NIRC.
• As an interpretative rule issued within the BIR's powers, the Circular need not be published, and no hearing is required for its validity.

• Procedural:
  • Whether ANPC violated the doctrine of hierarchy of courts by directly filing a petition for review on certiorari before the Supreme Court.
  • Whether ANPC failed to exhaust administrative remedies by not seeking review from the Secretary of Finance prior to filing suit.
• Substantive Issues:
  • Whether RMC No. 35-2012 is valid in interpreting membership fees, assessment dues, and similar fees as "income" subject to income tax.
  • Whether RMC No. 35-2012 is valid in interpreting such fees as part of "gross receipts" subject to VAT.

• Procedural:
  • The Court held that ANPC did not violate the doctrine of hierarchy of courts because a petition for review on certiorari under Rule 45 is the sole remedy to appeal an RTC decision involving pure questions of law, which do not require an examination of the probative value of evidence.
  • The Court held that the doctrine of exhaustion of administrative remedies was not transgressed because the issue involved a pure question of law, and there were circumstances indicating the urgency of judicial intervention, as membership fees and assessment dues would be imminently subjected to income tax and VAT.
• Substantive:
  • The Court held that while recreational clubs are generally subject to income tax under the 1997 NIRC (applying the doctrine of casus omissus due to the intentional omission of the previous exemption), the BIR erred in classifying membership fees, assessment dues, and similar fees as income subject to tax.
  • Such fees constitute capital, not income, because they are funds held in trust to defray operating costs and maintain facilities, representing no gain or profit to the club. Taxing these fees as income would amount to an unconstitutional confiscation of property.
  • The Court declared invalid the VAT component of RMC No. 35-2012, holding that membership fees and dues are not subject to VAT because their collection does not constitute a "sale, barter or exchange of goods or properties, or sale of a service" under Section 105 of the 1997 NIRC, as there is no economic or commercial activity involved when members pay dues to maintain the organization.

• Casus omissus pro omisso habendus est — A person, object, or thing omitted from an enumeration must be held to have been omitted intentionally. Applied to hold that the deletion of recreational clubs from the list of tax-exempt entities in the 1997 NIRC (compared to the 1977 Tax Code) evinces the deliberate intent of Congress to remove the income tax exemption previously accorded to these clubs generally.
• Capital vs. Income Distinction — Capital is a fund or wealth (the tree), while income is the flow of services rendered by capital or the fruit. Membership fees and assessment dues constitute capital held in trust for maintenance and operations, not income, as they represent no gain or profit to the club.
• Unconstitutional Confiscation — An income tax that taxes capital rather than income is arbitrary and confiscatory, violating the due process clause, because capital is not income.
• Interpretative vs. Legislative Rules — Interpretative rules merely provide guidelines to the law being enforced and are subject to administrative review by the Secretary of Finance; legislative rules implement primary legislation by providing details thereof. RMC No. 35-2012 was characterized as an interpretative rule.
• Exhaustion of Administrative Remedies — This doctrine may be relaxed when the issue involved is purely a legal question or when circumstances indicate the urgency of judicial intervention to prevent imminent harm.

• "The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth."
• "An income tax is arbitrary and confiscatory if it taxes capital because capital is not income."
• "The rule-making power of administrative agencies cannot be extended to amend or expand statutory requirements or to embrace matters not originally encompassed by the law. Administrative regulations should always be in accord with the provisions of the statute they seek to carry into effect, and any resulting inconsistency shall be resolved in favor of the basic law."

• Madrigal v. Rafferty — Established the fundamental distinction between capital (a fund or tree) and income (a flow or fruit), cited to support the holding that membership fees constitute capital contributions, not income.
• Conwi v. Court of Tax Appeals — Defined income as an amount of money coming to a person as payment for services, interest, or profit from investment, cited to distinguish why membership fees are not income.
• Chamber of Real Estate and Builders' Associations, Inc. v. Romulo — Held that an income tax on capital is unconstitutional confiscation, cited to invalidate the income tax component as applied to membership fees and dues.
• Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary — Established that courts may give varying degrees of authoritative weight to interpretative rules, cited to justify judicial review of the BIR's interpretation.
• Uy v. Contreras — Defined the doctrine of hierarchy of courts, cited to hold that direct resort to the Supreme Court via Rule 45 was proper for pure questions of law.
• Calamba Steel Center, Inc. v. Commissioner of Internal Revenue — Defined pure questions of law as those not involving an examination of the probative value of evidence, cited to support the propriety of the direct appeal.
• BPI Leasing Corporation v. Court of Appeals — Distinguished interpretative rules (providing guidelines) from legislative rules (implementing legislation), cited to characterize RMC No. 35-2012.
• Commissioner of Internal Revenue v. Sony Philippines, Inc. — Held that before a transaction is subject to VAT, a sale, barter, or exchange of goods or properties, or sale of a service is required, cited to invalidate the VAT component.
• CS Garment, Inc. v. Commissioner of Internal Revenue — Held that administrative regulations cannot amend or expand statutory requirements, cited to show the BIR exceeded its rule-making authority.

• Section 4, Title I of the 1997 National Internal Revenue Code (Republic Act No. 8424) — Grants the Commissioner power to interpret tax laws subject to review by the Secretary of Finance, cited regarding the administrative review process and exhaustion of remedies.
• Section 105, Chapter I, Title IV of the 1997 National Internal Revenue Code — Defines persons liable for VAT as those who sell, barter, exchange, lease goods or properties, or render services in the course of trade or business, cited to determine VAT liability.
• Section 32(A), Chapter VI, Title II of the 1997 National Internal Revenue Code — Defines gross income, referenced in the context of the BIR's interpretation of taxable income.
• Section 21(h), Chapter III, Title II of Presidential Decree No. 1158 (1977 Tax Code) — Previously granted income tax exemption to recreational clubs, cited to demonstrate the intentional omission in the 1997 NIRC.
• Rules of Court, Rule 41, Section 2(c) in relation to Rule 45 — Governs appeals by certiorari from the RTC to the Supreme Court on questions of law, cited regarding the propriety of the direct appeal.