Bureau of Internal Revenue vs. First E-Bank Tower Condominium Corp.

Revenue Memorandum Circulars that expand or alter the express provisions of the National Internal Revenue Code by subjecting to value-added tax and income tax the association dues and membership fees collected by non-stock, non-profit condominium corporations are void, where such dues are collected solely for the maintenance and preservation of common areas and do not constitute income or gain derived from trade or business or the performance of services.

First E-Bank Tower Condominium Corp. is a non-stock, non-profit condominium corporation organized under Republic Act No. 4726 (The Condominium Act) to hold title to common areas and manage the condominium project for the exclusive benefit of its member-unit owners. On October 31, 2012, the Bureau of Internal Revenue issued Revenue Memorandum Circular No. 65-2012, which abandoned prior rulings exempting association dues from taxation and instead declared that such dues constitute taxable income and gross receipts subject to 12% value-added tax and 32% income tax. First E-Bank, facing immediate tax liabilities of approximately ₱118,971.53 in monthly VAT and ₱665,904.12 in annual income tax, initiated judicial proceedings to challenge the validity of the Circular before the Regional Trial Court of Makati, alleging that the Circular was oppressive, confiscatory, and issued without due process.

• Nature of the Parties: First E-Bank Tower Condominium Corp. is a non-stock, non-profit condominium corporation organized pursuant to Republic Act No. 4726. It exists solely to hold title to common areas and manage the condominium project for the benefit of its member-unit owners, who automatically become members of the corporation in proportion to their interests in the common areas.
• The Assailed Circular: On October 31, 2012, the Bureau of Internal Revenue issued Revenue Memorandum Circular No. 65-2012, entitled "Clarifying the Taxability of Association Dues, Membership Fees and Other Assessments/Charges Collected by Condominium Corporations." The Circular abandoned prior BIR rulings that treated association dues as funds held in trust, and instead declared that such dues constitute income payments or compensation for beneficial services, thereby subjecting them to 12% value-added tax, 32% income tax, and applicable withholding taxes.
• Immediate Impact: First E-Bank calculated that the Circular imposed upon it monthly VAT liabilities of ₱118,971.53 and annual income tax liabilities of ₱665,904.12. The Circular effectively required unit owners to produce additional funds beyond their contributions for maintenance, rendering the tax burden oppressive and confiscatory.
• Protest and Consignation: Through the Makati Commercial Estate Association, First E-Bank sent letters dated December 5 and 19, 2012, to the BIR Commissioner and the Revenue District Officer requesting deferment of the Circular and informing them of judicial consignation of tax payments under protest. First E-Bank subsequently filed the petition for declaratory relief before the Regional Trial Court of Makati.
• Trial Court Proceedings: The Bureau of Internal Revenue opposed the petition, arguing that declaratory relief was improper because the Circular had already taken effect and the injury had already arisen, and that the principle of primary jurisdiction required the matter to be referred to the Secretary of Finance. The RTC nonetheless granted the petition, declaring RMC No. 65-2012 invalid for expanding the law, creating new tax burdens without statutory basis, and being issued without notice and hearing in violation of due process.
• Appellate Proceedings: Both parties appealed to the Court of Appeals. The BIR challenged the RTC's declaration of invalidity and its ruling on the propriety of declaratory relief. First E-Bank challenged the RTC's refusal to order the immediate release of judicially consignated funds. The Court of Appeals dismissed both appeals for lack of jurisdiction, ruling that the Court of Tax Appeals had exclusive appellate jurisdiction over local tax cases under Section 7(a) of Republic Act No. 9282.

• Bureau of Internal Revenue (G.R. No. 215801): The BIR maintained that the Court of Appeals erred in dismissing the appeal for lack of jurisdiction, arguing alternatively that the Court of Appeals had jurisdiction over the validity of administrative issuances or that the Court of Tax Appeals had jurisdiction. The BIR also argued that RMC No. 65-2012 was valid, merely clarifying existing law by restating that even non-stock, non-profit organizations are liable for value-added tax on services rendered, pursuant to Sections 105 and 108 of the National Internal Revenue Code and the ruling in Commissioner of Internal Revenue v. Commonwealth Management and Services Corporation.
• Primary Jurisdiction: The BIR contended that the petition for declaratory relief should have been dismissed for violation of the principle of primary jurisdiction, asserting that only the Secretary of Finance had authority to review the Circular.
• Validity of the Circular: The BIR argued that association dues constitute compensation for beneficial services provided to members, falling within the definition of gross income and sale of services under the NIRC.
• First E-Bank Tower Condominium Corp. (G.R. No. 218924): First E-Bank argued that the Court of Appeals committed grave abuse of discretion in dismissing the appeal, asserting that the Court of Appeals, not the Court of Tax Appeals, had jurisdiction because the case involved the validity of an administrative issuance, not a local tax case or tax dispute per se. First E-Bank maintained that the trial court correctly invalidated RMC No. 65-2012 for expanding the law and violating due process.
• Nature of Condominium Corporations: First E-Bank argued that as a non-stock, non-profit entity formed solely to manage common areas, it was not engaged in trade or business, and association dues were merely held in trust for maintenance expenses, not income.
• Consignation: First E-Bank sought the release of judicially consignated amounts, arguing that the invalidity of the Circular entitled it to immediate refund.

• First E-Bank Tower Condominium Corp. (in G.R. No. 215801): First E-Bank countered that RMC No. 65-2012 was invalid for contravening the Condominium Act and the National Internal Revenue Code. It maintained that the Circular expanded the law by imposing taxes on items not included in the statutory definitions of gross income or gross receipts, and that it was issued without prior notice and hearing, violating due process.
• Bureau of Internal Revenue (in G.R. No. 218924): The BIR argued that the petition for certiorari was improper because the Court of Appeals did not commit grave abuse of discretion, its dismissal being based on the specialized jurisdiction of the Court of Tax Appeals over tax matters. The BIR also maintained that the trial court erred in treating the petition as a valid action for declaratory relief and in invalidating the Circular.

• Propriety of Remedy: Whether a petition for declaratory relief is the proper vehicle to invalidate Revenue Memorandum Circular No. 65-2012.
• Jurisdictional Authority: Whether the Court of Appeals validly dismissed the twin appeals on the ground of lack of jurisdiction.
• Validity of the Circular:
  • Whether a condominium corporation is engaged in trade or business.
  • Whether association dues, membership fees, and other assessments are subject to income tax, value-added tax, and withholding tax.
  • Refund of Consignated Funds: Whether First E-Bank is entitled to the release of judicially consignated tax payments.

• Propriety of Remedy: A petition for declaratory relief is not the proper remedy to assail the validity of administrative issuances; certiorari or prohibition is the appropriate vehicle. However, where the case possesses far-reaching implications affecting numerous condominium corporations and the public interest in tax administration, and where the assailed act amounts to usurpation of legislative authority, the Court may treat a petition for declaratory relief as one for prohibition to promptly resolve questions pertaining to the validity of tax measures.
• Jurisdictional Authority: The parties' resort to the Court of Appeals was proper in light of the then-prevailing jurisprudence in British American Tobacco v. Camacho (2008), which held that the Court of Tax Appeals lacked jurisdiction to pass upon the constitutionality or validity of laws or rules, such authority being vested in regular courts. Although subsequent jurisprudence in City of Manila v. Judge Grecia-Cuerdo (2014) and Banco de Oro v. Republic (2016) recognized the Court of Tax Appeals' jurisdiction over such matters, the parties correctly filed their appeals before the Court of Appeals at a time when British American Tobacco was still controlling.
• Validity of RMC No. 65-2012: The Circular is invalid for grave abuse of discretion amounting to lack or excess of jurisdiction.
• Nature of Condominium Corporations: A condominium corporation organized under Republic Act No. 4726 is a non-stock, non-profit entity whose purposes are limited to holding common areas and managing the condominium project for the benefit of unit owners. It is not engaged in trade or business; the collection of association dues is purely for the benefit of members and constitutes a necessary incident to the preservation of common areas, not a commercial activity.
• Income Tax Liability: Association dues, membership fees, and assessments do not constitute gross income under Section 32 of the National Internal Revenue Code. They represent capital held in trust to defray maintenance and operating costs, not gain or profit. The principle in ANPC v. BIR (2019) regarding recreational clubs applies equally to condominium corporations: such fees are contributions to capital, not income from whatever source.
• Value-Added Tax Liability: Association dues are not subject to value-added tax under Section 105 of the NIRC. VAT applies only to the sale, barter, or exchange of goods or properties, or the performance of services, in the course of trade or business. A condominium corporation does not render services to unit owners for a fee; rather, dues form part of a pool for maintenance expenses. There is no economic or commercial activity constituting a sale of services.
• Withholding Tax Liability: Withholding tax applies only to items of income payable to persons. Because association dues do not constitute income, no withholding tax liability attaches.
• Grave Abuse of Discretion: The BIR Commissioner possesses authority to interpret tax laws under Section 4 of the NIRC, but cannot issue administrative rulings that override, supplant, or modify the law. By expanding the list of taxable items to include association dues—thereby altering the statutory definition of gross income and gross receipts—the Commissioner exceeded her interpretative authority and committed grave abuse of discretion.
• Refund of Consignated Funds: The general rule is that taxes paid under an invalid measure may be refunded. However, the determination of whether First E-Bank actually complied with the requirements for judicial consignation under Articles 1256 and 1257 of the Civil Code is a question of fact that the Court cannot pass upon in a petition for review or certiorari. First E-Bank may file the appropriate motion for the release of consignated funds before the trial court, upon finality of this judgment and after determination of compliance with consignation requisites.

• Nature of Condominium Corporations — A condominium corporation organized under Republic Act No. 4726 is a non-stock, non-profit entity formed for the limited purposes of holding title to common areas and managing the condominium project. It is not engaged in trade or business, and any profit derived from the sale of units accrues to the unit owners, not the corporation. The collection of association dues is a necessary incident to the maintenance and preservation of common areas, not a commercial activity.
• Income vs. Capital — Income denotes a flow of wealth during a definite period of time or gain derived from capital; capital is a fund or property existing at one distinct point in time. Membership fees and association dues collected by non-profit entities solely for maintenance and preservation of facilities constitute capital held in trust, not income subject to taxation, because no gain is realized.
• VAT on Non-Stock Entities — While Section 105 of the NIRC subjects non-stock, non-profit organizations to VAT on sales in the course of trade or business, a condominium corporation managing common areas for the benefit of unit owners is not engaged in trade or business. Association dues are not compensation for services rendered but contributions to a maintenance fund; hence, no sale of services exists to support VAT liability.
• Limits of Administrative Interpretation — The power of the Commissioner of Internal Revenue to interpret tax laws under Section 4 of the NIRC does not include the authority to expand or alter the law. Administrative issuances that override, supplant, or modify express statutory provisions are void. Grave abuse of discretion exists where an agency exercises power in an arbitrary manner outside its granted authority, particularly by imposing taxes not clearly and expressly authorized by law.
• Strict Construction of Tax Laws — A law will not be construed as imposing a tax unless it does so clearly and expressly. In case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer.

• "A condominium corporation, while enjoying such powers of ownership, is prohibited by law from transacting its properties for the purpose of gainful profit."
• "The profit motive in such cases is hardly the driving factor behind such improvements, if it were contemplated at all. Any profit that would be derived under such circumstances would merely be incidental, if not accidental."
• "Association dues, membership fees, and other assessments/charges form part of a pool from which a condominium corporation must draw funds in order to bear the costs for maintenance, repair, improvement, reconstruction expenses and other administrative expenses."
• "The BIR Commissioner is empowered to interpret our tax laws but not expand or alter them. In the case of RMC No. 65-2012, however, the BIR Commissioner went beyond, if not, gravely abused such authority."
• "A law will not be construed as imposing a tax unless it does so clearly and expressly. In case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer."

• Yamane v. BA Lepanto Condominium Corp., 510 Phil. 750 (2005) — Controlling precedent establishing that condominium corporations are not engaged in trade or business and that association dues are not intended for profit but for maintenance expenses.
• ANPC v. BIR, G.R. No. 228539 (2019) — Applied to hold that membership fees and assessment dues collected by recreational clubs (and by analogy, condominium corporations) constitute capital held in trust for maintenance, not income subject to tax.
• British American Tobacco v. Camacho, 584 Phil. 489 (2008) — Prevailing jurisprudence at the time of the appeal below, holding that the Court of Tax Appeals lacked jurisdiction over the validity of tax laws and that regular courts had such jurisdiction.
• Banco de Oro v. Republic, 793 Phil. 97 (2016) — Subsequent ruling recognizing the Court of Tax Appeals' jurisdiction to pass upon the constitutionality or validity of tax laws and administrative issuances.
• CIR v. Commonwealth Management and Services Corporation, G.R. No. 125355 (2000) — Distinguished; held that non-stock corporations rendering services for a fee are subject to VAT, but inapplicable to condominium corporations not rendering services for remuneration.
• Diaz v. Secretary of Finance, 669 Phil. 371 (2011) — Cited for the principle that petitions for declaratory relief may be treated as prohibition where the case has far-reaching implications and raises questions of public importance.

• Republic Act No. 4726 (The Condominium Act), Sections 9, 10, and 22 — Define the purposes and powers of condominium corporations, limiting them to holding common areas and managing the project for the benefit of unit owners, and authorizing the collection of assessments for maintenance and preservation.
• Republic Act No. 8424 (National Internal Revenue Code of 1997), Sections 4, 31, 32, 57, 105, and 108 — Define taxable income, gross income, withholding tax, and value-added tax. Section 4 grants the Commissioner interpretative authority; Sections 31-32 define income; Sections 105 and 108 define VAT liability.
• Republic Act No. 9282, Section 7 — Defines the appellate jurisdiction of the Court of Tax Appeals over tax cases.
• Rule 63, Section 1 and Rule 65, Revised Rules of Court — Govern declaratory relief and certiorari/prohibition, respectively.

Peralta, C.J. (Chairperson), Caguioa, Reyes, J., Jr., and Lopez, JJ.