Herrera vs. The Quezon City Board of Assessment Appeals

Properties used exclusively for charitable or educational purposes are exempt from taxation under the Constitution, and the admission of pay-patients does not deprive a hospital of its charitable character where the income derived from pay-patients is devoted to the improvement of charity wards and the maintenance of the institution as a public charity. The exemption extends not only to property actually indispensable for the charitable or educational purpose but also to facilities that are incidental to and reasonably necessary for the accomplishment of such purposes, such as a school for training nurses, a nurses' home, and housing facilities for hospital staff.

The petitioners, Jose V. Herrera, an architect, and Dr. Ester Ochangco Herrera, operated the St. Catherine's Hospital in Quezon City, which was authorized by the Director of the Bureau of Hospitals on July 24, 1952. The hospital was primarily a surgical and orthopedic hospital with emphasis on obstetrical cases, and the petitioners also operated the St. Catherine's School of Midwifery within the hospital premises. The constitutional provision at issue exempts from taxation all lands, buildings, and improvements used exclusively for religious, charitable, or educational purposes, and the case required the Court to determine whether the hospital properties fell within this exemption notwithstanding the presence of pay-patients and the school's operation.

The petitioners, Jose V. Herrera and Dr. Ester Ochangco Herrera, were authorized by the Director of the Bureau of Hospitals on July 24, 1952, to establish and operate the St. Catherine's Hospital at 58 D. Tuazon, Sta. Mesa Heights, Quezon City. On or about January 3, 1953, the petitioners requested exemption from real property tax on the lot, building, and other improvements comprising the hospital, stating that it was established for charitable and humanitarian purposes and not for commercial gain. After inspection and study, the exemption was granted effective for the years 1953, 1954, and 1955. Subsequently, however, in a letter dated August 10, 1955, the Quezon City Assessor notified the petitioners that the properties were reclassified from exempt to taxable and assessed for real property taxes effective 1956, enclosing Tax Declarations Nos. 19321 to 19322.

The building involved was principally used as a hospital, mainly a surgical and orthopedic hospital with emphasis on obstetrical cases, which constituted 90% of the total number of cases registered. The hospital had thirty-two beds, of which twenty were for charity-patients and twelve for pay-patients. There were two kinds of charity patients: out-charity patients who came for consultation only and were given free consultation and prescription, sometimes with free medicines; and charity lying-in-patients who were given free medical service and medicine, although the food served to pay-patients was much better. No condition was imposed on the admission of charity lying-in-patients, though they usually gave donations. Pay-patients were required to pay for hospital services ranging from P5.00 to P40.00 per day, and the income realized from pay-patients was spent for the improvement of the charity wards. The hospital personnel consisted of three nurses, two graduate midwives, a resident physician receiving a monthly salary of P170.00, and Dr. Ester Ochangco Herrera as directress, who received no salary.

The petitioners also operated the St. Catherine's School of Midwifery within the hospital premises, which was granted government recognition by the Secretary of Education on February 1, 1955. The school had an enrollment of about two hundred students, who were charged a matriculation fee of P300.00 for 1½ years, plus P50.00 a month for board and lodging, which included transportation to St. Mary's Hospital, also owned by the petitioners. A separate set of accounting books was maintained for the school, and the petitioners refused to submit a separate statement of accounts for the school. The hospital's income and expenses for 1954, 1955, and 1956 showed consistent deficits in the charity ward, with the pay ward income being applied to the charity ward's expenses. The petitioners also owned lands and coconut plantations in Quezon Province and other real estate in Manila consisting of apartments for rent, and Jose V. Herrera was an architect actively engaged in his profession.

The Court of Tax Appeals decided the issue in the negative, holding that the hospital had a pay ward for pay-patients charged for the use of private rooms, operating room, laboratory room, and delivery room like other hospitals operated for profit, and that the petitioners and their family occupied a portion of the building for their residence. With respect to the school of midwifery, the Court conceded that the proposition might be proper if the property used for the school were separate and distinct from the hospital, but found that the portions of the building used for classrooms had a dual use for classroom and hospital purposes, and that the portion dedicated to educational and charitable purposes could not be identified from those destined to other uses, the building being an indivisible unit of property.

• Exclusive Charitable Use: Petitioners argued that the lot, building, and other improvements occupied by the St. Catherine's Hospital were exempt from real property tax because the hospital was established for charitable and humanitarian purposes and not for commercial gain, and the properties were used exclusively for charitable or educational purposes within the meaning of the constitutional exemption.
• Pay-Patients Not Detrimental: Petitioners maintained that the admission of pay-patients did not detract from the charitable character of the hospital, since the income realized from pay-patients was spent for the improvement of the charity wards, and the hospital consistently operated at a deficit in its charity ward.
• School of Midwifery as Additional Ground: Petitioners argued that the operation of the St. Catherine's School of Midwifery furnished another ground for exemption, as the school was an educational institution whose students practiced in the hospital, and the matriculation fees and charges for board and lodging were immaterial to the issue of whether the properties were used exclusively for educational purposes.

• Pay Ward Indicates Profit Motive: Respondent, through the Court of Tax Appeals' decision, argued that the hospital had a pay ward for pay-patients who were charged for the use of private rooms, operating room, laboratory room, and delivery room, like other hospitals operated for profit, which negated the claim of exclusive charitable use.
• Dual Use of Property: Respondent argued that the portions of the building used for classrooms of the school of midwifery had a dual use for classroom and hospital purposes, the latter not being a purpose that renders the property tax exempt, and that the portion dedicated to educational and charitable purposes could not be identified from those destined to other uses, the building being an indivisible unit of property.
• Residential and Other Uses: Respondent noted that part of the building and lot was used as a hospital, part as residence of the petitioners, part as garage, part as dormitory, and part as school, and that the petitioners and their family occupied a portion of the building for their residence.

• Exclusive Charitable Use: Whether the lot, building, and other improvements occupied by the St. Catherine's Hospital are exempt from real property tax under the constitutional provision exempting properties used exclusively for charitable or educational purposes.
• Effect of Pay-Patients: Whether the admission of pay-patients to the hospital, who are charged for hospital services, detracts from the hospital's charitable character and defeats the claim of exclusive charitable use.
• School of Midwifery and Incidental Facilities: Whether the operation of the St. Catherine's School of Midwifery within the hospital premises, and the presence of a garage and residential quarters, affect the exemption to which the hospital is entitled.

• Exclusive Charitable Use: Yes. The St. Catherine's Hospital is a charitable institution within the purview of the constitutional exemption from taxation, and the lot, building, and improvements constituting the hospital are exempt from real property tax.
• Effect of Pay-Patients: No. The admission of pay-patients does not bar the hospital from claiming that it is devoted exclusively to benevolent purposes, it being admitted that the income derived from pay-patients is devoted to the improvement of the charity wards, which represent almost two-thirds of the bed capacity of the hospital, aside from out-charity patients who come only for consultation.
• School of Midwifery and Incidental Facilities: No. The existence of the St. Catherine's School of Midwifery does not affect the exemption to which the hospital is entitled; on the contrary, it furnishes another ground for exemption, and the garage, being essential to the operation of the school and incidental to the hospital's operation, did not affect the charitable character of the hospital and the educational nature of the school.

• Exclusive Charitable Use: The Court held that the constitutional exemption in favor of property used exclusively for charitable or educational purposes is not limited to property actually indispensable therefor, but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes. The Court noted that of the thirty-two beds in the hospital, twenty are for charity-patients, the income realized from pay-patients is spent for the improvement of the charity wards, and Dr. Ester Ochangco Herrera, as directress, does not receive any salary. The Court found that the hospital was a charitable institution, and the fact that it admits pay-patients does not bar it from claiming that it is devoted exclusively to benevolent purposes.
• Effect of Pay-Patients: The Court cited the well-settled rule that 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 Court quoted the principle that "where rendering charity is its primary object, and the funds derived from payments made by patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent character." The Court distinguished the present case from a for-profit hospital by emphasizing that the income from pay-patients was devoted to the improvement of the charity wards.
• School of Midwifery and Incidental Facilities: The Court held that the existence of the school of midwifery, with an enrollment of about 200 students who practice partly in St. Catherine's Hospital and partly in St. Mary's Hospital, furnishes another ground for exemption. The Court rejected the Court of Tax Appeals' impression that the size of the enrollment and the matriculation fee charged warranted the belief that petitioners derive a substantial profit from the school's operation, stating that such factor is immaterial because "all lands, buildings and improvements used exclusively for religious, charitable or educational purposes shall be exempt from taxation, pursuant to the Constitution, regardless of whether or not material profits are derived from the operation of the institutions in question." The Court also held that the garage, which was essential to the operation of the school of midwifery for transportation of students to St. Mary's Hospital, and the residential quarters for Mrs. Herrera, who received no compensation as directress, were incidental to the operation of the hospital and the school and did not affect their charitable and educational character.

• Exclusive Use for Charitable or Educational Purposes — The constitutional exemption from taxation for lands, buildings, and improvements used exclusively for religious, charitable, or educational purposes is not limited to property actually indispensable for such purposes, but extends to facilities that are incidental to and reasonably necessary for the accomplishment of said purposes. The Court applied this doctrine to hold that the garage and residential quarters in the hospital building, being incidental to the operation of the hospital and the school of midwifery, did not defeat the exemption.
• Charitable Character of Hospitals Admitting Pay-Patients — 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. Where rendering charity is the primary object, and the funds derived from payments made by patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent character. The Court applied this doctrine to hold that the St. Catherine's Hospital, which devoted the income from its pay ward to the improvement of its charity wards, remained a charitable institution.
• Profit Motive Immaterial to Constitutional Exemption — The constitutional exemption for properties used exclusively for religious, charitable, or educational purposes applies regardless of whether or not material profits are derived from the operation of the institutions in question. Congress may impose taxes upon such profits, but the lands, buildings, and improvements themselves are beyond its taxing power. The Court applied this doctrine to reject the Court of Tax Appeals' finding that the school of midwifery's enrollment and fees warranted the belief that petitioners derived substantial profit from its operation.

• "It is well settled, in this connection, that 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'." — This passage states the controlling rule on the effect of pay-patients on a hospital's charitable character, which is the ratio decidendi of the Court's reversal of the Court of Tax Appeals.
• "In other words, where rendering charity is its primary object, and the funds derived from payments made by patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent character." — This passage articulates the canonical formulation of the doctrine that a hospital's charitable character is not negated by the admission of pay-patients where the income is devoted to benevolent purposes.
• "Such factor is, however, immaterial to the issue in the case at bar, for 'all lands, building and improvements used exclusively for religious, charitable or educational purposes shall be exempt from taxation,' pursuant to the Constitution, regardless of whether or not material profits are derived from the operation of the institutions in question." — This passage establishes that the constitutional exemption applies regardless of profit, and that Congress may tax profits but not the exempt properties themselves.

• U.S.T. Hospital Employees Association vs. Sto. Tomas University Hospital, L-6988, May 24, 1954 — Cited as controlling precedent for the proposition that a hospital with paying beds maintained to partly finance the expenses of free wards for charity patients is not established for profit-making purposes.
• Collector of Internal Revenue vs. St. Paul's Hospital of Iloilo, L-12127, May 25, 1959 — Cited as controlling precedent for the proposition that a hospital organized for charitable, educational, and religious purposes cannot be considered as engaged in business merely because its pharmacy department charges paying patients the cost of their medicine plus 10% thereof to partly offset the cost of medicines supplied free to charity patients.
• Collector of Internal Revenue vs. University of Visayas, L-13554, February 28, 1961 — Cited as controlling precedent for the proposition that the conversion of a non-stock corporation to a stock corporation and the increase of its assets distributed among members in shares of stock does not justify the inference that the corporation has become one for business and profit, where none of its profits inured to the benefit of any stockholder or individual.
• Prairie Du Chien Sanitarium Co. vs. City of Prairie Du Chien, 242 Wis. 262, 7 NW (2d) 832, 144 A.L.R. 1480 — Cited as persuasive authority for the proposition that where rendering charity is the primary object of a hospital, and the funds derived from payments made by patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent character.

• Article III, Section 1, 1935 Constitution (as applied) — The constitutional provision exempting from taxation all lands, buildings, and improvements used exclusively for religious, charitable, or educational purposes. The Court applied this provision to declare the St. Catherine's Hospital properties exempt from real property tax, holding that the hospital was a charitable institution and the school of midwifery an educational institution, and that the exemption applies regardless of whether material profits are derived from their operation.

Chief Justice Bengzon, and Justices Padilla, Labrador, Reyes, J.B.L., Paredes, and De Leon, concurred in the decision.