Lung Center of the Philippines vs. Quezon City

A charitable institution does not lose its character or tax-exempt status merely because it derives income from paying patients or receives government subsidies, provided such income is devoted entirely to charitable purposes and no profit inures to private benefit; however, to qualify for real property tax exemption under Section 28(3), Article VI of the 1987 Constitution and Section 234(b) of the Local Government Code, the lands, buildings, and improvements must be actually, directly, and exclusively used for charitable purposes, meaning the direct and immediate application of the property itself to charitable objectives, excluding portions diverted to commercial leasing or other profit-making activities.

The Lung Center of the Philippines was established on January 16, 1981 under Presidential Decree No. 1823 as a non-stock, non-profit corporation administered by the Office of the President with the Ministry of Health and Ministry of Human Settlements to combat the high incidence of lung and pulmonary diseases in the Philippines. It operates a hospital on a 121,463-square meter property at Quezon Avenue corner Elliptical Road, Quezon City, providing medical services to both paying and non-paying patients while receiving annual government subsidies. The dispute arose when the City Assessor assessed real property taxes on the entire property, leading the LCP to claim tax exemption as a charitable institution, which was denied by the Local Board of Assessment Appeals, affirmed by the Central Board of Assessment Appeals, and subsequently affirmed by the Court of Appeals.

• The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on January 16, 1981 by virtue of Presidential Decree No. 1823, administered by the Office of the President in coordination with the Ministry of Health and the Ministry of Human Settlements, and is the registered owner of a 121,463-square meter parcel of land located at Quezon Avenue corner Elliptical Road, Central District, Quezon City, covered by Transfer Certificate of Title No. 261320.
• A hospital building is erected on the property, with portions of the ground floor 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 patients whom they charge for professional services.
• 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 of Quezon Avenue and Elliptical Road is leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center.
• The petitioner accepts both paying and non-paying patients and renders medical services to out-patients, receiving annual government subsidies aside from income derived from paying patients, and alleged that for the years 1995 to 1999, 100% of its out-patients were charity patients and 60% of its 282-bed hospital capacity (170 beds) was allotted to charity patients.
• The petitioner collected rentals amounting to P1,136,483.45 in 1991 and P1,679,999.28 in 1992 from its lessees, and incurred net losses in its operations for those years despite the rental income and subsidies.

• The petitioner asserts it is a charitable institution within the context of Section 28(3), Article VI of the 1987 Constitution, arguing that its character is not altered by the fact that it admits paying patients and renders medical services to them, leases portions of the land to private parties, or rents out portions of the hospital to private medical practitioners.
• It contends that the "exclusivity" required by the Constitution does not necessarily mean "solely," and that income derived from paying patients and lease rentals is used for operational expenses to further its charitable purposes of treating lung diseases and assisting the poor.
• It maintains that receiving government subsidies attests to its charitable character and that even if Presidential Decree No. 1823 does not expressly exempt it from real estate taxes, it is not precluded from seeking tax exemption under the 1987 Constitution.
• It cites Herrera v. Quezon City Board of Assessment Appeals to support its position that leasing portions of the property to private individuals does not destroy its tax-exempt status as a charitable institution.

• The respondents contend that the petitioner is not a charitable entity and that its real properties are not actually, directly, and exclusively used for charitable purposes as required by the Constitution and Section 234(b) of the Local Government Code, asserting that the petitioner failed to prove its charitable status and exclusive use of property.
• They argue that the petitioner uses government subsidies only for charity patients while using other income derived from the property for the benefit of paying patients, and cite alleged irregularities in lease contracts (specifically the underpriced lease to Elliptical Orchids and Garden Center where monthly rental was only P20,000 instead of P357,000) as evidence of non-charitable, commercial use.
• They assert that the petitioner failed to prove that 100% of out-patients and 170 beds are reserved for indigent patients, citing hospital practices requiring deposits and promissory notes from poor patients before admission or discharge, and that indigent patients prefer the Quezon Institute due to the petitioner's stringent requirements.
• They argue that the constitutional requirement of "actual, direct, and exclusive" use is not met when portions of the property are leased for commercial purposes to private entities.

• Procedural Issues: N/A
• Substantive 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.

• Procedural: N/A
• Substantive: The Court held that the petitioner is a charitable institution as defined by its enabling law and Articles of Incorporation, and that deriving income from paying patients or receiving government subsidies does not destroy this character provided the income is devoted to charitable purposes and no profit inures to private benefit; however, only those portions of the land and building actually, directly, and exclusively used for charitable purposes (hospital operations and patient care) are exempt from real property taxes, while portions leased to private entities for commercial purposes are subject to taxation. The Court directed the City Assessor 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.

• Strictissimi Juris in Tax Exemptions — Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power, as taxation is the rule and exemption is the exception; the effect of an exemption is equivalent to an appropriation, and a claim for exemption must be clearly shown and based on language in the law too plain to be mistaken.
• Expressio Unius Est Exclusio Alterius — The express mention of specific tax exemptions in a statute (Section 2 of PD 1823 enumerating exemptions for donations and equipment but not real property) implies the exclusion of all others, preventing the extension of exemptions by interpretation beyond those expressly mentioned by the legislature.
• Actual, Direct and Exclusive Use Test — Under Section 28(3), Article VI of the 1987 Constitution and Section 234(b) of the Local Government Code, real property tax exemption for charitable institutions requires that lands, buildings, and improvements be actually, directly, and exclusively used for charitable purposes, meaning the direct and immediate application of the property itself to the charitable objectives; it is not the use of the income from the real property that is determinative, and the words "dominant use" or "principal use" cannot be substituted for "used exclusively" without doing violence to the Constitution.
• Charitable Institution Character Preservation — An institution does not lose its charitable character or tax exemption by admitting paying patients or receiving government subsidies so long as the money received is devoted altogether to the charitable object and no money inures to the private benefit of managers, as the test is whether it exists to carry out a purpose recognized in law as charitable rather than being maintained for gain, profit, or private advantage.

• "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."
• "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."
• "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 words 'dominant use' or 'principal use' cannot be substituted for the words 'used exclusively' without doing violence to the Constitutions and the law."
• "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."
• "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."

• Herrera v. Quezon City Board of Assessment Appeals — Distinguished as it was decided on September 30, 1961 under the 1935 Constitution, which required only "exclusive" use without the "actually" and "directly" requirements added in the 1973 and 1987 Constitutions.
• Province of Abra v. Hernando — Cited for the proposition that the addition of the words "actually" and "directly" in the 1973 and 1987 Constitutions substantially changed the requirements for tax exemption, necessitating proof of actual and direct use of the property itself rather than reliance on past decisions interpreting the 1935 Constitution.
• Commissioner of Internal Revenue v. Court of Appeals — Cited for the strictissimi juris rule in the construction of tax exemptions and the principle that the tax exemption under the constitutional provision covers property taxes only.
• Congregational Sunday School & Publishing Society v. Board of Review (Illinois) — Followed for the principle that an institution does not lose its charitable character by requiring paying patients to pay where no profit is made and benefits are refused to none on account of inability to pay.
• Lutheran Hospital Association of South Dakota v. Baker — Cited for the view that receiving money from paying patients enhances the usefulness of the institution to the poor and does not impair its charitable character so long as the money is devoted to charitable objects.
• Yorgason v. County Board of Equalization of Salt Lake County — Followed for the principle that government subsidies are analogous to gifts or donations and do not destroy charitable exemption if the facts otherwise support such exemption, regardless of whether the subsidization comes from government or private sources.
• Salvation Army v. Hoehn — Cited for the principle that an intention to grant tax exemption will never be implied from language admitting other construction and must be expressed in clear and unmistakable terms.
• St. Louis Young Men's Christian Association v. Gehner — Cited for the principle that tax exemptions must not be enlarged by construction since the reasonable presumption is that the State has granted in express terms all it intended to grant.

• Section 28(3), Article VI of the 1987 Philippine Constitution — Provides that charitable institutions, churches, and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.
• Section 234(b) of Republic Act No. 7160 (Local Government Code of 1991) — Implements the constitutional provision by exempting from real property tax the lands, buildings, and improvements of charitable institutions actually, directly, and exclusively used for charitable purposes.
• Presidential Decree No. 1823, Section 2 — Enumerates specific tax exemptions for the Lung Center including donations, contributions, endowments, equipment, and supplies, but does not include real property tax exemption, which the Court used to apply the principle of expressio unius est exclusio alterius.
• Article VI, Section 22(3) of the 1935 Constitution — Cited for comparison, showing that the exemption then only required "exclusive" use without the "actual" and "direct" requirements.
• Article VIII, Section 17(3) of the 1973 Constitution — Shown as the intermediate provision adding "actually" and "directly" to the "exclusively" requirement for tax exemption.