Young Hen's Christian Association of the Philippines, Inc. vs. Commissioner of Internal Revenue

DECISION

- 2 - amount of P415, 651.01 as deficiency inco me tax and intere st , expanded wi thhold ing taxes on rentals a nd prof~ssional fees , a nd withholdi ng tax o n wages, surcharge an d interest. ( 2 ) Petitioner timely proteste d the above- stated deficiency tax assess ments, and under date of Oc tober 8, 1985, the petitioner filed a supple me n t to th e sai d basic protests. ( 3 ) On F bru ry 13, 1989, the petitioner r ece ived a copy of t he respondent's lette r- decision of J a nuary 13, 1989, in reply to p ti ioner' s letter- pr o es t date d October 8, 1985.

A xerox copy of the responden t ' s letter- decision of January 13, 1989 is a tac h ed hereto as Annex "A" . (4) In hi s letter of January 13, 1989, Annex "A" hereof, the responde nt cancelled the followi ng assessment, incl u sive of increments, to wit :

1980 De£ . Fixed Tax (Real Estate Dealer) ... P 7,694.71 1980 Def. Expanded Withholding Tax (Professional Fees . .................

8,215.06 Ho~1ever, respondent reiterated th e followi ng ass e. sment inclusive of increments thereon, namel y:

- 3 - 1980 Def. Fixed Tax (as operator of parking lots) .... ....... ... ................. . 1980 Def. Contractor's Tax ............... . 1980 Def . Income Tax ..................... . 1980 Def. Expanded Withholding Tax (Rental of Pinsettler) ...................... . 1980 Def. Withholding Tax on Wages ....... . p 353.15 3,129.73 372 , 578.20 1,798. 93 33,058.82 From the denial of Petitioner ' s protest, it filed the instant Petition for Review on March 14, 1989.

Petitioner on · ts part alleged that it is a religious, charitable and education a l institution and it is established primari 1 y for the promotion of t h e social welfare, pleasure, recreation and oth e r non - p ofitable purposes primarily for the development of the youth into uprigh t and civic- mind ed and useful citizen s and that no part of the net income of which inures to the benefit of any private stockholder or member.

Such being the case, the Petitioner is exempt from taxation pu rsuant to Section 27 (g) and (h) of the National Internal Revenue Code.

It likewise denied liabilities over withholding taxes on wages and rentals on pinsetters. The truth being that the wages whic h were not subjected to withholding tax pertain to wages of casuals excepted from the - 806

- 4 - requirem e nts of \-li thhold in g by Revenue Regu lation No.

6-82.

The rentals o n pinsetters a r e not actually r ntals ut repr • nt t he service f ee paid to Hr.

Al do de Guzm n or main taining the pinset ing machin .

Being not on e of those enumerated und e R venue Regul tion No . 13-7 8 as amendPd, i is not sub'ec to exp nded withho lding tax.

Re pond nt on hi s par t a ll eged that notwithstan ding t o ner' s t ax exe mpt status under Se ction 27 (g) and ( h) of t h e Tax Code, the income derived by the P titio ner fr om le ase of the r eal properties and from operations of th e park ing lot is subject to income tax pursuant to the last pa r graph of atd sect o n.

Likewise, the Petiti one fail - d 0 withhold axes on salaries and wages ai d to i emp y e s a s well as the withholding on th rent a s of pi n se tters in viol-tion f he w:i. hhold ng tax law and regu lation.

The issues presented for re sol ut ion by this court are as followst (1) Whether or not the coll ection or earnings of rental income from lease of certain ., 807

- 5 - p r emise s a nd income e a rned from parking f e es fall un der t he last para graph of Section 27 o f t h e NIRC ; ( 2 ) Whether or no t it i s liable to withhold i ng ax o n wa g e s and to e xpanded wi hhol din g X on rentals o f pinsetters. On th e f i rst i sue , n o doub t a s also admitted by the Respondent in h is me mor ndum, Pe titioner is a non - stoc k nd non - p ro f it domesti c co rporation organize d for t h e promotio n of soci al we lfa r e as well as f or pl e sure, ecre a on and other non- prof talJl urpo aes.

Pe tit io ner will fall the re o und r S c o n 27 (g ) an ( l\) of the· NIRC.

For e sy f r nc h if:J r ti cul p ovis ion of law invol ved is quoted he r unde r' SEC.

27.

Exemptions f rom tax on c orporations.

Th e fo llowing organizations sh a ll not be taxed under this Title in respect to income received by them as such - (g) Civil league o r organization not organ ized for profit but operated exclusively for the promotion of social welfare ;

(h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no part of the net income of v1hich inures to the benefit of any private stockholder or member;

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- 6 - Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing org ni zat ons from any of their properties, real or pe rsonal , or from any of their activities conducted for profit, regardless of the dispo sition made of such income, shall be s ubj ect to tax imposed under this Code. However , the question for resolution is whether o not the rental income in the amount of P649, 701 . .... ~ an the parking ot fees in the amount of P44, 259 . . ?.

~.' .

may b e ns e e d s income fa ll i ng under · he a paragraph o f the aforequote d prov sion.

Th t i s , whet h e r n ot said in come may be conside ed as "incom of wh atever kind and cha cter of the o regoin g organi zation from any of their prop ti real o personal, or from a ny of their act · v i s conducted for profi ·t, regardless of the disposition made of such income" subject to income tax.

Thi s wi 11 consequent! y also subject the said activities to fixed tax as operator of park ing lots a nd to contractor's tax. While it may appear that the last paragraph was introduced only on June 11, 1978 by Pre sidential Decree No.

1457, the same provision has been part of the same Sec ion 27 from the very - 808 start of the enactment of our National Internal Revenue Code on July 1, 1939 under Commonwealth Act No. 466. It was a proviso in subsection(e) of Section 27, quoted hereunder: SEC. 27. Exemptions from tax on corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such-

XXX XEN XXX

(e) Corporation or association organized and operated exclusively for religious, charitable, - gspetentific, athletic, cultural, or educational purposes, or for the rehabilitation of veterans no part of the net income of which inures to the benefit of any private stockholder or individual; Provided however, That the income of whatever kind and character from any of its properties, real or personal, or from any activity conducted for profit, regardless of the disposition made of such income, shall be liable to the tax imposed under this Code;

XXX xXx XXX

Therefore, the jurisprudence established in the interpretation of the said Section 27 even prior to June ii, 1978 will apply in our particular case. The Young Men’s Christian Association of the Philippines, Incorporated was established primarily with the following objectives:

As recited in its Articles of Incorporation- a 810

- 8 - ( a ) •ro develop the charac t er and usef uln ess of and to improve the i nt e llectual, social a nd c ondi c tion of the you t h. Christian its members spiritual, physical And as recited i n its Constitution and By- Laws, the association has the fo ll owi ng objectives: Section 2.

The conti nuing ba s is of t h e work and wittness of the YMCA of the Phil ippines , Inc.

is Christ- oriented in nature.

Th e Movement endeavor as it does to encou rag e an d inspire the search for unity i n Christ and th e mission to work tog e ther for the e xtension of His Kingdo m among a ll the peoples of the wo rld. Section 3.

The enduring objectives of the Fe deration s hall be: ( a ) To develop we ll - balanced Christian personality, mi ssion in lif e , u sefulnes s o f individual s, a n d he pr omo t i on of u n i t y a mong Ch ist ians and und er s tanding a mo ng peop les of all f aiths , t o th e e nd t hat th e Brotherh ood o f Man un de r h e Fat h e r h ood of God may be fostere d in a n at mo s ph e e of mutual re spect a nd un de r s t a ndi ng, (b) To p ro mo t e on e qu a l bas is th e physical, me ntal , and s p i ritual we l fa re o f the you t h, with e mp hasis on re vere nce for God, soci a l disc i plin e , res pons i bility for he co mmon good , res pect for hum a n d igni t y, a n d t he observa n ce o f th e Go ld e n Ru le ;

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- 9 - (c) To e ncourage members of the Young Men's Christian Association s in the Philippines to participate loyally in t h e life of their res pective c hurches; to b rin g the s e churches clo se together, and to partie pate in the effort to realize the church Universal ;

( d) 'l'o s r ng t hen and ( e ) coordinate the work of the Young Me n ' s Christi a n ·Assoc iation s .

in the Philip pi n ~s and to f oster t h e exte ns ion of the You n g Men's Chr st i an A sociations to new a reas, ·ro h elp Association s ad pt their t he n eds of its Member de velo p and program s to the you t h 1 (f) To ass st t he Member Associations in developin g and ma i ntain ing an high standard of management, operation and practice;

and (g) To undert a ke and sponsor nation a l and international prog ra ms a nd activities in pursuan c e of its purposes and objectives.

In furtherance of these objectives, the association has s ponsored continuing programs towards the developme nt of the welfare of the youth as good Christians.

Actual workshop, seminars, - 81 2 )

- 10 - training, sports ca mp s , c onf erences, s ummer camps and other programs or s uch ma tters like developing Chrl st.ian values , drug addJctions, unskilled and out. - o.f -school youth, h andicapped working youth a nd you t.h alcoholism were held throughout the Philippines through its various branches.

(Exhibit s F, G, H, I). To s upport these multifa rio us activities and to attai n the various objectives of the association funding is necessary. As gathered from the various testimonies, fundings are derived from various sources such as membership dues, charges on the use of f aci 1 i ties 1 ike bowling and bi lli.ards, lodging, small shop rentals, interest income, parking fees, re s taurant and canteen. Unlike other clubs, the membershi p dues in the association are very minimal.

It is only P.50 for elementary students, Pl. 00 for high school students, P3. 00 for college students and PlOO. o o for professionals and other corporate members.

With these minimal dues its multifarious activitie s have to be supported by other sources.

Two of these sources are rentals derived from small shops, restaurant and taka canteen and parking fees. For taxable year ended 81 ~

- 11 - December 1980, Petitioner earned gross rental income of P676,829.26 and P44,259.°9°° from parking fees which is the subject of the assessment.

In a similar case involving Petitioner’s predecessor, Young Men’s Christian Association of Manila vs. The Collector of Internal Revenue (No. 7988, January 19, 1916), the Supreme Court held that "YMCA is exempt from taxation on the ground that it is a combination of religious, charitable and educational institution and not founded and conducted for profit". Against the argument that YMCA runs a business because it keeps lodging and boarding houses, the Supreme Court states, as follows:

“These facts, however, are far from constituting a business in the ordinary acceptance of the word. In the first place, no profit is realized by the association in any sense. In the second place, it is undoubted as it is undisputed that the purpose of the association is not primarily to obtain money which comes from the lodgers and boarders. The real purpose is to keep presents to ; o. lack home or other similar influences We regard this feature of the institution not as a business or means of making money, but, rather, as a very efficient young. me a - .........

DF.CISION

- 12 - means of maintaining the influence of the institution over its members 1 as we held in the case of Columbia Club 1 religious and moral teachings do not always stop with the spoken word;

but to be effective 1 the highest degree they must follow the young through as many moments of his l ife as possible.

To t.his end 1 the feature of the Young Men's Christian As s ociation to which objection is made lends itself with great effect; and we are __ c:_tg _c:::.<?. r.:c:l~f.l:9 .~ . ¥ ... forced . ~<? ..... 1:: .~ .. 9. .~!: .<:1 ..... _ t:}~i!'l .? c_t:

-~ .'!A!: y ......... g .t ........... ~ h -~ i .rl .~ ~ J .!: .. ~ .. !: .. i . .<? .. rl .............. 11. <:>. .. !:....

a s l?~?~f.l:. ~::;::;

_ . !?~~ - ~~ c::t ..... ~E:!.!:hC>c:l ........ !?.¥ .. which the institution maintain its influence and ......................................... ............................................................... ................................................... , .. , ..... . the benefits which its g_:r:gaf.)~~ .. c::t .. !:Jc:> .. f.l ..... was . g~~ -~9.l.1~~~9 . to cc:>.f.l .. f .. e..E. " (Underscoring supplied.) In the case of Jesus Sacred Heart College vs. Collector of Internal Revenue (No. L- 6807 1 May 24 1 1954, 95 Phil 16) which involves the. interpretatio n of Section 27(e) the taxpayer maintains that it is exempt from taxation under the first part of the said p a ragraph(e) which the Collector asserts that the income in question (net income from tuition and other fees) was derived from an "activity conducted for prof i t" and a c cordingly it is taxable under the prov iso of the same paragraph. The Supreme Court states, as follows:

1.

Section 27 (e) of the National Internal Revenue Code, as amended by Republic Act No. 82 (section 5), exempts from taxation tne "net income" of corporations "organized and operated exclusively for • • • educational - 81 a . ., - 13 - purposes • • no part of th~ net inc ome of which inures to the benefit of any private stockholder or i ndividual, " and it is conceded that plaintiff corporation belongs to this class. •ro hold that an ed uc t onal nstitution i s subject to income tax whenever it is so ~dministered as to reas onable assure t hat it will not incur in deficit, is t o nullify and defeat the aforementioned exemption.

Indeed 1 the effect, n general, of the interpretation advoca ed by appellant would be to deny the exempti on "7henever th , e is a ru~t income, contra ry to the te nor of s aid s ect ion 27 ( e ) which positivly xempts from taxation those co porat'ona or assoc iations which, ot he wise, wou ld be a ubject thereto, be use of he existen e of s id net income.

Needless to say , every responsible o ganization must be so run as to, at le ast insure its existen c e, by operating within the limits of its own resources, especially its regular in come.· In other words, it should always st i ve, whenever possible , to have a surplus .

Upon the other hand, a ppellant's pretense would limi he benefi s of the exemption, under said section 27(e), to institutions which do not hope, or propose, to have such su plus.

Unde r this view, the exemption would apply only to schools which are on the verge of bankruptcy, for - unlike the United State s , where a substantial number of institutions of learning are dependent upon voluntary contributions and still enjoy economic stability , such as Harvard, the trust fund of which has been steadily increas ing with the years-there are, and there have always been, very few educational enterprise s in the Philippines which are supporte d by donations , a nd these organizations usually have a very precarious existence. - 816 -- - DF.CI!>ION

- 14 - The final result of appellant's contention, if adopted, would be to discourage the establishment o f colleges in the Philippines, which is precis e ly the opposite of the obj ective consiste ntly sought by our laws . In other words, the making of profit does not destroy tax exemption of charitable, benevolent or education 1 institution.

'!'his de cision rei~e at d in s veral othe decisio n s of Supr m Court , to w "The me e charging of medical and hosp t a e s for those who can affo rd to pay , did not mak e he institution estab ' s hed f or profi t or g in.

It had o meet xpe n ses for op era ~ion and main nano - , in o .der o carry its lofty pu po es t a rve h mani ty".

( UST

Hasp al Employees v.

s anto Tomas Hospita , G.R .

N .

L-69SB, Oc ober 29, 1955 i Collector of !nternal Revenue vs. St. P u Hospital in I oilo, L- 12127, May 2 5, 19 58 , University of San Agustin vs.

CIR, et al., No, L- 1222 2. May 26, 1958). was the Other decision on t he m t e a re w 1 1 re cited in the Petition or Rev·ew and memorandum of t h e Petitioner.

An a lyzing the particular income involved in the instant case, namely, rental income and parking fees, the question would be whether or not the n e t income for said activities would be subject to income tax considering that they are derived from ( - 817 DECISION CTA CASE NO . 4347 - 15 - op e ation 0 eal p op e y .

Fol l owing t he afo e m ~ n ioned deci Rions of the Supreme Co u r t, a s long as no r r o i · i nu e A to t he be n e fj t of a ny p ri vate i ndiv id u 1 r enti ty a n d th a t i t is i n pursuant to t h e benevo lent obj ective s of the org a n iza· ion, t h n it r rna n s no t t a xabl e .

However , t h is court wish to go furthe r and d 'stinguish, fo oth e rwis the bs o l ute applicati on of t h e a b o v e ju r i s prudenc e \-to u d re nde r n ugato ry a n d effect he · proviso und e Sect ion 27 o f the NIRC.

I f we ma y borrow fr om US authorities on t he u se o f prope t y, the j uri s prud en ce i s as foll ows 1 " Th xemptio n vo r of . r operty x c usive ly c h a itabl e o r · anal ur ose s not ,1 m t ed to y c tu lly ind ispe nsable the refore y o n Taxation, Vol . 2, 14 30) but o t c li i e s which are an d re a o n b y necessa ry fo .

ceo m ~ i shmen , f sai d pu rposes , su c h as in the of hospi tal s , 'a s c h ool 50r n rses, a nu rses' h ome, property t o provide housi ng facilities for interns, r e s id e nt doctor s , s uperintendents and other members of the hospital staff, and recreation facilities for student nurses, interns and residents' ( 84 C. J. S.

621) such as n athletic field, s including 'a farm used for the inmates of the institution" (Cooley on Taxation, Vol. 2, p.

14 30);

cited in the case of Jose V. Herrera et al.

vs.

The Quezon City Board of Assessment Appeals (L-15270 September 30, 1961).

- 818

- 16 - Under the a bove guidelines, the leasing of Petitioner's faci 1 i ties to small shop owners, to restaur a nt and canteen operators and the operation of the parking lot are reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the Petitioners. It appears from the testimonies of the witnesses for the Petitioner particularly Mr. Jame s C. Delate, former accountant of YMCA, that these facilities were leased to members and that they have to service the needs of its members a nd their guests.

The rentals were minimal as for example, the Barbershop was only charged P300 per month. He also testified that there was actua lly no lot devoted for parking space but the parking was done at the sides of the building.

The parking was primarily for members with stickers on the windshields of their ca rs and they charged P.50 for non-members . The rentals and parking fees were just enough t o cover the costs of operation and maintenance only. The earnings from these rental s and parking char ges including those from l odging and other charges for the use of the recreationa l facilities constitute bulk of its income which are channeled to support its many - 819 Df:C[SJON

- 17 - activities a nd attainment of its objectives. As pointed out ea l ier , the membe r s h i p dues are very insu f f icie n t to s upport its programs . We find it reasonably necessar y therefore for petitioner to make most out its existing facilities to earn some income.

It would have been different if under the c rc ms nces, -i tione wi l u rc hase a lot and convert 't 0 parkin g 0 to cate r to the needs of h n ~ 1 public: fo r a f@ · , or construct a ' build ng n d lease it out to h~ hig he st bidder or at th ma ke te f or eommerci 1 purpo ses, or should it inve t its funds n the buy and sell of properties, real or e sonal.

Under these circumstances, we could c on dlude that the act ivities are already profit oriented, not incidental and reasonably necessary to the pursuit of the objectives of the association and therefore, will fall under the last paragraph of Section 27 of the Tax Code and any income derived therefrom shall be taxable.

Considering our findings that Petitioner was not engaged in the business of operating or contracting parking lot, we find no legal basis also for the imposition of deficiency fixed tax and - 82CI

DECI SION

CTA CASE NO . 4347 - 18 - contractor's tax i n t h e amount of P353.1 5 and P3,129 . ~~ . respect' vely .

On he alleged def io ncy exp a nde d withho l ding t x n h amou n o · Pl,79 .~~ , we gi ve cre d e nce to th inding of Re p n d n a s s upported by t he audi d ti na r& o

n. · h t th e re ntal on t h e pin set t rs n h e o a moun of 75 ,1 17 . . ~ ... c' .. s hould hav e been s ub ecte d to expan d e d wi t hhold i ng tax pursur~nt to Re v e nue R gu tio n No .

13 - 78 , as s uppleme nte d by Reve nu e Regulation No. 6 - 79.

It appeari n g tha t on ly t h e a moun t of P54 ,300 paid to Car l os Antonio Disno s , Inc.

out of the total payment of P75,117 h a s been · subjected to withhold i ng tax, the balance 0 f p 2 0 , 8 1 7 . . ?. ... ~ . i s therefore subj e ct to withholding tax.

The alleg a tion by Petitioner that the said amount of P20, 8 17 represents service fee paid to certain Alfre do de Guzman on a contractual basis for the ma inte nance service of the pinsetting machine is not support ed by any evidence. On the alleged deficiency withholding tax on wag e s, Petitioner alleged in its memorandum that the payme nts for salaries being subjecte d to wi t hholding tax pertain to casual laborers employed - 821 DECISION CTA CASE NO . 4 347 - 19 - in t.he past years but not in 1980. Respon de nt assumed that in 1980, Pe titioner woul d have t he same number of employees as i n p r evious years .

Petitioner alleged that this as sumptio n i s contrary to the jurisprudence laid down b y t h is Court in Benipayo v. Coll ctor o f Interna l Re venue (CTA Case No. 251 , J une 23, 1958 ) t hat "assessment should not b e base d on pres umption s no matter how r eason a ble or logical sai d , pre sumpti on s may be" .

We be g to disagree with th e Petitioner becau s e the records show that aside fro m t h e regular BIR Form W-3 covering withholding taxes o n salarie s of re gul a r employees , i t likewise filed f or ta~ abl e year 1980 BIR Fo r m 1701 - B cove rin g payme n ts of salaries to casual employees witho u t the correspond i ng withholding tax withheld (pp.

20 -25 of the BIR record s ).

Co n trary to t he a llegation of Petitio ner , t he a larie s of t he casua l l a bo rers are s ubject to wi thhol ding taxe s pursuant t o Section 90 (a) ( 3 ) of the NIRC ef fective as of 1980 because their empl o yment were in the c ours e of the employer's ope r ation of the bowl in g a l le y s . Also, as against th co mputation ma de by the Respondent, Peti.tioner failed o refute or s how th e correct - computation. On this ground this court believes that the rule that "all presumptions in favor of the correctness of tax assessments" (T provincial Autobus Co., Ine. vs. Coll. of Int »-, 98 Phil 290 [1959]; Comm. of Int. Rev. Vs. ‘ino, 8 SCRA 572 [1963]; Mindanao Bus Co. ve. Co) f Int. Rev., 1 SCRA 538 [1961]) cited by Respon: shall apply.

WHI RE, in view of all the foregoing, the. followii evawence bee fiarkby dismissed for lack of merit:

1980 Defi *y Fixed Tax - P353,15, 1980 Defic y Contractor’s Tax - 3,129.23, 1980 De£ic Income Tax - 372,578.2°.

While the £ ing assessments are hereby sustained:

1980 Defic » Expanded Withholding Tax - 1,798.93;

1980 Deficic Withholding Tax on Wages - 33,058.82 ;

plus 10% surcharge 1 20% interest per annum from July 2, 1984 unti ully paid but not to exceed three (3) years pu 1 * to Section 51(e)(2) & (3) of the National In’ W Revenue Code effective as of 1984.

w -- --

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