Commissioner of Internal Revenue vs. St. Lukes Medical Center, Inc.

DECISION

COTANGCO-MANALASTAS, J.:

On a ppeal before the Court En Bane by way of a Petition for Review l filed on Se ptember 20 , 2011 by petitioner Commissioner of the Burea u of Interna l Revenue (SIR), pursua nt to Section 18 of Republic Act No. 11 25, as a mended by Republic Act No. 9282 a nd J,-

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.

Republic Act No. 9503,2 are the August 23, 2011 Resolution3 and June 3, 2011 Decision4 enunciated by the Second Division of this Court in CTA Case No. 7857 entitled "St. Luke's Medical Center, Inc., us. Commissioner of Internal Revenue".

Quoted hereunder are the dispositive portions of the assailed Resolution and Decision: Resolution dated August 23, 2011:

"WHEREFORE, premises considered, respondent's "Motion for Reconsideration" is hereby DENIED for lack of merit.

CTA EB No. 823 (CTA Case No. 7857) Commissioner oflnternall?evenue us. St. Luke's Medical Center, Inc.

interest for late payment from 29 August 2008 (due da te indicated in the Formal Letter of Demand) until fully paid pursuant to Sections 248 and 249 of the Na tiona l Interna l Revenue Code (NIRC) of 1997, as a mended .

THE FACTS

The facts of the case, as na rrated by the Second Division of this Courl, a re reproduced hereunder:

"Petitioner is a non-stock, non-profit corporation duly organized and existing under a nd by virtu e of the laws of the Republic of the Philippines, with principal office address at St. Luke's Hospita l, E. Rodriguez Blvd., Quezon City. Respondent is the duly a ppointed Commissioner of the Bureau of Internal Revenue (SIR) vested with a uthority to exerc1se the fun ctions of said office, including, inter alia, the power to a ba te or cancel a lax lia bility when the tax or any portion thereof appears to be unjustly or excessively assessed . Respondent holds office at the SIR National Office Building, Diliman, Quezon City.

Petitioner received from respondent's Large Taxpayer's Service a Forma l Letter of Demand dated ,July 21, 2008, together with

Details

of

Discrepancies

and

Audit

Result/ Assessment Notice No. INC-07-000224 dated August 7, 2008, for alleged deficiency income tax for the taxable year 2007 amounting to P89,627,083.92.

On

September

19, 2008, petitioner filed a n administra tive protest against the a bove-mentioned deficiency tax assessment, praying for its cancellation . O n November 28, 2008 , petitioner received respondent's Final Decision on Disputed Assessment da ted October 22, 2008. The Final Decision modified the Formal Letter of Demand,

Details

of

Discrepancies

a nd

Audit V

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us. St. Luke's Medical Center, Inc.

Result/ Assessment Notice by increasing the alleged deficiency income tax for the year 2007 to P93 ,074,387. 18. Respondent's main reason for assessing petitioner for deficiency income tax was based on the finding that petitioner is allegedly a non-profit hospital that is liable to pay ten percent (I 0%) tax on its net income pursuant to Section 27 (B) of the National Internal Revenue Code (NIRC) of 1997. Hence, petitioner filed the instant Petition for Review on December 23, 2008.

Respondent filed her Answer on February 6, 2009, as follows:

"5.

Petitioner is subject to 10% income tax. Section 27 (B) of the NIRC of 1997 specifically provides that: 'SECTION 27.

Rates of Income Tax on Domestic

Corporations. -

(B)

Proprietary Education Institutions and Hospitals. Proprietary educational institutions and hospitals which are nonprofit shall pay a lax of ten percent ( 1 0%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institu lion or hospital of its pnmary purpose or function.

A

'proprietary educational institution ' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education,

Culture

and

Sports

(DECS), or the ~

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us. St. Luke 's Medical Center, Inc.

Commission on High er Educa tion (CHED) , or the

TechnicaJ Education and Skills Development Authority

(TESDA) , a s the case m ay be, in accordance with existing laws a nd regula tions.' Crysta l clear from the foregoing provision of law is the fact tha t non -profit hos pita ls are now lia ble to pay ten percen t ( 1 0%) on their tax a ble income except those covered by Section (D) of the s am e Code . This is a new provision introduced by the legisla ture unmistaka bly intended to amend the exemption on non -profit hospitals tha t were previously categorized a s non- stock, non-profit corpora tions under Section 26 of the NJRC of 1977 , a s amended .

The aforequoted provision should be distinguished from Section 30(E) of the NIRC of 1997 which provides : 'S ECTION 30.

Exemptions

from

Tax

on Corpora tions. - The followin g organization s shaJI not be taxed under thi s Tille in respect to income received by them a s su ch :

XXX

XXX

X X X

(E)

Nonstock corporation or associa tion organized a nd opera ted exclusively for religious, cha rita ble, scientific, a thletic, or cultural purposes, or for the reh a bilita tion of veterans, no pa rt of its net income or a sset sh a ll belong to or inure to the benefit of any m ember, organizer, officer or any specific person ;

X X X

XXX

xxx' The ba sic difference between Section 27 (8 ) a nd Section 30(E) is tha t the form er particularly m entions non-profit hospita ls, while the Ia Uer generally enumera tes non-stock corpora tions organized and opera ted exclusively, among other things , for ch a rita ble purposes . Ba sic a nd axioma tic is the rule on sta tutory constru ction tha t the specific provision should aJways prevail over the generaJ provision . Moreover, Section 27(8) docs not provide any prohibition m the a llocation of its net income a s distinguished from ~

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us. St. Luke's Medical Center, Inc.

Section 30(E) which requires that 'no part of its net income or asset shaJI belong to or inure to the benefit of any m ember, organizer, officer or any specific person .' Although there is no explicit requirement for non -profit hospitals to aJlot a certa in percentage of its net income for charitable purposes, Section 27(8) considers non-profit hospitals as ordinary corporations but subject to a preferentia l rate of 10% . Petitioner's reliance on the alleged letter of exemption issu ed to it on 9 June 1990 stating among others that it faJls within the purview of a corporation for purely charita ble and social welfare purposes, and accordingly, it is exempt from the payment of income tax on income received by it as such organization is utterly misplaced . In light of the enactment of the NIRC of 1997 which took effect on 1 January 1998, the 1990 ruling being invoked by petitioner is deemed repealed by Section 27(8) . Thus, petitioner, as non -profit hospital is now subject to the 10% tax on its taxa ble incom e. 6.

The payment of surcharge is mandatory. It has been explained by the Supreme Court' .. . that it is mandatory to collect penalty and interest a t the stated rate in case of delinqu ency. The intention of the law is to discourage delay in the paym ent of taxes du e the Government and, in this sense, the penalty and interest are not penal but compensatory for the concomita nt use of the funds by the taxpaye r beyond the date when he is supposed to have pajd them to the Government. .. . ' (Philippine Refinin g Company vs. Court of Appeals, et al., G.R. No. 118794, 8 May 1996) . Although petitioner filed Annual Income Tax Returns for taxable year 2007, the said return was evidenlly deficient and faJse as it did not contain the income tax due for the said taxable year. Section 248 (B) categorically provides that 'in case of willful neglect to file the return within the period prescribed by this Code or by rules and regula tions, or in case a false or fra udulent return is wil lfully ma de, the penalty to be imposed shall be fifty percent (50%) of the tax or of the~

CTA EB No. 823 (CTJ\ Case No. 7857) Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.

deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud: 7.

All presumptions are in favor of the correctness of tax assessments. The good faith of lax assessors and the validity of their actions are presumed . They will be presumed to have taken into consideration all the facts to which their attention was called (CIR vs. Construction Resources of Asia, Inc. 145 SCRA 671). It is incumbent upon the taxpayer to prove the contrary (Mindanao Bus Company vs. CIR, 1 SCRA 538; CIR vs. Tuazon, Inc., 173 SCRA 397) and failure to do so shall vest legality on respondent's actions and assessments. 8.

Failure

to present proof of error in the assessment will justify judicial affirmation of said assessment (Della Motors Co. vs. Commissioner, C.T.A. Case No. 3782, 21 May 1986; Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. Nos. 104151 and 105563, 10 March 1995)."

During trial, petitioner and respondent presented documentary and testimonial evidence in support of their respective claims and contentions.

On July 23, 2010, considering petitioner's Memorandum filed on July 21, 2010 and respondent's Memorandum filed on ,July 16, 2010, the case was deemed submitted for decision. The issues are as follows:

"1.

Whether Petitioner is a non-stock, non-profit corporation organized for charitable and social welfare purposes under section 30 (E) and (G) of the NIRC; 2 .

Whether Petitioner is subject to 10% income tax under Section 27(8) of the NIRC;

3.

Whether

Petitioner

SLMC

is liable for the surcharge and interest imposed by Respondent CIR; and 4.

Whether Petitioner SLMC is liable for compromise penalties for alleged non-compliance with Section 248(A) of the NIRC as amended."~ CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us. St. Luke's Medical Center, Inc.

The foregoing issues can be summarized as- "Whether petitioner is a non-stock, non-profit corporation organized for charitable and social welfare purposes under Section 30(E) and (G) of the NIRC or whether petitioner is subject to 10% income tax under Section 27(8) of the NIRC."' In its Decisions promulgated on ,June 3, 2011, the Court in Division found merit in SLMCI's contentions and, thus, granted its petition for review.

Accordingly, the Court in Division ordered the cancellation and selling aside of Assessment Notice No. I NC-07- 000224, assessing the petitioner therein, SLMCI (respondent herein), for alleged deficiency income taxes for the taxable year 2007. The Court in Division denied in its Resolution6 dated August 23, 201 1 the Motion for Reconsideration filed by the respondent therein, Commissioner of the BIR (petitioner herein), for lack of merit. Hence, the filing of the instant Petitionfor Review7 . On October 4, 2011, the Court En Bane required respondent SLMCI to file its comment on the subject petition within ten (10) days from notice. Respondent SLMCI failed to file its comment within the period granted, thus, considering the issues and arguments proffered by the petitioner, this Court resolved to give due course to the Petition and ordered the parties to submit their respective mcmoranda8 . V Supra, Note 4.

6 Supra, Note 3.

7 Supra, Note 1.

B Rollo, pp. 57-58.

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.

On December 2, 2011, petitioner filed a Manifestation9 stating that she is adopti n g the subject Petition for Review filed on September 20, 2011 as her Memorandum in this case. Respondent SLMCI timely filed its Memorandum lO on December 29, 2011.

Considering the

Manifestation of petitioner and the Memorandum of responde nt, the instant Petition for Review was submitted for decision on January 18, 2012.

THE ISSUE/S

Petitioner interposed the following sole issue: "WHETHER OR NOT THE SECOND DIVISION OF THE

HONORABLE

COURT

ERRED

IN

RULING

THAT

RESPONDENT IS NOT SUBJECT TO TEN PERCENT

(10%) INCOME TAX UNDER SECTION 27 (B) OF THE

NATIONAL INTERNAL REVENUE CODE OF 1997 (NIRC

OF 1997)."

Arguments of Petitionerll

Petitioner emphasizes that Section 27 (B) of the NIRC of 1997 imposes on non -profit hospitals a tax of 10% on their taxable income; this new prov1s1on was unmistakably intended to amend the exemption on non -profit hospitals that were previously categorized as~

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue vs. St. Luke 's Medical Center, Inc.

non-stock, non-profit corporations under Section 26 of the NIRC of 1977, as a m ended.

Further, petitioner argues tha t the above- me ntioned proviSIOn should be distinguished from Section 30 (E) of the NIRC of 1997; the ba sic difference between Section 27 (B) and Section 30 (E) is tha t the former pa rticula rly mentions "proprieta ry hospita ls which a re non - profi t", while the !a lter ge nera lly enumera tes non -stock corpora tions organized a nd opera ted exclusively, a mong other things, for cha rita ble purposes; it does not necessa rily follow that when a hospita l is non- stock, non-profit a nd operated exclusively for cha rita ble purpose, it fa lls within the purview of Section 30 (E) of the NIRC of 1997; where there is a pa rticula r or specia l provision a nd a genera l provision in the sam e sta tute a nd the la tter in its most comprehensive sense would overrule the forme r, the pa rticula r or specia l provision must be opera tive a nd the genera l provision must be ta ken to a ffect only the other pa rts of the sta tute to which it may properly a pply . Also, petitioner ma inta ins tha t: respondent is not opera ting purely for cha rita ble a nd socia l welfa re purposes ; respondent's opera tions indicate tha t it is esta blished for profit a nd not solely for cha ritable or soc ia l welfa re purposes a s only 13% of its opera tions for 1998 were a lloca ted to cha rita ble purposes; respondent's witness Atty. Alfonso Ancheta categorica lly a nswered on cross-exa mination tha t only 10% of the opera tions of the hospita l is a llocated for cha rita ble purposes . V

CTA EB No. 823 (CTA Case No. 7857) Commissioner oflntemal Revenue us. St. Luke's Medical Center, Inc.

Lastly, petitioner submits that a ll presumptions are in favor of the correctness of tax assessments; a nd failure lo present proof of error in the assessment will justify judicia l a ffirmation of said assessment.

Arguments of Respondentl2

Respondent SLMCI opposes petitione r's a llegations a nd posits that petitioner erroneously concluded that respondent is a proprietary non-profit hos pi tal which is taxable under Section 27 (B) of the NIRC of 1997.

Responde n l ma in lai ns that: Section 27 (B) of the Nl RC of 1997 imposes a 10% income lax on non -profit hospita ls lhal are proprietary, but said provision does nol stale that the 10% income tax is imposed on non -stock, non -profit hospita ls; non-stock, non -profit hospitals organized and operated as cha ritable a nd social welfa re institutions are still exempt from income tax pursua nt to Section 30 (E) a nd (G) of the NIRC of 1997; the legislative intent was to remove the tax exemption only of proprietary non-profit hospita ls is evident from a comparison of Section 26 (e) of the 1977 NIRC and Section 30 (E) of the NIRC of 1997; Section 26 (c) of th e 1977 NIRC speaks of "corporation or association" in gene ra l terms inte nded to a pply lo both stock a nd non -stock corporations or associations that a re non -profi t; when said section was re-enacted as Sec lion 30 (E) of the Nl RC of 1997, the exemption from lax was no longer extended lo a ny non - profit corporation or associatio n , the exemption from income tax V

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us. St. Luke's Medical Center, Inc.

under Section 30 (E) of the NIRC of 1997 is now limited to non-stock corpora Lions Lhat are non -profit; a nd LhaL pe LiLioners insistence that respondent is Laxable under Section 27 (B) of the NIRC of 1997 would therefore expand the coverage of the provision beyond what the law clearly a nd expressly slates, i.e. , that only proprietary, non-profit hospita ls a re subject to the 10% income Lax. Furthe r, respondent avers that this Court has already ruled in cases involving Lhe sa m e issue Lhal respondenl is not a proprietary, non -profit hospila l Laxable under Section 27 (B) of the NlRC of 1997, but is a non-sloc k, non -profiL corporation organized for cha ritable a nd social welfare purposes that is exempl from income Lax under Section 30 (E) a nd (G) of the NIRC of 1997.

F'or its fina l point, respondent argues Lhal it has shown by overwhelming pre pondera nce of evidence thal iL is a charitable a nd social welfare institution , a nd thal no pa rt of its income or assets belong or inure Lo a ny member, organ izer, officer, Lrustee or a ny specific person .

Respondenl contends that the transcript of slenographic noles of the testimony of Alty. Ancheta will readily show that what he actually said was that "al least" 10% of respondent's operations a re a lloca led to charitable purposes; that the Lestimony of Alty . Anchela was not given in the insla nt case but in a nother case docketed as CTA Ca se No. 6993 involving the same pa rties but of a different taxa ble year. V

CT/\ EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.

THE RULING OF THE COURT EN BANC

In this case, petitioner contends that respondent SLMCI , a s a proprietary non-profit hospita l, is lia ble to pay the income tax ra te of 10% on its taxable income under Section 27 (B) of the NIRC of 1997; a nd a rgu es that this new provision was unmista ka bly inte nded to a mend the exemption that non-profit hospita ls previously e njoyed as non -s toc k, non -profit corpora tions under Section 26 of the NIRC of 1977, a s a m e nded .

Section 27 (B) of the NIRC of 1997 sla tes tha t: "SEC. 27. Ra tes of Income Tax on Domestic Corpora tion s.-

XXX

XXX

XXX

"(B) Proprietary Ed u cational Ins titutions and Hospitals. - Proprietary educa tional institutions and hospitals which are non-profit shall pay a tax of ten percent ( 10%) on their taxable income except those covered

by Subsection

(D)

hereof:

Provided , That if the gross income from unrela ted trade, business or other a ctivity exceeds fifty percent (50%) of the total gross income derived by su ch edu cational institutions or hospitals from all sources , the lax prescribed in Subsection (A) hereof sha ll be imposed on the entire taxable income. For purposes of this Subsection , the term 'unrelated trade, business or other activity' m eans any tra de, bu s iness or other activity, the condu ct of which is not substan tially rela ted to the exercise or performance by su ch educational institution or hospital of its prima ry purpose or function . A 'proprietary educational institution' is any privat e school m aintain ed and adminis tered by private individu als or groups with an issu ed permit to ope ra te from the Department of Education , Culture and Sports (DECS) , or the Commission on High er Education (CHED) , or the Technical Education and Skills Development Authority (TESDA) , a s th e case may be, in a ccordance with existing laws a nd regula tions." (Underscoring supplied) Respondent, on the other ha nd , cla ims tha t it is a non-stock, non -profit corporation orga nized for cha rita ble a nd socia l welfa re purposes tha t is exempt from income lax unde r Section 30 (E) a nd (G) ~ CTJ\ El3 No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us. St. Luke 's Medical Center, Inc.

of the NIRC of 1997; and contents that Section 27 (B) of the NIRC of 1997 imposes a 10% income tax on non -profit hospita ls tha t a re proprietary, bul said provision does not sta le tha t the 10% income tax is imposed on non-stock, non-profit hospita ls like SLMCI. Pertinent portions of Section 30 (E) a nd (G) of the NIRC of 1997 provide:

"SEC. 30. Exemptions from Tax on Corporations. - The following organiza tions shall nol be taxed under this Title in respect to income received by them as such :

Xxx

"(E) Nonstock corporation or associa tion organized and operated exclusively for religious, charitable , scientific, athletic, or cultural purposes , or for the reha bilita tion of vetera ns, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person;

XXX

"(G) Civic leagu e or organization not organized for profit but opera ted exclusively for the promotion of socia l welfare;

XXX

"Notwithstanding the prov1s1ons in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from a ny of their properties , real or personal , or from any of their activities conducted for profit regardless of the disposition made of such income , shall be subject to tax imposed under this Code." (Emphasis supplied) Afte r due considera tion of the a rguments of both pa rties, the laws a nd recent jurisprude nce releva n t lo the ca se a l ba r, We a re inclined to pa rtia lly grant lhe Petition for Review of the Commissioner of BIR. V

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us. St. Luke's Medical Center, Inc.

In the disposi tion of this present controversy, a pa rt from the express provisions of Section 27 (B) a nd Section 30 (E) a nd (G) of the NIRC of 1997, a s a mended , the Court En Bane ta kes its bearing from the recent pronouncement of the Supre me Court in the ca se of Commissioner of Internal Revenue us. St. Luke's Medical Center, Inc., 13 -- consid e ring tha t "JtJhc Supreme Court by tradition a nd in our syste m of judic ia l administra tion , ha s the la st word on wha t the law is ; it is the fin a l a rbi ter of a ny justifia ble controve rsy"1 4 . In the said case, the High Court cla rified th e linge ring issues / questions, z. e., 1ss u es as to the imposition of the income tax ra te of 10% on the taxa ble incom e of proprieta ry non -profit hospita ls unde r Section 27 (B) ; the income ta x exemptions of proprietary non -profit hos pitals unde r Section 30 (E) a nd (G) of the NIRC of 1997, a s a m e nded ; a nd the questions a s to wh en a proprieta ry non -profit hospi tal subject to the income tax ra te of 10% on its taxable income?; a nd when is it considered exempt from income tax?

Firs t, the Suprem e Court described the rate of tax imposed under Section 2 7 (B), the qua lifications of hospita ls in order for the sa id ra te to a pply, the effect of the introduction of the a foresa id section , a nd likewise expla ined tha t Section 27 (B) a nd Section 30 (E) a nd (G) of the NIRC of 1997 can be construed together withou t the re mova l of s uc h tax exe mption unde r the la tte r provis ion, z. e., a proprie ta ry non-profi t hospita l whose income from activities /r 13 G. !~. No. 195909 a nd 195960, September 26, 201 2.

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us . St. Luke's Medical Center, Inc.

conducted for profit is subjected to the 10% tax ra te unde r Section 27 (B) may still re ta in its lax exempt sta tus under Section 30 (E) a nd (G) for its not-for-profit activities, thus: "The Court parlly gra nts the petition of the SIR but on a different ground . We hold that Section 27(8) of the NIRC does not remove the income lax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(8) on one hand , a nd Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption. The effect of the introdu ction of Section 27(8) is to subject the taxable income of two specific institutions, namely, proprietary non-profit educa tional institutions a nd proprietary non-profit hospita ls, among the institutions covered by Section 30 , to the 10% pre ferential ra te under Section 27(8) instead of the ordina ry 30% corpora te ra te under the last paragra ph of Section 30 in rela tion to Section 27(A) ( 1). "Section 27(8) of the NIRC imposes a 10% preferential tax ra te on the income of ( 1) proprietary non-profit educational institu Lions and (2 ) proprietary non -profit hospitals. The only qualifications for hospitals are tha t they must be proprietary and non-profit. "Proprietary" means private , following the de fini tion of a "proprieta ry edu cational institution" a s "any private school m a inta ined and a dministered by private individu a ls or groups" with a government permit. "Non-profit" m eans no net income or a sset a ccru es to or benefits any m ember or specific person , with all the n et income or a sset devoted to the institution's purposes and all its activities ." (Underscoring s upplied) Second, the High Court discussed Section 30 (E) a nd (G) of the NIRC of 1997, a s a mended , (the provision under which the respondent SLMCI is claiming income tax exemption) by enume ra ting the essentia l requisites in orde r for the income received by a cha rita ble corpora tion or associa tion lo be considered exempt from income tax. The discussion highlights the High Court's pronouncem ent tha t "[tjo be exempt from income taxes, Section 30(£) of the NIRC requires that a charitable institution must be "organized and operated exclusively"~

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us. St. Luke's Medical Center, Inc.

for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NJRC requires that the institution be operated exclusively" for social welfare." viz:

"Section 30(E) of the NIRC provides lhal a charitable institution must be:

( l) A non -stock corporation or association;

(2) Organized exclusively for charitable purposes; (3) Operated exclusively for charitable purposes; and (4) No part of its net income or asset shall belong to or inure to lhe benefit of any member, organizer, officer or any specific person.

"Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for charitable purposes. The organization of the institution refers lo its corporate form, as shown by its articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC specifical ly requires that the corporation or association be non-stock, which is defined by the Corporation Code as "one where no part of its income is distributable as dividends lo its members, trustees, or officers" and that any profit "obtainledl as an incident lo its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized."

However, under Lung Center, any profit by a charitable institution must nol only be plowed back "whenever necessary or proper," but must be "devoted or used altogether lo the charitable object which it is intended to achieve."

"The operations of the charitable institution general ly refer lo ils regular activities. Section 30(E) of the NlRC requires that these operations be exclusive lo charily. There is also a specific requirement lhal "no part of llhel nel income or asset shall belong lo or inure lo the benefit of any member, organizer, officer or any specific person." The use of lands, buildings and improvements of the institution is but a part of its operations.

"There is no dispute lhal Sl. Luke's is organized as a non-stock and non-profit charitable institution. However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of charily, a charitable institution is not ioso [acto tax exempt. To be exempt from real property taxes, Section 28(3) , Article VI of the Constitution requires that a ~ CTA EB No. 823 (CTA Case No. 7857) Commissioner oflntemal Revenue us . St. Luke's Medical Center, Inc.

charita ble institution use the property "actually, directly and exclusively" for charita ble purposes.

To be exempt from income taxes , Section 30(E) of the NIRC requires that a charita ble institution must be "organized and operated exclusively" for ch a rita ble purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires tha t the institution be opera ted exclusively" for socia l welfare." Following the foregoing discussion, the Suprem e Court keenly s teered th e discussion to the last pa ragra ph of Section 30 of the NIRC a nd stressed its poin t that this last pa ragra ph qua lifies the words "organized a nd ope rated exclusively" by providing tha t "income of whatever kind and character of the foregoing organizations xxx xxx from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code." Simply put, eve n if the cha rita ble institution must be "organized and operated exclusively" for cha rita ble purposes , it is still a llowed to e ngage in "activities conducted for profit" wi thout losing its lax exempt sta tus for its not-for-profit activities. The only consequence is tha t the "income of whatever kind and character" of a cha rita ble institution "from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax. ", viz:

"However, the last pa ragra ph of Section 30 of the NIRC qualifies the words "organized and opera ted exclusively" Qy providing tha t: Notwithsta nding the provisions in the preceding paragra phs, the income of wha tever kind and character of the foregoing organizations from any of their properties , real or personal , or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.

"In short, the last pa ragra ph of Section 30 provides tha t if a lax exempt charita ble institution conducts "any" activity for profit, such activity is not lax exempt even a s its not-for- ~ CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us. St. Luke's Medical Center, Inc.

profit activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the "Inion-stock corporation or a ssociation !must bel organized and operated exclusively for x x x charitable x x x purposes x x x." It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated exclusively" for the promotion of social welfare.

"Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its not-for-profit activities. The only consequence is that the "income of whatever kind and character" of a charitable institution "from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax." Prior to the introduction of Section 27(8) , the tax ra te on such income from for-profit activities was the ordinary corpora te rate under Section 27(A). With the introduction of Section 27(8) , the lax ra te is now 10%." (Underscoring supplied) Finally, consiste nt with the a bove-discussion, the Supreme Court ruled tha t St. Luke's is a corporation that is not "operated exclusively" for charitable or social w e lfare purposes insofar as its revenues from paying patie nts a re concerned. The Supre m e Court d eclared that the Pl. 73 billion from paying patie nts are mcome received from "activities conducted for profit". The Supre m e Court expla ined, thus:

"In 1998, St. Luke's had total revenues of PI ,730 ,367,965 from services to paying patients. It cannot be disputed that a hospita l which receives approximately P1 .73 billion from paying patients is not an institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are income received from "activities conducted for profit." xxx.

XXX

XXX

XXX

"In Lung Center, this Court declared :

"lelxclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as en joying a privilege exclusively." x x x ~

DECISION

CTA EB No. 8 23 (CTA Ca se No. 7857) Commissioner of Internal Revenue us. St. Luke's Medical Center, Inc. The words "domina nt use" or "principa l use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution a nd the la w. Solely is synonymous with exclusively.

Page 20 of 28

"The Court cannot expand the meaning of the words "opera ted exclusively" without violating the NIRC. Services to paying patients are activities conducted for profit. They cannot be considered any other way. There is a "purpose to make profit over and above the cost" of services. The Pl.73 bi llion total revenu es from paying pa tients is not even incidental to St. Luke's charity expenditure of P2 18, 187,498 for non-paying patients.

"St. Luke's claims th a t its charity expenditure of P2 18, 187,498 is 65.20% of its opera ting income in 1998. However , if a part of the remaining 34.80% of the opera ting income is reinvested in property, equipment or facilities used for services to paying and non-paying patients, then it cannot be sa id tha t the income is "devoted or used altogether to the charitable object which it is intended to achieve. " The income is plowed back to the corpora tion not entirely for charita ble purposes, but for profit a s well. In any ca se, the last paragraph of Section 30 of the NIRC expressly qualifies that income from activities for profit is taxa ble "regardless of the disposition made of such income ."

XXX

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"The qu estion wa s whether h aving a hospital is essentia l to a n educational institution like the College of Medicine of the University of Sa nto Toma s. Sen a tor Cu enca answered tha t if the hospital h a s pa id rooms genera lly occupied by people of good economic standing, then it should be subject to income lax. He said tha t this wa s one of the reasons Congress inserted the phra se "or a ny activity condu cted for profit." "The question in ,Jesus Sacred H eart College involves a n edu cational institution. However, it is applicable to charita ble institutions because Sena tor Cuenco's response shows an intent to focus on the activities of cha ritable institutions. Activities for profit should not esca pe the rea ch of taxa tion . Being a non-stock and non-profit corporation does not, by this reason a lone, completely exempt an institution from tax. An institution cannot use its corpora te form to prevent its profita ble activities from being taxed .

"The Court finds tha t St. Luke 's is a corpora tion th a t is not "opera ted exclusively" for charitable or social welfare purposes insofar a s its revenues from paying patients are concerned . This ruling is ba sed not on ly on a strict interpreta tion of a provision gra nting lax exemption, but a lso on the clear and pla in text of Section 30(E) a nd (G) . Section 30(E) and (G) of the ~ CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us. St. Luke's Medical Center, Inc.

NIRC requires tha t an institution be "operated exclusively" for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last para gra ph of Section 30, is m erely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% ra te pursua nt to Section 27(8) .

XXX

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"St. Luke's fa ils to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from a ll its income . However, it rem a ins a proprietary non-profit hospita l under Section 27(8) of the NIRC as long as it does not distribute a ny of its profits to its members a nd such profits are reinvested pursua nt to its corporate purposes. St. Luke's, as a. proprieta ry non-profit hospital , is entitled to the preferential tax rate of 10% on its net income from its for-profit activities." (Underscoring supplied) Conspicuously, the present case fits perfectly into the mold of the a bove-quoted case en titled Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., G .R. No.

195909 a nd 195960, September 26, 2 01 2.

The facts in the insta nt case, the issue, a nd laws a pplicable, a nd eve n the pa rties involved a re substantially similar to those of G.R. No. 195909.

Thus, applying the foregoing principles la id down by the Supreme Court in G.R. No. 195909 to the insta nt case, the inescapa ble conclusion is that respondent SLMCI is liable for deficiency income tax in 2007 unde r Section 2 7 (B) of the NIRC of 1997, as a mended .

As cited , be fore a corporation or association may be exempt from income tax under Section 30 (E) and (G) of the NIRC of 1997, as a mended, followin g requisites must be satisfied: ( 1) A non-stock corpora tion or a ssocia tion ; V

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.

(2) Organized exclusively for charitable purposes; (3) Operated exclusively for charitable purposes; and (4) No part of its net income or asset shaJI belong to or inure lo the benefit of any member, organizer, officer or any specific person .

As regards the first, second , a nd fourth requisite, this Court agrees with the Court in Division in finding that respondent SLMCI sufficiently satis fied these requisites.

SLMCI is a non-stock, non - profit corporation organized for charitable and social welfare purposes as indicated in its Ame nded Articles of Incorporation; and on the basis of a judicia l a ffid a vit, wh ich was not con tested by the petitioner, a ttesting that no part of SLMCI's income or net asset inures to the benefit of any trustee , respondent SLMCI is deemed to have satisfied the fourth requisite.

It is the third requisite which respondent SLMCI ulle rly fa iled to satisfy.

In line with the a bove-mentioned jurisprude ntia l precepts enuncia ted in G.R. No. 19590915, and based on the explicit provisions of Section 30 (E) and (G) of the NIRC of 1997, as a me nded , and a lso on the strict inte rpretation of a provtston granting tax exemption , the Court holds that respondent SLMCI is not "operated exclusively" for cha rita ble or social welfare purposes insofar as its revenues from paying patients are concerned.

The Supreme Court expressed that '"Services to paying pa tients are activities conducted for profit. They~ 1" Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., G.R. No. 195909 and 195960, September 26, 20 12.

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.

cannot be considered any other way. There is a "purpose to make profit ove r and above the cost" of services."' Records show that respondent SLMCI declared the amount of P4,680,298,23 1 as "Revenue from Se rvices to Patients", the expenditure of P511 ,843,073 as "Free Services", a nd the a mount of P753, 166,4 77 as "Excess of Revenue Ove r Expenses". The contrasting differe nce between the sizeable a mount of revenues received by SLMCI from paying pa tients of approximately P4.6 billion a nd the a mount a llotted by SLMCI to "Free Services" which is roughly PS . 1 million , further buttress the findin g that respondent SLMCI is not a n institution "operated exclusively" for charitable purposes.

The Supreme Court stressed in G. R. No. 19590916 that the operations of the cha ritable institution genera lly refe r to its regula r activities a nd Section 30 (E) requires th a t these operations be exclusive to cha rity. In the case of Lung Center of the Philippines us. Quezon City 17, the Supreme Court expounded on the meaning of exclusive: "[elxclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participa tion or enjoym ent; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution and the law. Solely is synonymous with exclusively. Hence, if a pa rt of the remaining P7.5 million ("Excess of Revenue Over Expenses") '"is reinvested in property, equipment, or fr. 16 Supra, Note 15.

17 G . l~ . No. 144104, June 29, 2004.

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.

facilities used for services to paying and non-paying patients, then it cannot be said that the income is "devoted or used altogether to the charitable object which it is intended to achieve". The .

.

mcome IS plowed back to the corporation not entirely for charitable purposes, but for profit as weii."'I8 In support of the above finding, We reite rate the ratiocination of the Supreme Court in G .R. No. 19590919:

"In 1998, St. Luke's had total revenues of Pl,730,367,965 from services to paying patients. It cannot be disputed that a hospital which receives approximately Pl. 73 billion from paying patients is not an institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are income received from "activities conducted for profit." xxx.

XXX

XXX

XXX

"In Lung Center, this Court declared :

:J.elxclusivc" is defined as possessed and enjoyed to the exclusion of others; debarred from pa rticipation or enjoyment; and "exclusively" is defined , "in a ma nner to exclude; a s enjoying a privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution and the law. Solely is synonymous with exclusively.

"The Court cannot expand the meaning of the words "operated exclusively" without violating the NJRC. Services to paying patients are activities conducted for profit. They cannot be considered any other way. There is a "purpose to make profit over and above the cost" of services. The P1.73 billion tolaJ revenues from paying patients is not even incidenlaJ to St. Luke's charity expenditure of P218, 187,498 for non-paying patients.

"Sl. Luke's claims tha t its charily expenditure of P2 18,187,498 is 65.20% of its operating income in 1998. However, if a part of the remaining 34.80% of the operating income is reinvested in prope rty, equipment or facilities used for services to paying V 18 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., G.R. No. 195909 a nd 195960, September 26, 20 12 citing Lung Center of the Philippines vs. Quezon City, G.R. No. 144104, June 29, 2004. 19 Supra, Note 15.

CTA EB No. 823 (CT/\ Case No. 7857) Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.

and non-paying patients, then it cannot be said that the income is "devoted or used altogether to the charitable object which it is intended to achieve." The income is plowed back to the corporation not entirely for charitable purposes, but for profit a s well . In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that income from activities for profit is taxable "regardless of the disposition made of such income."

XXX

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xxx'' Nevertheless , even if this Court rules thal respondent is a n institution "operated exclusively" for charitable purpose, respondent may still be held liable for deficiency income tax under of the last pa ragraph of Section 30 of the NIRC of 1997, a s a m ended. The last pa ragra ph of Section 30 provides lhal if an institution, considered a s tax exempt under Section 30 (E) and (G), conducts "any" activity for profit, lhe income from such activity is not lax exempt rega rdless of the disposition ma de of such income and even as its not-for-profit activities rema in tax exempt.

It bears to stress, howeve r, that "[a ]n institution unde r Section 30(E) or (G) does nol lose ils tax exemption if il earns income from its for-profit activities. Such income from for- profit activities, under the lasl pa ragraph of Section 30, is merely s ubject lo income lax, previously a t the ordina ry corpora te ra le but now a l the pre ferentia l 10% ra le pursuant lo Section 27(8)."20 As h eld by lhe Supreme Court, "revenues from paying pa tients a rc m come received from "activities conducted for profit."2L Thus, in this case, a lbeit we consider respondent SLMCI an institution (r, 2o Supra, Note 15.

2 1 Supra.

CTA EB No. 823 (CTA Case No. 7857) Commissioner of internal Revenue vs. St. Luke's Medical Center, Inc.

"operated exclusive ly" for charitable purposes, its revenues received from paying patients a re regarded as income from "activities conducted for profit" a nd therefore subject to tax under the Tax Code regardless of the disposition made of such income. "Prior lo the introduction of Section 27(8), the tax rate on such income from for- profit activities was the ordinary corporate ra te under Section 27(A). Wi th the introduction of Section 27(8), the lax ra te is now 1 0%."22 Respondent fa iled to meet a ll the requirements unde r Section 30 (E) a nd (G) of the NIRC of 1997, as a mended, to be completely tax exempt from a ll its income. Nonetheless, considering that it rem a ins a proprieta ry non -profit hospita l under Section 27 (B) of the NIRC of 1997 as long as it docs not distribute a ny of its profits lo its members a nd such profits a re reinvested pursua nt lo its corpora te purposes, respondent SLMCI is entitled lo the pre fere ntia l tax rate of 10% on its net income from its "activities conducted for profit". 23 Finally, as regards the interest a nd surcharges, the Court finds that respondent SLMCI has adequate reasons to rely on the letter dated June 6, 1990 by the BlR, which declared that respondent is "a corpora tion for purely c ha ritable a nd social welfa re purposes". Hence, there is sufficient justification lo delete the imposition of surcharges and interest. This is in keeping with the ruling of the Supreme Court in G. R. No. 19590924 , viz: ~ 22 Supra, Note 15.

23 Supra.

24 Supra.

CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us. St. Luke's Medical Center, Inc.

"St. Luke's is therefore lia ble for deficiency income tax in 1998 under Section 27(8) of the NIRC. However, St. Luke's has good reasons to rely on the letter da ted 6 June l 990 by the SIR, which opined that St. Luke 's is "a corporation for purely charitable and sociaJ welfare purposes" and thus exempt from income lax.

In Michael J

Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that "good faith and honest belief that one is not subject lo tax on the basis of previous interpretation of government agencies tasked to implement the lax law, are sufficient justifica tion to delete the imposition of surcharges and interest."

WHEREFORE, prem1ses considered, the Petition for Review is hereby PARTIALLY GRANTED. The Decision of the Second Division of this Court dated clune 3, 2011 a nd its Resolution dated August 23, 2011 in CTA Case No. 7857 a re MODIFIED. Rcsponden t St. Luke's Medica l Cente r, Inc. is ORDERED TO PAY the d eficie ncy income tax in 2007 ba sed on th e 10% prefere ntia l income tax rate und er Section 27(8) of the NIRC of 1997, as a me nded. However, it is not liable for surcharges a nd inte rest on such deficiency income tax under Sections 248 a nd 249 of the NIRC of 1997, as a mend ed .

WE CONCUR:

~~-/-~~ AMELIA R. COTANGCO-MANALASTAS

Associate Justice

~~ It · \J....,A..-- ERNESTO D. ACOSTA

Presiding Justice

Q~1' c. Q:t--~ .0.

JUANITO c. CASTANED.( JR.

L

Associate Justice

CTA EB No. 82 3 (CTA Case No. 7857) Commissioner of Internal Re venue us. St. Luke's Medical Center, Inc.

~ t E~P.UY

Associate Justice

CAESAR A. CASANOVA

(On Leave)

OLGA PALANCA-ENRIQUEZ

Associate ,Justice

ESPE

W,lzt N. M~~ C~ CIELITO N. MINDARO-GRULLA Associa te Justice

CERTIFICATION

Pursua n t to Section 13 , Article VIII of the Constitution , it is hereby certified tha t the conclusions in the a bove Decision were reached in consultation with the membe rs of the Court En Bane before the ca se wa s a ssigned to the writer of the opinion of the Court. ~/iJ;.. 0 -.J\-- ERNESTO D. ACOSTA

Presiding Justice