Commissioner of Internal Revenue vs. St. Luke's
Medical Center, Inc.
G.R. No. 195909 September 26, 2012
In a
nutshell:
St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital organized
as a non-stock and non-profit corporation. St. Luke’s accepts both paying and
non-paying patients. With respect to its non-paying patients, St. Luke’s
is exempted from income tax pursuant to Sec. 30 (E) and (G) of the NIRC for
being a non-stock corporation or organization operated exclusively for
charitable or social welfare purposes. Accepting paying patients does not destroy
the exemption of St. Luke’s under Sec. 30 of the NIRC. Instead, the last
paragraph of Sec. 30 of the NIRC provides that St. Luke’s activities conducted for profit, regardless
of the disposition of such income, shall be subject to tax imposed under this
Code.
What is the income tax rate to be applied
to St. Luke’s activities conducted for profit? With respect to its paying patients, St. Luke’s is subject to the 10% preferential tax rate of
proprietary non-profit hospitals under Section 27(B).
Relevant
Sections:
Before discussing the
case, let us take a look at the relevant sections of the law in question.
Section 27(B) of the National Internal Revenue
Code (NIRC) states:
(B)
Proprietary Educational Institutions and Hospitals. ̶ Proprietary
educational 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 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
institution or hospital of its primary 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 Commission on Higher Education (CHED), or the Technical Education and
Skills Development Authority (TESDA), as the case may be, in accordance with
existing laws and regulations. (Emphasis supplied)
In comparison, Section 30(E) and Section
30(G) state:
Sec. 30.
Exemptions from Tax on Corporations. – The following organizations shall not be
taxed under this Title in respect to
income received by them as such:
x
x x x
(E) Nonstock corporation or association organized and operated exclusively
for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific person;
x
x x x
(G)
Civic League or organization not organized for profit but operated exclusively for the promotion of social welfare
x
x x x
Notwithstanding
the provisions in the preceding paragraphs, the income of whatever 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 of such
income, shall be subject to tax imposed under this Code.
(Emphasis supplied)
CASE DIGEST
Facts:
St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital organized
as a non-stock and non-profit corporation.
The BIR assessed St. Luke’s deficiency taxes for 1998 comprised of
deficiency income tax, value-added tax, and withholding tax. The BIR claimed
that St. Luke’s should be liable for income tax at a preferential rate of 10%
as provided for by Section 27(B). Further, the BIR claimed that St. Luke’s was
actually operating for profit in 1998 because only 13% of its revenues
came from charitable purposes. Moreover,
the hospital’s board of trustees, officers and employees directly benefit from
its profits and
assets.
On the other hand, St. Luke’s maintained that it is a non-stock and
non-profit institution for charitable and social welfare purposes exempt from
income tax under Section 30(E) and (G) of the NIRC. It argued that the making
of profit per se does not destroy its income tax exemption.
Issue:
The sole issue is whether St. Luke’s
is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC,
which imposes a preferential tax rate of 10^ on the income of proprietary
non-profit hospitals.
Ruling:
Section 27(B) of the NIRC does not
remove the income tax exemption of proprietary non-profit hospitals under Section
30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other
hand, can be
construed together without the
removal of such
tax exemption.
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the
income of (1)
proprietary non-profit educational
institutions and (2)
proprietary non-profit hospitals. The only qualifications for hospitals
are that they must be proprietary and non-profit. “Proprietary” means private, following the definition of a
“proprietary educational institution” as “any private school
maintained and administered
by private individuals or groups”
with a government permit. “Non-profit”
means no net income or asset accrues to or benefits any member or specific
person, with all the net income or asset devoted to the institution’s purposes
and all its activities conducted not for profit.
“Non-profit” does not necessarily mean “charitable.”
In Collector of Internal Revenue v. Club
Filipino Inc. de Cebu, this Court considered as non-profit a sports club
organized for recreation and entertainment of its stockholders and members. The
club was primarily funded by membership fees and dues. If it had profits, they
were used for overhead expenses and improving its golf course. The club was non-profit
because of its purpose and there was
no evidence that
it was engaged in
a profit-making enterprise.
The sports club in Club
Filipino Inc. de Cebu may be non-profit, but it was not charitable.
The Court defined
“charity” in Lung Center
of the Philippines v. Quezon
City as “a gift,
to be applied
consistently with existing laws,
for the benefit of an indefinite number of persons, either by bringing their
minds and hearts under the influence of education or religion, by assisting
them to establish themselves in life or [by] otherwise lessening the burden
of government.” However, despite
its being a tax exempt institution, any income such institution earns from activities
conducted for profit is taxable, as expressly provided in the last paragraph of
Sec. 30.
To be a charitable institution, however, an organization must meet
the substantive test of
charity in Lung Center.
The issue in Lung
Center concerns exemption from real property tax and not income tax.
However, it provides for the test of charity in our jurisdiction. Charity is
essentially a gift to an indefinite number of persons which lessens the burden
of government. In other
words, charitable institutions
provide for free
goods and services to the public
which would otherwise fall on the shoulders of government. Thus, as a
matter of efficiency, the government forgoes taxes which should
have been spent
to address public
needs, because certain private entities already assume a
part of the burden. This is the rationale for the tax
exemption of charitable
institutions. The loss
of taxes by the
government is compensated by its relief from doing public works which would
have been funded by appropriations from the Treasury
The Constitution
exempts charitable institutions only
from real property taxes. In the NIRC, Congress decided to extend the
exemption to income taxes. However, the way Congress crafted Section 30(E) of
the NIRC is materially different from Section 28(3), Article VI of the Constitution. (Emphasis supplied)
Section 30(E) of the NIRC defines the corporation or association
that is exempt from income tax. On the other hand, Section 28(3), Article VI of
the Constitution does not define a charitable institution, but requires that
the institution “actually, directly and exclusively” use the property
for a charitable purpose. (Emphasis supplied)
To be exempt from real
property taxes, Section 28(3), Article VI of the Constitution requires
that a charitable institution use the property “actually, directly and
exclusively” for charitable purposes. (Emphasis supplied)
To be exempt from income
taxes, Section 30(E) of the NIRC requires that a charitable
institution must be “organized and
operated exclusively” for charitable purposes. Likewise, to be exempt from income taxes,
Section 30(G) of the NIRC requires that the institution be “operated
exclusively” for social welfare. (Emphasis supplied)
However, the last paragraph of Section 30 of the NIRC qualifies the words
“organized and operated exclusively” by providing that:
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever 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. (Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax
exempt charitable institution conducts “any” activity for profit, such activity
is not tax exempt even
as its not-for-profit activities remain
tax exempt.
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(B), the tax rate on such income
from for-profit activities was the ordinary corporate rate under Section
27(A). With the introduction of Section
27(B), the tax rate is now 10%. (Emphasis supplied)
The Court finds that St. Luke’s is a corporation that is not
“operated exclusively” for charitable or social welfare purposes insofar as
its revenues from paying patients are concerned. This ruling is based not
only on a strict interpretation of a provision granting tax exemption, but also
on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of
the NIRC requires that 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
paragraph of Section 30, is merely subject to income tax, previously at the
ordinary corporate rate but now at
the preferential 10% rate pursuant to Section 27(B). (Emphasis supplied)
St. Luke’s fails to meet the requirements under Section 30(E) and
(G) of the NIRC to be completely tax exempt from all its income.
However, it remains a proprietary non-profit hospital under Section 27(B) of
the NIRC as long as it does not distribute any of its profits to its members
and such profits are reinvested pursuant to its corporate purposes. St. Luke’s,
as a proprietary non-profit hospital, is entitled to the preferential tax rate
of 10% on its net income from its for-profit activities.
St. Luke’s is therefore liable for deficiency income tax in 1998
under Section 27(B) of the NIRC. However, St. Luke’s has good reasons to rely
on the letter dated 6 June 1990 by the BIR, which opined that St. Luke’s is “a corporation
for purely charitable and social welfare purposes” and thus exempt from income
tax.
In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the
Court said that “good faith and honest belief that one is not subject to tax on
the basis of previous interpretation of government agencies tasked to implement
the tax law, are sufficient justification to delete the imposition of
surcharges and interest.”
WHEREFORE, St. Luke’s Medical
Center, Inc. is ORDERED TO
PAY the deficiency
income tax in 1998
based on the 10%
preferential income tax rate under Section 27(8) of the National Internal Revenue Code. However, it
is not liable for surcharges
and interest on
such deficiency income
tax under Sections
248 and 249 of
the National Internal
Revenue Code. All
other parts of the
Decision and Resolution of the
Court of Tax Appeals are AFFIRMED.
