Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.

G.R. No. 195909. September 26, 2012.* 67

COMMISSIONER OF INTERNAL
VOL. 682, SEPTEMBER 26, 2012
REVENUE, petitioner, vs. ST. LUKE’S
MEDICAL CENTER, INC., respondent.
Commissioner of Internal Revenue vs. St. Luke's M
G.R. No. 195960. September 26, 2012.* Center, Inc.
ST. LUKE’S MEDICAL CENTER, INC., come or asset accrues to or benefits any
petitioner, vs.COMMISSIONER OF member or specific person, with all the net
INTERNAL REVENUE, respondent. income or asset devoted to the institution’s
purposes and all its activities conducted not for
Taxation; Tax Exemptions; The Supreme profit.
Court holds that Section 27(B) of the National Same; “Non-profit” does not necessarily
Internal Revenue Code (NIRC) does not remove mean “charitable.”―“Non-profit” does not
the income tax exemption of proprietary non- necessarily mean “charitable.” In Collector of
profit hospitals under Section 30(E) and Internal Revenue v. Club Filipino Inc. de Cebu, 5
(G).―The Court partly grants the petition of the SCRA 321 (1962), this Court considered as non-
BIR but on a different ground. We hold that profit a sports club organized for recreation and
Section 27(B) of the NIRC does not remove the entertainment of its stockholders and members.
income tax exemption of proprietary non-profit The club was primarily funded by membership
hospitals under Section 30(E) and (G). Section fees and dues. If it had profits, they were used for
27(B) on one hand, and Section 30(E) and (G) on overhead expenses and improving its golf course.
the other hand, can be construed together The club was non-profit because of its purpose
without the removal of such tax exemption. The and there was no evidence that it was engaged in
effect of the introduction of Section 27(B) is to a profit-making enterprise.
subject the taxable income of two specific Same; Tax Exemptions; Charity is
institutions, namely, proprietary non-profit essentially a gift to an indefinite number of
educational institutions and proprietary non- persons which lessens the burden of government.
profit hospitals, among the institutions covered In other words, charitable institutions provide for
by Section 30, to the 10% preferential rate under free goods and services to the public which would
Section 27(B) instead of the ordinary 30% otherwise fall on the shoulders of government;
corporate rate under the last paragraph of The government forgoes taxes which should have
Section 30 in relation to Section 27(A)(1). been spent to address public needs, because
Same; Preferential Tax Rate; Section 27(B) certain private entities already assume a part of
of the National Internal Revenue Code (NIRC) the burden.―To be a charitable institution,
imposes a 10% preferential tax rate on the income however, an organization must meet the
of (1) proprietary non-profit educational substantive test of charity in Lung Center of the
institutions and (2) proprietary non-profit Philippines vs. Quezon City, 433 SCRA 119
hospitals.―Section 27(B) of the NIRC imposes a (2004). The issue in Lung Center concerns
10% preferential tax rate on the income of (1) exemption from real property tax and not income
proprietary non-profit educational institutions tax. However, it provides for the test of charity in
and (2) proprietary non-profit hospitals. The only our jurisdiction. Charity is essentially a gift to an
qualifications for hospitals are that they must be indefinite number of persons which lessens the
proprietary and non-profit. “Proprietary” burden of government. In other words,
means private, following the definition of a charitable institutions provide for free
“proprietary educational institution” as “any goods and services to the public which
private school maintained and administered would otherwise fall on the shoulders of
by private individuals or groups” with a government. Thus, as a matter of efficiency, the
government permit. “Non-profit” means no net government forgoes taxes which should have
in- been spent to address public needs, because
_______________ certain private entities already assume a part of
* SECOND DIVISION. the burden. This is the rationale for the tax
exemption of charitable institutions. The loss of
Page 1 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
taxes by the government is compensated by its lot for commercial purposes. The effect of failing
relief from doing public works which would have to meet the use requirement is simply to remove
been funded by appropriations from the from the tax exemption that portion of the
Treasury. property not devoted to charity.
Same; Same; Charitable institutions are not Same; Same; The Constitution exempts
ipso facto entitled to a tax exemption. The charitable institutions only from real property
requirements for a tax exemption are specified by taxes. In the National Internal Revenue Code
the law granting it.―Charitable institutions, (NIRC), Congress decided to extend the exemption
however, are not ipso facto entitled to a tax to income taxes.―The Constitution exempts
exemption. The requirements for charitable institutions only from real property
68 taxes. In the NIRC, Congress decided to extend
the exemption to income taxes. However, the way
6 SUPREME COURT REPORTS ANNOTATED Congress crafted Section 30(E) of the NIRC is
8 materially different from Section 28(3), Article VI
of the Constitution. Section 30(E) of the NIRC
Commissioner of Internal Revenue vs. St. Luke's Medical
Center, Inc. defines the corporation or association that is
a tax exemption are specified by the law exempt from income tax. On the other hand,
granting it. The power of Congress to tax implies Section 28(3), Article VI of the Constitution does
the power to exempt from tax. Congress can not define a charitable institution, but requires
create tax exemptions, subject to the that the institution
69
constitutional provision that “[n]o law granting
any tax exemption shall be passed without the
VOL. 682, SEPTEMBER 26, 2012
concurrence of a majority of all the Members of
Congress.” The requirements for a tax exemption
are strictly construed against the taxpayer Commissioner of Internal Revenue vs. St. Luke's M
because an exemption restricts the collection of Center, Inc.
taxes necessary for the existence of the “actually, directly and exclusively” use the
government. property for a charitable purpose.
Same; Same; Income Taxation; Real Estate Same; Same; Real Estate Taxes; Income
Taxes; For real property taxes, the incidental Taxation; To be exempt from real property taxes,
generation of income is permissible because the Section 28(3), Article VI of the Constitution
test of exemption is the use of the property; The requires that a charitable institution use the
effect of failing to meet the use requirement is property “actually, directly and exclusively” for
simply to remove from the tax exemption that charitable purposes. To be exempt from income
portion of the property not devoted to taxes, Section 30(E) of the National Internal
charity.―For real property taxes, the incidental Revenue Code (NIRC) requires that a charitable
generation of income is permissible because the institution must be “organized and operated
test of exemption is the use of the property. The exclusively” for charitable purposes. Likewise, to
Constitution provides that “[c]haritable be exempt from income taxes, Section 30(G) of the
institutions, churches and personages or National Internal Revenue Code (NIRC) requires
convents appurtenant thereto, mosques, non- that the institution be “operated exclusively” for
profit cemeteries, and all lands, buildings, and social welfare.―There is no dispute that St.
improvements, actually, directly, and exclusively Luke’s is organized as a non-stock and non-profit
used for religious, charitable, or educational charitable institution. However, this does not
purposes shall be exempt from taxation.” The automatically exempt St. Luke’s from paying
test of exemption is not strictly a requirement on taxes. This only refers to the organization of St.
the intrinsic nature or character of the Luke’s. Even if St. Luke’s meets the test of
institution. The test requires that the institution charity, a charitable institution is not ipso facto
use the property in a certain way, i.e. for a tax exempt. To be exempt from real property
charitable purpose. Thus, the Court held that the taxes, Section 28(3), Article VI of the
Lung Center of the Philippines did not lose its Constitution requires that a charitable
charitable character when it used a portion of its institution use the property “actually, directly
Page 2 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
and exclusively” for charitable purposes. To be and (G) of the NIRC requires that an institution
exempt from income taxes, Section 30(E) of the be “operated exclusively” for charitable or
NIRC requires that a charitable institution must social welfare purposes to be completely exempt
be “organized and operated exclusively” for from income tax. An institution under Section
charitable purposes. Likewise, to be exempt from 30(E) or (G) does not lose its tax exemption if it
income taxes, Section 30(G) of the NIRC requires earns income from its for-profit activities. Such
that the institution be “operated exclusively” for income from for-profit activities, under the last
social welfare. paragraph of Section 30, is merely subject to
Same; Same; Even if the charitable income tax, previously at the ordinary corporate
institution must be “organized and operated rate but now at the preferential 10% rate
exclusively” for charitable purposes, it is pursuant to Section 27(B).
nevertheless allowed to engage in “activities Same; Tax Exemptions; A tax exemption is
conducted for profit” without losing its tax exempt effectively a social subsidy granted by the State
status for its not-for-profit activities.―Even if the because an exempt institution is spared from
charitable institution must be “organized and sharing in the expenses of government and yet
operated exclusively” for charitable purposes, it benefits from them.―A tax exemption is
is nevertheless allowed to engage in “activities effectively a social subsidy granted by the State
conducted for profit” without losing its tax because an exempt institution is spared from
exempt status for its not-for-profit activities. The sharing in the expenses of government and yet
only consequence is that the “income of benefits from them. Tax exemptions for
whatever kind and character” of a charitable charitable institutions should therefore be
institution “from any of its activities limited to institutions beneficial to the public and
conducted for profit, regardless of the those which improve social welfare. A profit-
disposition made of such income, shall be making entity should not be allowed to exploit
subject to tax.”Prior to the introduction of this subsidy to the detriment of the government
Section 27(B), the tax rate on such income from and other taxpayers.
for-profit activities was the ordinary corporate
rate under Section 27(A). With the introduction PETITIONS for review on certiorari of the
of Section 27(B), the tax rate is now 10%.70 decision and resolution of the Court of Tax
Appeals.
7 SUPREME COURT REPORTS ANNOTATED The facts are stated in the opinion of the
0 Court.
Commissioner of Internal Revenue vs. St. Luke's MedicalOffice of the Solicitor General for
Center, Inc. petitioner.
Same; Income Taxation; Preferential Tax Quasha, Ancheta, Peña & Nolasco for St.
Rate; The Supreme Court finds that St. Luke’s is Luke’s Medical Center, Inc.
a corporation that is not “operated exclusively” for
charitable or social welfare purposes insofar as 71
its revenues from paying patients are concerned; VOL. 682, SEPTEMBER 26, 2012
Such income from for-profit activities, under the Commissioner of Internal Revenue vs. St. Luke's Med
last paragraph of Section 30, is merely subject to Center, Inc.
income tax, previously at the ordinary corporate CARPIO, J.:
rate but now at the preferential 10% rate
pursuant to Section 27(B).―The Court finds that The Case
St. Luke’s is a corporation that is not“operated
exclusively” for charitable or social welfare These are consolidated1 petitions for
purposes insofar as its revenues from paying
review on certiorariunder Rule 45 of the
patients are concerned. This ruling is based not
only on a strict interpretation of a provision
Rules of Court assailing the Decision of 19
granting tax exemption, but also on the clear and November 2010 of the Court of Tax Appeals
plain text of Section 30(E) and (G). Section 30(E) (CTA) En Banc and its Resolution2 of 1
March 2011 in CTA Case No. 6746. This
Page 3 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
Court resolves this case on a pure question of x x x x3
law, which involves the interpretation of
Section 27(B) vis-à-vis Section 30(E) and (G) On 16 December 2002, the Bureau of
of the National Internal Revenue Code of the Internal Revenue (BIR) assessed St. Luke’s
Philippines (NIRC), on the income tax deficiency taxes amounting to
treatment of proprietary non-profit hospitals. P76,063,116.06 for 1998, comprised of
deficiency income tax, value-added tax,
The Facts withholding tax on compensation and
expanded withholding tax. The BIR reduced
St. Luke’s Medical Center, Inc. (St. the amount to P63,935,351.57 during trial in
Luke’s) is a hospital organized as a non-stock the First Division of the CTA.4
and non-profit corporation. Under its articles On 14 January 2003, St. Luke’s filed an
of incorporation, among its corporate administrative protest with the BIR against
purposes are: the deficiency tax assessments. The BIR did
(a) To establish, equip, operate and maintain a not act on the protest within the 180-day
non-stock, non-profit Christian, benevolent, period under Section 228 of the NIRC. Thus,
charitable and scientific hospital which shall give St. Luke’s appealed to the CTA.
curative, rehabilitative and spiritual care to the The BIR argued before the CTA that
sick, diseased and disabled persons; provided Section 27(B) of the NIRC, which imposes a
that purely medical and surgical services shall be
10% preferential tax rate on the income of
performed by duly licensed physicians and
surgeons who may be freely and individually
proprietary non-profit hospitals, should be
contracted by patients; applicable to St. Luke’s. According to the
(b) To provide a career of health science BIR, Section 27(B), introduced in 1997, “is a
education and provide medical services to the new provision intended to amend the
community through organized clinics in such exemption on non-profit hospitals that were
specialties as the facilities and resources of the previously categorized as non-stock, non-
corporation make possible; profit corporations under Section 26 of the
(c) To carry on educational activities related to 1997 Tax Code x x x.”5 It is a specific
the maintenance and promotion of health as well provision which prevails
as provide facilities for scientific and _______________
_______________ 3 CTA First Division Decision dated 23 February
1 The consolidation of the petitions is pursuant to the 2009, citing the earlier decision in St. Luke’s Medical
Resolution of this Court dated 4 April 2011. Rollo (G.R. No.Center, Inc. v. Commissioner of Internal Revenue, CTA
195960), p. 9.
Case No. 6993, 21 November 2008. Rollo (G.R. No.
2 This Resolution denied the motions filed by both
195909), p. 68.
parties to reconsider the CTA En Banc Decision dated 19
4 This prompted St. Luke’s to file an Amended
November 2010.
Petition for Review on 12 December 2003 before the First
72 Division of the CTA.
5 CTA First Division Decision, citing the Answer filed
72 SUPREME COURT REPORTS ANNOTATED BIR before the CTA. Rollo (G.R. No. 195909), p.
by the
62.
Commissioner of Internal Revenue vs. St. Luke's Medical
Center, Inc. 73
medical researches which, in the opinion of the VOL. 682, SEPTEMBER 26, 2012
Board of Trustees, may be justified by the Commissioner of Internal Revenue vs. St. Luke's Med
facilities, personnel, funds, or other requirements Center, Inc.
that are available; over the general exemption on income tax
(d) To cooperate with organized medical granted under Section 30(E) and (G) for non-
societies, agencies of both government and
stock, non-profit charitable institutions and
private sector; establish rules and regulations
consistent with the highest professional ethics;
civic organizations promoting social welfare.6

Page 4 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
The BIR claimed that St. Luke’s was The petition of St. Luke’s in G.R. No.
actually operating for profit in 1998 because 195960 raises factual matters on the
only 13% of its revenues came from treatment and withholding of a part of its
charitable purposes. Moreover, the hospital’s income,9 as well as the payment of surcharge
board of trustees, officers and employees and delinquency interest. There is no ground
directly benefit from its profits and assets. for this Court to undertake such a factual
St. Luke’s had total revenues of review. Under the Constitution10and the
P1,730,367,965 or approximately P1.73 Rules of Court,11 this Court’s review power is
billion from patient services in 1998.7 generally limited to “cases in which only an
St. Luke’s contended that the BIR should error or question of law is involved.”12 This
not consider its total revenues, because its Court cannot depart from this limitation if a
free services to patients was P218,187,498 or party fails to invoke a recognized exception.
65.20% of its 1998 operating income (i.e.,
total revenues less operating expenses) of The Ruling of the Court of Tax Appeals
P334,642,615.8St. Luke’s also claimed that
its income does not inure to the benefit of The CTA En Banc Decision on 19
any individual. November 2010 affirmed in toto the CTA
St. Luke’s maintained that it is a non- First Division Decision dated 23 February
stock and non-profit institution for charitable 2009 which held:
WHEREFORE, the Amended Petition for
and social welfare purposes under Section
Review [by St. Luke’s] is hereby PARTIALLY
30(E) and (G) of the NIRC. It argued that the
GRANTED. Accordingly, the 1998 deficiency
making of profit per se does not destroy its VAT assessment issued by respondent against
income tax exemption. petitioner in the amount of P110,000.00 is
The petition of the BIR before this Court hereby CANCELLEDand WITHDRAWN.
in G.R. No. 195909 reiterates its arguments However, petitioner is
before the CTA that Section 27(B) applies to hereby ORDERED to PAY deficiency income tax
St. Luke’s. The petition raises the sole issue and deficiency expanded withholding tax for the
of whether the enactment of Section 27(B) taxable year 1998 in the respective amounts of
takes proprietary non-profit hospitals out of P5,496,963.54 and P778,406.84 or in the sum of
the income tax exemption under Section 30 P6,275,370.38, x x x.
xxxx
of the NIRC and instead, imposes a
In addition, petitioner is
preferential rate of 10% on their taxable
hereby ORDERED to PAY twenty percent (20%)
income. The BIR prays that St. Luke’s be delinquency interest on the total amount of
ordered to pay P57,659,981.19 as deficiency _______________
income and expanded withholding tax for 9 This income in the amount of P17,482,304 was
declared by St. Luke’s as “Other Income-Net” in its 1998
1998 with surcharges and interest for late Income Tax Return/Audited Statements of Revenues and
payment. Expenses.
_______________ 10 CONSTITUTION, Art. VIII, Sec. 5(2)(e). Except for
6 Id., at p. 63. criminal cases where the penalty imposed is reclusion
7 Id., at pp. 65-67. perpetua or higher, the enumeration under Article VIII,
8 Id., at p. 67. The operating expenses of St. Luke’s Section 5(1) and (2) of the Constitution generally involves a
consisted of professional care of patients, administrative, question of law.
household and property expenses. 11 RULES OF COURT, Rule 45, Sec. 1.
12 CONSTITUTION, Art. VIII, Sec. 5(2)(e). See note 10.
74
75
74 SUPREME COURT REPORTS ANNOTATED
Commissioner of Internal Revenue vs. St. Luke's Medical VOL. 682, SEPTEMBER 26, 2012
Center, Inc. Commissioner of Internal Revenue vs. St. Luke's Med
Center, Inc.
Page 5 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
P6,275,370.38 counted from October 15, 2003 76 SUPREME COURT REPORTS ANNOTAT
until full payment thereof, pursuant to Section Commissioner of Internal Revenue vs. St. Luke's Med
249(C)(3) of the NIRC of 1997. Center, Inc.
SO ORDERED.13
emption from taxation merely because
The deficiency income tax of recipients of its benefits who are able to pay
P5,496,963.54, ordered by the CTA En Banc are required to do so, where funds derived in
to be paid, arose from the failure of St. this manner are devoted to the charitable
Luke’s to prove that part of its income in purposes of the institution x x x.”19 The
1998 (declared as “Other Income-Net”)14 came generation of income from paying patients
from charitable activities. The CTA cancelled does not per se destroy the charitable nature
the remainder of the P63,113,952.79 of St. Luke’s.
deficiency assessed by the BIR based on the Hospital de San Juan cited Jesus Sacred
10% tax rate under Section 27(B) of the Heart College v. Collector of Internal
NIRC, which the CTA En Bancheld was not Revenue,20 which ruled that the old NIRC
applicable to St. Luke’s.15 (Commonwealth Act No. 466, as
The CTA ruled that St. Luke’s is a non- amended)21“positively exempts from taxation
stock and non-profit charitable institution those corporations or associations which,
covered by Section 30(E) and (G) of the otherwise, would be subject thereto, because
NIRC. This ruling would exempt all income of the existence of x x x net income.”22 The
derived by St. Luke’s from services to its NIRC of 1997 substantially reproduces the
patients, whether paying or non-paying. The provision on charitable institutions of the old
CTA reiterated its earlier decision in St. NIRC. Thus, in rejecting the argument that
Luke’s Medical Center, Inc. v. Commissioner tax exemption is lost whenever there is net
of Internal Revenue,16 which examined the income, the Court in Jesus Sacred Heart
primary purposes of St. Luke’s under its College declared: “[E]very responsible
articles of incorporation and various organization must be run to at least insure
documents17 identifying St. Luke’s as a its existence, by operating within the limits
charitable institution. of its own resources, especially its regular
The CTA adopted the test in Hospital de _______________
19 Id., at p. 41; p. 229 citing 51 Am. Jur. 607.
San Juan de Dios, Inc. v. Pasay City,18 which 20 95 Phil. 16 (1954).
states that “a charitable institution does not 21 Commonwealth Act No. 466, as amended by
lose its charitable character and its Republic Act No. 82, Sec. 27 provides: Exemption from
tax on corporation.―The following organizations shall
consequent ex-
not be taxed under this Title in respect to income
_______________
received by them as such―
13 Rollo (G.R. No. 195909), pp. 82-83. Emphases in
xxxx
the original.
(e) Corporation or association organized and
14 See note 9. This is one of the errors assigned by
operated exclusively for religious, charitable, scientific,
St. Luke’s in its petition before this Court.
athletic, cultural, or educational purposes, or for the
15 Rollo (G.R. No. 195909), p. 65. The revised total
rehabilitation of veterans no part of the net income of
deficiency income tax assessed by the BIR is
which inures to the benefit of any private stockholder or
P63,113,952.79, which includes the deficiency under
individual: Provided, however, That the income of
“Other Income-Net.”
whatever kind and character from any of its properties,
16 CTA Case No. 6993, 21 November 2008.
real or personal, or from any activity conducted for profit
17 These are documentary evidence which, among
regardless of the disposition made of such income, shall
others, show that government agencies such as the
be liable to the tax imposed under this Code[.]
Department of Social Welfare and Development and the
22 Jesus Sacred Heart College v. Collector of Internal
Philippine Charity Sweepstakes Office recognize St.
Revenue, supranote 20 at p. 21.
Luke’s as a charitable institution.
18 123 Phil. 38; 16 SCRA 226 (1966). 77
76 VOL. 682, SEPTEMBER 26, 2012
Page 6 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
Commissioner of Internal Revenue vs. St. Luke's Medical
78 SUPREME COURT REPORTS ANNOTAT
Center, Inc. Commissioner of Internal Revenue vs. St. Luke's Med
income. In other words, it should always Center, Inc.
strive, whenever possible, to have a “[t]he petition shall raise only questions of
surplus.”23 law which must be distinctly set forth.” St.
The CTA held that Section 27(B) of the Luke’s cites Martinez v. Court of
present NIRC does not apply to St. Appeals which permits factual review
26

Luke’s.24 The CTA explained that to apply “when the Court of Appeals [in this case, the
the 10% preferential rate, Section 27(B) CTA] manifestly overlooked certain relevant
requires a hospital to be “non-profit.” On the facts not disputed by the parties and which,
other hand, Congress specifically used the if properly considered, would justify a
word “non-stock” to qualify a charitable different conclusion.”27
“corporation or association” in Section 30(E) This Court does not see how the CTA
of the NIRC. According to the CTA, this is overlooked relevant facts. St. Luke’s itself
unique in the present tax code, indicating an stated that the CTA “disregarded the
intent to exempt this type of charitable testimony of [its] witness, Romeo B. Mary,
organization from income tax. Section 27(B) being allegedly self-serving, to show the
does not require that the hospital be “non- nature of the ‘Other Income-Net’ x x
stock.” The CTA stated, “it is clear that non- x.”28 This is not a case of overlooking or
stock, non-profit hospitals operated failing to consider relevant evidence. The
exclusively for charitable purpose are exempt CTA obviously considered the evidence and
from income tax on income received by them concluded that it is self-serving. The CTA
as such, applying the provision of Section declared that it has “gone through the
30(E) of the NIRC of 1997, as amended.”25 records of this case and found no other
evidence aside from the self-serving affidavit
The Issue executed by [the] witnesses [of St. Luke’s] x x
x.”29
The sole issue is whether St. Luke’s is
The deficiency tax on “Other Income-Net”
liable for deficiency income tax in 1998 under
stands. Thus, St. Luke’s is liable to pay the
Section 27(B) of the NIRC, which imposes a
25% surcharge under Section 248(A)(3) of the
preferential tax rate of 10% on the income of
NIRC. There is “[f]ailure to pay the
proprietary non-profit hospitals.
deficiency tax within the time prescribed for
The Ruling of the Court its payment in the notice of
assessment[.]” St. Luke’s is also liable to
30

St. Luke’s Petition in G.R. No. 195960 pay 20% delinquency interest under Section
As a preliminary matter, this Court 249(C)(3) of the NIRC.31 As explained by the
denies the petition of St. Luke’s in G.R. No. CTA En Banc, the amount of P6,275,370.38
195960 because the petition raises factual in the dispositive portion of the CTA First
issues. Under Section 1, Rule 45 of the Rules Division Decision
_______________
of Court, 26 410 Phil. 241; 358 SCRA 38 (2001).
_______________
27 Id., at p. 257; pp. 49-50; Rollo (G.R. No. 195960),
23 Id.
pp. 15-16.
24 The CTA adopted its earlier interpretation in St.
28 Rollo (G.R. No. 195960), p. 24.
Luke’s Medical Center, Inc. v. Commissioner of Internal
29 Id., at p. 50.
Revenue. Supra note 16.
30 NIRC, Sec. 248(A)(3).
25 Rollo (G.R. No. 195909), p. 76. Italics in the
31 NIRC, Sec. 249(C)(3) provides: “A deficiency tax,
original.
or any surcharge or interest thereon on the due date
appearing in the notice and demand of the
78
Commissioner, there shall be assessed and collected on
Page 7 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
the unpaid amount, interest at the rate prescribed in 80
Subsection (A) hereof until the amount is fully paid, 80
SUPREME COURT REPORTS ANNOTAT
which interest shall form part of the tax.”
Commissioner of Internal Revenue vs. St. Luke's Med
79 Center, Inc.
VOL. 682, SEPTEMBER 26, 2012 SEC. 79
27. Rates of Income Tax on Domestic
Corporations.―
Commissioner of Internal Revenue vs. St. Luke's Medical
Center, Inc. xxxx
includes only deficiency interest under (B) Proprietary Educational Institutions and
Hospitals.―
Section 249(A) and (B) of the NIRC and not
Proprietary educational institutions and
delinquency interest.32 hospitals which are non-profit shall pay a
The Main Issue tax of ten percent (10%) on their taxable
The issue raised by the BIR is a purely income except those covered by Subsection (D)
legal one. It involves the effect of the hereof: Provided, That if the gross income from
introduction of Section 27(B) in the NIRC of unrelated trade, business or other activity
1997 vis-à-vis Section 30(E) and (G) on the exceeds fifty percent (50%) of the total gross
income tax exemption of charitable and income derived by such educational institutions
social welfare institutions. The 10% income or hospitals from all sources, the tax prescribed
tax rate under Section 27(B) specifically in Subsection (A) hereof shall be imposed on the
entire taxable income. For purposes of this
pertains to proprietary educational
Subsection, the term ‘unrelated trade, business
institutions and proprietary non-profit
or other activity’ means any trade, business or
hospitals. The BIR argues that Congress other activity, the conduct of which is not
intended to remove the exemption that non- substantially related to the exercise or
profit hospitals previously enjoyed under performance by such educational institution or
Section 27(E) of the NIRC of 1977, which is hospital of its primary purpose or function. A
now substantially reproduced in Section ‘proprietary educational institution’ is any
30(E) of the NIRC of 1997.33 Section 27(B) of private school maintained and administered by
the present NIRC provides: private individuals or groups with an issued
_______________ permit to operate from the Department of
32 CTA En Banc Resolution dated 1 March 2011. Education, Culture and Sports (DECS), or the
Rollo (G.R. No. 195909), p. 56. Commission on Higher Education (CHED), or the
Section 249 of the NIRC provides: Technical Education and Skills Development
(A) In General.―There shall be assessed and
collected on any unpaid amount of tax, interest at the
Authority (TESDA), as the case may be, in
rate of twenty percent (20%) per annum, or such higher accordance with existing laws and regulations.
rate as may be prescribed by rules and regulations, from (Emphasis supplied)
the date prescribed for its payment until the amount is
fully paid. St. Luke’s claims tax exemption under
(B) Deficiency Interest.―Any deficiency in the tax Section 30(E) and (G) of the NIRC. It
due, as the term is defined in this Code, shall be subject
to the interest prescribed in Subsection (A) hereof, which
contends that it is a charitable institution
interest shall be assessed and collected from the date and an organization promoting social
prescribed for its payment until the full payment thereof. welfare. The arguments of St. Luke’s focus
xxxx on the wording of Section 30(E) exempting
33 Id., at pp. 21-27. Section 27(E) of the NIRC of
1977 provides:
from income tax non-stock, non-profit
Sec. 27. Exemptions from tax on corporations.―The charitable institutions.34 St. Luke’s asserts
following organizations shall not be taxed under this that the legislative intent of introducing
Title in respect to income received by them as such― Section 27(B) was only to remove the
xxxx
(E) Corporation or association organized and exemption for “proprie-
operated exclusively for religious, charitable, scientific, _______________
athletic, or cultural pur-

Page 8 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
poses, or for the rehabilitation of veterans, no part of proprietary non-profit educational
the net income of which inures to the benefit of any
institutions and
36 proprietary non-profit
private stockholder or individual.
xxxx hospitals, among the institutions covered by
34 See Comment of St. Luke’s dated 19 September _______________
2011 in G.R. No. 195909. Id., at pp. 105-116. 35 Id., at pp. 106-108.
36 Cf. NIRC, Sec. 30(H).
81
VOL. 682, SEPTEMBER 26, 2012 82 81
82 SUPREME COURT REPORTS ANNOTAT
Commissioner of Internal Revenue vs. St. Luke's Medical
Center, Inc. Commissioner of Internal Revenue vs. St. Luke's Med
Center, Inc.
tary non-profit” hospitals. The 35 relevant
provisions of Section 30 state: Section 30, to the 10% preferential rate
SEC. 30. Exemptions from Tax on under Section 27(B) instead of the ordinary
Corporations.―The following organizations shall 30% corporate rate under the last paragraph
not be taxed under this Title in respect to income of Section 30 in relation to Section 27(A)(1).
received by them as such: Section 27(B) of the NIRC imposes a 10%
xxxx preferential tax rate on the income of (1)
(E) Nonstock corporation or proprietary non-profit educational
association organized and operated institutions and (2) proprietary non-profit
exclusively for religious, charitable, scientific, hospitals. The only qualifications for
athletic, or cultural purposes, or for the hospitals are that they must be proprietary
rehabilitation of veterans, no part of its net
and non-profit. “Proprietary” means private,
income or asset shall belong to or inure to
the benefit of any member, organizer,
following the definition of a “proprietary
officer or any specific person; educational institution” as
xxxx “any private school maintained and
(G) Civic league or organization not organized administered by private individuals or
for profit but operated exclusively for the groups” with a government permit. “Non-
promotion of social welfare; profit” means no net income or asset accrues
xxxx to or benefits any member or specific person,
Notwithstanding the provisions in the preceding with all the net income or asset devoted to
paragraphs, the income of whatever kind the institution’s purposes and all its
and character of the foregoing activities conducted not for profit.
organizations from any of their properties, real
“Non-profit” does not necessarily mean
or personal, or from any of their activities
conducted for profit regardless of the
“charitable.” In Collector of Internal Revenue
disposition made of such income, shall be v. Club Filipino Inc. de Cebu,37 this Court
subject to tax imposed under this Code. considered as non-profit a sports club
(Emphasis supplied) organized for recreation and entertainment
of its stockholders and members. The club
The Court partly grants the petition of the was primarily funded by membership fees
BIR but on a different ground. We hold that and dues. If it had profits, they were used for
Section 27(B) of the NIRC does not remove overhead expenses and improving its golf
the income tax exemption of proprietary non- course.38The club was non-profit because of
profit hospitals under Section 30(E) and (G). its purpose and there was no evidence that it
Section 27(B) on one hand, and Section 30(E) was engaged in a profit-making enterprise.39
and (G) on the other hand, can be construed The sports club in Club Filipino Inc. de
together without the removal of such tax Cebu may be non-profit, but it was not
exemption. The effect of the introduction of charitable. The Court defined “charity”
Section 27(B) is to subject the taxable income in Lung Center of the Philippines v. Quezon
of two specific institutions, namely,
Page 9 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
City40as “a gift, to be applied consistently been funded by appropriations from the
with existing laws, for the benefit of an Treasury.42
indefinite number of persons, either by Charitable institutions, however, are
bringing their minds and hearts under the not ipso facto entitled to a tax
influence of education or religion, by exemption. The requirements for a tax
assisting them to establish themselves in life exemption are specified by the law granting
or [by] oth- it. The power of Congress to tax implies the
_______________ power to exempt from tax. Congress can
37 115 Phil. 310; 5 SCRA 321 (1962).
create tax exemptions, subject to the
38 Id., at p. 311; p. 322.
39 Id., at p. 314; p. 324. constitutional
40 G.R. No. 144104, 29 June 2004, 433 SCRA 119. _______________
41 Id., at pp. 128-129. Emphasis supplied.
83 42 For further discussion of the Subsidy Theory of
VOL. 682, SEPTEMBER 26, 2012 Tax Exemption,
83 see H. Hansmann, The Rationale for
Exempting Nonprofit Organizations from Corporate
Commissioner of Internal Revenue vs. St. Luke's Medical
Income Taxation, 91 YALE L. J. 54 (1981) at 66-75. See
Center, Inc. also M. Hall & J. Colombo, The Charitable Status of
erwise lessening the burden of Nonprofit Hospitals: Toward a Donative Theory of Tax
Exemption, 66 WASH. L. REV. 307 (1991).
government.”41 A non-profit club for the
benefit of its members fails this test. An 84
organization may be considered as non-profit 84 SUPREME COURT REPORTS ANNOTAT
if it does not distribute any part of its income Commissioner of Internal Revenue vs. St. Luke's Med
to stockholders or members. However, Center, Inc.
despite its being a tax exempt institution, provision that “[n]o law granting any tax
any income such institution earns from exemption shall be passed without the
activities conducted for profit is taxable, as concurrence of a majority of all the Members
expressly provided in the last paragraph of of Congress.”43 The requirements for a tax
Section 30. exemption are strictly construed against the
To be a charitable institution, however, an taxpayer44because an exemption restricts the
organization must meet the substantive test collection of taxes necessary for the existence
of charity in Lung Center. The issue in Lung of the government.
Center concerns exemption from real The Court in Lung Center declared that
property tax and not income tax. However, it the Lung Center of the Philippines is a
provides for the test of charity in our charitable institution for the purpose of
jurisdiction. Charity is essentially a gift to exemption from real property taxes. This
an indefinite number of persons which ruling uses the same premise as Hospital de
lessens the burden of government. In other San Juan45 and Jesus Sacred Heart
words, charitable institutions provide College46 which says that receiving income
for free goods and services to the public from paying patients does not destroy the
which would otherwise fall on the charitable nature of a hospital.
shoulders of government. Thus, as a As a general principle, a charitable institution
matter of efficiency, the government forgoes does not lose its character as such and its
taxes which should have been spent to exemption from taxes simply because it derives
address public needs, because certain private income from paying patients, whether out-
entities already assume a part of the burden. patient, or confined in the hospital, or receives
This is the rationale for the tax exemption of subsidies from the government, so long as the
money received is devoted or used altogether to
charitable institutions. The loss of taxes by
the charitable object which it is intended to
the government is compensated by its relief
achieve; and no money inures to the private
from doing public works which would have
Page 10 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
benefit of the persons managing or operating the 28(3), Article VI of the Constitution. Section
institution.47 30(E) of the NIRC defines the corporation or
association that is exempt from income tax.
For real property taxes, the incidental
On the other hand, Section 28(3), Article VI
generation of income is permissible because
of the Constitution does not define a
the test of exemption is the use of the
charitable institution, but requires that the
property. The Constitution provides that
institution “actually, directly and
“[c]haritable institutions, churches and
exclusively” use the property for a charitable
personages or convents appurtenant
_______________
purpose.
43 CONSTITUTION, Art. VI, Sec. 28(4). Section 30(E) of the NIRC provides that a
44 Commissioner of Internal Revenue v. The charitable institution must be:
Philippine American Accident Insurance Company, Inc., (1) A non-stock corporation or
493 Phil. 785; 453 SCRA 668 (2005); Lung Center of the
Philippines v. Quezon City, supra note 40 at pp. 133- association;
134; Mactan Cebu International Airport Authority v. (2) Organized exclusively for
Marcos, 330 Phil. 392; 261 SCRA 667 (1996); Manila charitable purposes;
Electric Company v. Vera, 160-A Phil. 498; 67 SCRA 351 (3) Operated exclusively for charitable
(1975).
45 Supra note 18. purposes; and
46 Supra note 20. (4) No part of its net income or asset
47 Lung Center of the Philippines v. Quezon City, shall belong to or inure to the benefit of
supra note 40 at pp. 131-132. Citation omitted.
any member, organizer, officer or any
85 specific person.
VOL. 682, SEPTEMBER 26, 2012 _______________
85
48 CONSTITUTION, Art. VI, Sec. 28(3).
Commissioner of Internal Revenue vs. St. Luke's Medical
Center, Inc. 86
thereto, mosques, non-profit cemeteries, and 86 SUPREME COURT REPORTS ANNOTAT
all lands, buildings, and improvements, Commissioner of Internal Revenue vs. St. Luke's Med
actually, directly, and exclusively used for Center, Inc.
religious, charitable, or educational purposes Thus, both the organization and
shall be exempt from taxation.”48 The test of operations of the charitable institution must
exemption is not strictly a requirement on be devoted “exclusively” for charitable
the intrinsic nature or character of the purposes. The organization of the institution
institution. The test requires that the refers to its corporate form, as shown by its
institution use the property in a certain articles of incorporation, by-laws and other
way, i.e.for a charitable purpose. Thus, the constitutive documents. Section 30(E) of the
Court held that the Lung Center of the NIRC specifically requires that the
Philippines did not lose its charitable corporation or association be non-stock,
character when it used a portion of its lot for which is defined by the Corporation Code as
commercial purposes. The effect of failing to “one where no part of its income is
meet the use requirement is simply to distributable as dividends to its members,
remove from the tax exemption that portion trustees, or officers”49 and that any profit
of the property not devoted to charity. “obtain[ed] as an incident to its operations
The Constitution exempts charitable shall, whenever necessary or proper, be used
institutions only from real property taxes. In for the furtherance of the purpose or
the NIRC, Congress decided to extend the purposes for which the corporation was
exemption to income taxes. However, the organized.”50 However, under Lung Center,
way Congress crafted Section 30(E) of the any profit by a charitable institution must
NIRC is materially different from Section not only be plowed back “whenever necessary
Page 11 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
or proper,” but must be “devoted or character of the foregoing organizations from any
used altogether to the charitable object of their properties, real or personal, or from any
which it is intended to achieve.”51 of their activities conducted for profit
The operations of the charitable regardless of the disposition made of such
income, shall be subject to tax imposed
institution generally refer to its regular
under this Code. (Emphasis supplied)
activities. Section 30(E) of the NIRC requires
that these operations be exclusive to In short, the last paragraph of Section 30
charity. There is also a specific requirement provides that if a tax exempt charitable
that “no part of [the] net income or asset institution conducts “any” activity for profit,
shall belong to or inure to the benefit of any such activity is not tax exempt even as its
member, organizer, officer or any specific not-for-profit activities remain tax exempt.
person.” The use of lands, buildings and This paragraph qualifies the requirements in
improvements of the institution is but a part Section 30(E) that the “[n]on-stock
of its operations. corporation or association [must
There is no dispute that St. Luke’s is be] organized and operated
organized as a non-stock and non-profit exclusively for x x x charitable x x x
charitable institution. However, this does not purposes x x x.” It likewise qualifies the
automatically exempt St. Luke’s from paying requirement in Section 30(G) that the civic
taxes. This only refers to the organization of organization must be “operated exclusively”
St. Luke’s. Even if St. Luke’s meets the test for the promotion of social welfare.
of charity, a charitable institution is not ipso Thus, even if the charitable institution
facto tax exempt. To be exempt from real must be “organized and operated exclusively”
property taxes, Section 28(3), Article VI of for charitable purposes, it is nevertheless
the Constitution requires that a charitable allowed to engage in “activities conducted for
institution use the property “actually, profit” without losing its tax exempt status
directly and for its not-for-profit activities. The only
_______________
consequence is that the “income of
49 CORPORATION Code (B.P. Blg. 68), Sec. 87.
50 Id. whatever kind and character” of a
51 Supra note 40. Emphasis supplied. charitable institution “from any of its
activities conducted for profit,
87
regardless of the disposition made of
VOL. 682, SEPTEMBER 26, 2012 87
such income, shall be subject to
Commissioner of Internal Revenue vs. St. Luke's Medical
tax.” Prior to the introduction of Section
Center, Inc. 27(B), the tax rate on such income from for-
exclusively” for charitable purposes. To be profit activities was the ordinary
exempt from income taxes, Section 30(E) of 88
the NIRC requires that a charitable 88 SUPREME COURT REPORTS ANNOTAT
institution must be “organized and Commissioner of Internal Revenue vs. St. Luke's Med
operated exclusively” for charitable Center, Inc.
purposes. Likewise, to be exempt from corporate rate under Section 27(A). With the
income taxes, Section 30(G) of the NIRC introduction of Section 27(B), the tax rate is
requires that the institution be “operated now 10%.
exclusively” for social welfare. In 1998, St. Luke’s had total revenues of
However, the last paragraph of Section 30 P1,730,367,965 from services
of the NIRC qualifies the words “organized to paying patients. It cannot be disputed
and operated exclusively” by providing that: that a hospital which receives approximately
Notwithstanding the provisions in the preceding
P1.73 billion from paying patients is not an
paragraphs, the income of whatever kind and
Page 12 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
institution “operated exclusively” for INCOME FROM P116,455,117.00
charitable purposes. Clearly, revenues OPERATIONS, Net of
from paying patients are income received FREE SERVICES
from “activities conducted for
profit.” Indeed, St. Luke’s admits that it
52 OTHER INCOME 17,482,304.00
derived profits from its paying patients. St.
Luke’s declared P1,730,367,965 as “Revenues EXCESS OF P133,937,421.00
from Services to Patients” in contrast to its REVENUES OVER
“Free Services” expenditure of P218,187,498. EXPENSES
In its Comment in G.R. No. 195909, St. In Lung Center, this Court declared:
Luke’s showed the following “calculation” to “[e]xclusive” is defined as possessed and enjoyed
support its claim that 65.20% of its “income to the exclusion of others; debarred from
after expenses was allocated to free or participation or enjoyment; and “exclusively” is
charitable services” in 1998.53 defined, “in a manner to exclude; as enjoying a
REVENUES FROM SERVICES TO P1,730,367,965.00 privilege exclusively.” x x x The words “dominant
use” or “principal use” cannot be substituted for
PATIENTS
the words “used exclusively” without doing
OPERATING EXPENSES violence to the Constitution and the law. Solely
_______________
52 Since the exemption is proportional to the revenue
is synonymous with exclusively.54
of the institution, Hall & Colombo say that “a general tax
exemption suffers from the same ‘upside down’ effect as The Court cannot expand the meaning of
many tax deductions: those entities with the highest net the words “operated exclusively” without
revenues or the greatest value of otherwise-taxable violating the NIRC. Services to paying
property receive the greatest amount of subsidy, yet
patients are activities conducted for
these are the entities that least need support. From the
standpoint of equity among different tax-exempt entities, profit. They cannot be considered any
the result of the general tax exemption is that entities other way. There is a “purpose
that are the ‘poorest’ in either an income or property tax _______________
sense, and thus most in need of government assistance to 54 Supra note 40 at p. 137. Emphasis supplied;
serve impoverished and uninsured patients, receive the citations omitted.
least government assistance. Because uncompensated
care is an expense item, those hospitals with the most 90
net revenues are more likely to have actually rendered 90 SUPREME COURT REPORTS ANNOTAT
the least free care, all other things being equal.” Hall &
Colombo, supra note 42 at pp. 355-356. Citations
Commissioner of Internal Revenue vs. St. Luke's Med
omitted. Center, Inc.
53 Comment of St. Luke’s dated 19 September to make profit over and above the cost”
2011. Rollo (G.R. No. 195909), p. 113.
of services.55The P1.73 billion total
89 revenues from paying patients is not even
VOL. 682, SEPTEMBER 26, 2012 incidental
89 to St. Luke’s charity expenditure
of P218,187,498
Commissioner of Internal Revenue vs. St. Luke's for non-paying patients.
Medical Center, Inc. St. Luke’s claims that its charity
Professional care of P1,016,608,394.00 expenditure of P218,187,498 is 65.20% of its
patients operating income in 1998. However, if a part
Administrative 287,319,334.00 of the remaining 34.80% of the operating
Household and Property 91,797,622.00 income is reinvested in property, equipment
P1,395,725,350.00 or facilities used for services to paying and
non-paying patients, then it cannot be said
INCOME FROM P334,642,615.00 that
100% the income is “devoted or
OPERATIONS used altogether to the charitable object
Free Services which it is intended to achieve.”56 The income
-218,187,498.00 -65.20%
Page 13 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
is plowed back to the corporation not entirely the reasons Congress inserted the phrase “or
for charitable purposes, but for profit as well. any activity conducted for profit.”
In any case, the last paragraph of Section 30 The question in Jesus Sacred Heart
of the NIRC expressly qualifies that income College involves an educational
from activities for profit is institution. However, it is applicable to
58

taxable “regardless of the disposition charitable institutions because Senator

made of such income.” Cuenco’s response shows an intent to focus
Jesus Sacred Heart College declared that on the activities of charitable institutions.
there is no official legislative record Activities for profit should not escape the
explaining the phrase “any activity reach of taxation. Being a non-stock and non-
conducted for profit.” However, it quoted a profit corporation does not, by this reason
deposition of Senator Mariano Jesus Cuenco, alone, completely exempt an institution from
who was a member of the Committee of tax. An institution cannot use its corporate
Conference for the Senate, which introduced form to prevent its profitable activities from
the phrase “or from any activity conducted being taxed.
for profit.” The Court finds that St. Luke’s is a
P. Cuando ha hablado de la Universidad de corporation that is not “operated exclusively”
Santo Tomás que tiene un hospital, no cree Vd. for charitable or social welfare purposes
que es una actividad esencial dicho hospital para insofar as its revenues from paying patients
el funcionamiento del colegio de medicina de are con-
dicha universidad? _______________
xxxx 57 Supra note 20 at p. 29.
R. Si el hospital se limita a recibir enformos 58 Supra note 20 at p. 23. Jesus Sacred Heart
pobres, mi contestación seria afirmativa; pero College distinguished an educational institution from a
considerando que el hospital tiene cuartos de charitable institution: “More important still, the law
applied in the case relied upon by [the BIR] exempted
pago, y a los mismos generalmente van enfermos
from taxation only such educational institutions as were
de buena posición social económica, lo que se established for charitable or
paga por estos enfermos debe estar sujeto philanthropic purposes. Consequently, the amount of
_______________ fees charged or the intent to collect more than the
55 Jesus Sacred Heart College v. Collector of Internal cost of operation or instruction was material to
Revenue, supra note 20 at pp. 20-21. the determination of such purpose. Upon the other
56 Lung Center of the Philippines v. Quezon City, hand, under Section 27(e) of [the old] National Internal
supra note 40.
Revenue Code, as amended, an institution operated
exclusively for educational purposes need not have, in
91
addition thereto, a charitable or philanthropic character,
to be exempt from taxation, provided only that no part of
VOL. 682, SEPTEMBER 26, 2012 91
its net income ‘inures to the benefit of any private
Commissioner of Internal Revenue vs. St. Luke's Medical
stockholder or individual.’” (Italics in the original;
Center, Inc. emphasis supplied)
a ‘income tax’, y es una de las razones que hemos 92
tenido para insertar las palabras o frase ‘or from 92 SUPREME COURT REPORTS ANNOTAT
any activity conducted for profit.’57
Commissioner of Internal Revenue vs. St. Luke's Med
The question was whether having a Center, Inc.
hospital is essential to an educational cerned. This ruling is based not only on a
institution like the College of Medicine of the strict interpretation of a provision granting
University of Santo Tomas. Senator Cuenco tax exemption, but also on the clear and
answered that if the hospital has paid rooms plain text of Section 30(E) and (G). Section
generally occupied by people of good 30(E) and (G) of the NIRC requires that an
economic standing, then it should be subject institution be “operated exclusively” for
to income tax. He said that this was one of charitable or social welfare purposes to
Page 14 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
be completely exempt from income tax. An Revenue,61 the Court said that “good faith
institution under Section 30(E) or (G) does and honest belief that one is not subject to
not lose its tax exemption if it earns income tax on the basis of previous interpretation of
from its for-profit activities. Such income government agencies tasked to implement
from for-profit activities, under the last the tax law, are sufficient justification to
paragraph of Section 30, is merely subject to delete the imposition of surcharges and
income tax, previously at the ordinary interest.”62
corporate rate but now at the preferential WHEREFORE, the petition of the
10% rate pursuant to Section 27(B). Commissioner of Internal Revenue in G.R.
A tax exemption is effectively a social No. 195909 is PARTLY GRANTED. The
subsidy granted by the State because an Decision of the Court of Tax Appeals En
exempt institution is spared from sharing in Banc dated 19 November 2010 and its
the expenses of government and yet benefits Resolution dated 1 March 2011 in CTA Case
from them. Tax exemptions for charitable No. 6746 are MODIFIED. St. Luke’s Medical
institutions should therefore be limited to Center, Inc. is ORDERED TO PAY the
institutions beneficial to the public and those deficiency income tax in 1998 based on the
which improve social welfare. A profit- 10% preferential income tax rate under
making entity should not be allowed to Section 27(B) of the National Internal
exploit this subsidy to the detriment of the Revenue Code. However, it is not liable for
government and other taxpayers. surcharges and interest on such deficiency
St. Luke’s fails to meet the requirements income tax under Sections 248 and 249 of the
under Section 30(E) and (G) of the NIRC to National Internal Revenue Code. All other
be completely tax exempt from all its income. parts of the Decision and Resolution of the
However, it remains a proprietary non-profit Court of Tax Appeals are AFFIRMED.
hospital under Section 27(B) of the NIRC as The petition of St. Luke’s Medical Center,
long as it does not distribute any of its Inc. in G.R. No. 195960 is DENIED for
profits to its members and such profits are violating Section 1, Rule 45 of the Rules of
reinvested pursuant to its corporate Court.
purposes. St. Luke’s, as a proprietary non- SO ORDERED.
profit hospital, is entitled to the preferential Leonardo-De
tax rate of 10% on its net income from its for- Castro,** Brion, Perez and Perlas-Bernabe,
profit activities. JJ., concur.
St. Luke’s is therefore liable for deficiency
income tax in 1998 under Section 27(B) of Petition partly granted, judgment and
the NIRC. However, St. Luke’s has good resolution modified.
reasons to rely on the letter dated 6 June _______________
1990 by the BIR, which opined that St. 60 See CTA First Division Decision dated 23
Luke’s is “a corporation for purely charitable February 2009. Rollo (G.R. No. 195909), p. 69.
61 533 Phil. 101; 501 SCRA 450 (2006).
and social welfare purposes”59 and thus 62 Id., at pp. 108-109; p. 460.
_______________
** Designated Acting Member per Special Order No.
59 Italics supplied.
1308 dated 21 September 2012.
93
94
VOL. 682, SEPTEMBER 26, 2012 94 93 SUPREME COURT REPORTS ANNOTAT
Commissioner of Internal Revenue vs. St. Luke's Medical
Commissioner of Internal Revenue vs. St. Luke's Med
Center, Inc. Center, Inc.
exempt from income tax.60 In Michael J. Notes.―There is no vested right in a tax
Lhuillier, Inc. v. Commissioner of Internal exemption, more so when the latest
Page 15 of 16
 Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.
expression of legislative intent renders its receipts, less sales returns, allowances,
continuance doubtful. (Republic vs. discounts and cost of services. (Commissioner
Caguioa,536 SCRA 193 [2007]) of Internal Revenue vs. Philippine Airlines,
Gross income of a domestic corporation Inc., 592 SCRA237 [2009])
engaged in the sale of service means gross

Page 16 of 16