Commissioner of Internal Revenue vs.

St
Luke's Medical Center
Facts:
St. Lukes Medical Center, Inc. (St. Lukes) is a
hospital organized as a non-stock and non-profit
corporation. St. Lukes accepts both paying and
non-paying patients. The BIR assessed St.
Lukes deficiency taxes for 1998 comprised of
deficiency income tax, value-added tax, and
withholding tax. The BIR claimed that St. Lukes
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. Lukes was
actually operating for profit in 1998 because
only 13% of its revenues came from charitable
purposes. Moreover, the hospitals board of
trustees, officers and employees directly
benefit from its profits and assets.
On the other hand, St. Lukes 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. Lukes 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 institutions
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.
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.
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.
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.
However, the last paragraph of Section 30 of the
NIRC qualifies the words organized and
operated exclusively by providing that:

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 notfor-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%.
The Court finds that St. Lukes 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).

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.

St. Lukes 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. Lukes,
as a proprietary non-profit hospital, is entitled to
the preferential tax rate of 10% on its net
income from its for-profit activities.

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.

St. Lukes is therefore liable for deficiency

income tax in 1998 under Section 27(B) of the
NIRC. However, St. Lukes has good reasons to
rely on the letter dated 6 June 1990 by the BIR,
which opined that St. Lukes 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. Lukes 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.
CREBA v. EXECUTIVE SECRETARY
G.R. No. 160756 March 9, 2010
FACTS: Chamber of Real Estate and Builders
Associations, Inc. (CREBA) is an association of
real estate developers and builders in
the Philippines. It filed a petition for
certiorari and
mandamus questioning the constitutionality of
Section 27 (E) of Republic Act (RA) 8424 and the
revenue regulations (RRs) issued by the Bureau
of Internal Revenue (BIR) to implement said
provision and those involving creditable
withholding taxes. It impleaded former
Executive
Secretary Alberto Romulo, then acting
Secretary of Finance Juanita D. Amatong and
then
Commissioner of Internal Revenue Guillermo
Parayno, Jr. as respondents. CREBA assails the
validity of the imposition of minimum corporate
income tax (MCIT) on corporations and
creditable
withholding tax (CWT) on sales of real properties
classified as ordinary assets. CREBA argues
that the MCIT violates the due process clause
because it levies income tax even if there is no
realized gain. CREBA also seeks to nullify
Sections 2.57.2(J) (as amended by RR 6-2001)
and
2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii)
of RR 7-2003, all of which prescribe the rules
and procedures for the collection of CWT on the
sale of real properties categorized as ordinary

assets. Petitioner contends that these

revenue regulations are contrary to law
for two
reasons: first, they ignore the different
treatment by RA 8424 of ordinary assets and
capital
assets and second, respondent Secretary of
Finance has no authority to collect CWT, much
less,
to base the CWT on the gross selling price or fair
market value of the real properties classified as
ordinary assets.
ISSUE: Whether or not the imposition of the
MCIT on domestic corporations is
unconstitutional.
: Whether or not the imposition of CWT on
income from sales of real properties classified
as ordinary assets under RRs 2-98, 6-2001 and
7-2003, is unconstitutional.
DECISION: No.
Under the MCIT scheme, a corporation,
beginning on its fourth year of operation, is
assessed an MCIT of 2% of its gross income
when such MCIT is greater than the normal
corporate income tax imposed under Section
27(A). If the regular income tax is higher than
the
MCIT, the corporation does not pay the MCIT.
Any excess of the MCIT over the normal tax
shall
be carried forward and credited against
the normal income tax for the three
immediately
succeeding taxable years.
The SC ruled that MCIT is not violative of due
process and thus is not unconstitutional.
MCIT was devised as a relatively simple and
effective revenue-raising instrument compared
to
the normal income tax which is more difficult to
control and enforce. It is a means to ensure that
everyone will make some minimum contribution
to the support of the public sector.
The contention of CREBA that pegging the tax
base of the MCIT to a corporations gross
income is tantamount to a confiscation of
capital because gross income, unlike net
income, is not
"realized gain" is untenable. MCIT is not a tax
on capital. The MCIT is imposed on gross income
which is arrived at by deducting the capital
spent by a corporation in the sale of its goods,
i.e., the
cost of goods and other direct expenses from
gross sales. Clearly, the capital is not being
taxed.
Furthermore, the MCIT is not an additional tax
imposition. It is imposed in lieu of the normal
net

income tax, and only if the normal income tax is

suspiciously low. The MCIT merely approximates
the amount of net income tax due from a
corporation, pegging the rate at a very much
reduced
2% and uses as the base the corporations gross
income. Besides, there is no legal objection to a
broader tax base or taxable income by
eliminating all deductible items and at the same
time
reducing the applicable tax rate. Absent any
other valid objection, the assignment of gross
income, instead of net income, as the tax base
of the MCIT, taken with the reduction of the tax
rate from 32% to 2%, is not constitutionally
objectionable. Moreover, CREBA does not cite
anyactual, specific and concrete negative
experiences of its members nor does it present
empirical
data to show that the implementation of the
MCIT resulted in the confiscation of their
property.
In sum, CREBA failed to support, by any factual
or legal basis, its allegation that the
MCIT is arbitrary and confiscatory. The Court
cannot strike down a law as unconstitutional
simply
because of its yokes. Taxation is necessarily
burdensome because, by its nature, it adversely
affects property rights.
The party
alleging the laws unconstitutionality has
the burden to
demonstrate the supposed violations in
understandable terms.
RR 9-98 Merely Clarifies Section 27(E) of
RA 8424
Petitioner alleges that RR 9-98 is a deprivation
of property without due process of law because
the MCIT is being imposed and collected even
when there is actually a loss, or a zero or
negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. xxx The MCIT shall

be imposed whenever such corporation
has zero or negative taxable income or
whenever the amount of [MCIT] is greater than
the normal income tax due from such
corporation. (Emphasis supplied)
RR 9-98, in declaring that MCIT should be
imposed whenever such corporation has zero or
negative taxable income, merely defines the
coverage of Section 27(E). This means that even

if a corporation incurs a net loss in its business

operations or reports zero income after
deducting its expenses, it is still subject to an
MCIT of 2% of its gross income. This is
consistent with the law which imposes the MCIT
on gross income notwithstanding the amount of
the net income. But the law also states that the
MCIT is to be paid only if it is greater than the
normal net income. Obviously, it may well be
the case that the MCIT would be less than the
net income of the corporation which posts a
zero or negative taxable income.

As to the issue on the validity of the imposition

of CWT on income from sales of real
properties classified as ordinary assets, the SC
ruled that it is not unconstitutional.
The contention that the assailed revenue
regulations ignore the different treatment by RA
8424 of ordinary assets and capital assets is
unmeritorious. Final Withholding Tax (FWT) is
imposed on the sale of capital assets. On the
other hand, CWT is imposed on the sale of
ordinary
assets. The inherent and substantial differences
between FWT and CWT disprove CREBAs
contention that ordinary assets are being
lumped together with, and treated similarly as,
capital
assets in contravention of the pertinent
provisions of RA 8424. The fact that the tax is
withheld at
source does not automatically mean that it is
treated exactly the same way as capital gains.
As
aforementioned, the mechanics of the FWT are
distinct from those of the CWT. The withholding
agent/buyers act of collecting the tax at the
time of the transaction by withholding the tax
due
from the income payable is the essence of the
withholding tax method of tax collection.
The contention that respondent Secretary of
Finance has no authority to collect CWT is
likewise unmeritorious. Respondent Secretary
has the authority to require the withholding of a
tax
on items of income payable to any person,
national or juridical, residing in the Philippines
based
on Section 57 (B) of RA 8424. Thus, the
questioned provisions of RR 2-98, as amended,
are well
within the authority given by Section 57(B) to
the Secretary, i.e., the graduated rate of 1.5%5% is
between the 1%-32% range; the withholding tax
is imposed on the income payable and the tax is

creditable against the income tax liability of the

taxpayer for the taxable year.

CIR vs PAL
FACTS:
PHILIPPINE AIRLINES, INC. had zero taxable
income for 2000 but would have been liable for
Minimum Corporate Income Tax based on its gross
income. However, PHILIPPINE AIRLINES, INC. did
not pay the Minimum Corporate Income Tax using
as basis its franchise which exempts it from all
other taxes upon payment of whichever is lower of
either (a) the basic corporate income tax based on
the net taxable income or (b) a franchise tax of 2%.

ISSUE:
Is PAL liable for Minimum Corporate Income Tax?

HELD:
NO. PHILIPPINE AIRLINES, INC.s franchise clearly
refers to "basic corporate income tax" which refers
to the general rate of 35% (now 30%). In addition,
there is an apparent distinction under the Tax Code
between taxable income, which is the basis for basic
corporate income tax under Sec. 27 (A) and gross
income, which is the basis for the Minimum
Corporate Income Tax under Section 27 (E). The
two terms have their respective technical meanings
and cannot be used interchangeably. Not being
covered by the Charter which makes PAL liable only
for basic corporate income tax, then Minimum
Corporate Income Tax is included in "all other taxes"
from which PHILIPPINE AIRLINES, INC. is
exempted.

The CIR also can not point to the Substitution

Theory which states that Respondent may not
invoke the in lieu of all other taxes provision if it did
not pay anything at all as basic corporate income tax
or franchise tax. The Court ruled that it is not the fact
tax payment that exempts Respondent but the
exercise of its option. The Court even pointed out
the fallacy of the argument in that a measly sum of
one peso would suffice to exempt PAL from other
taxes while a zero liability would not and said that
there is really no substantial distinction between a
zero tax and a one-peso tax liability. Lastly, the
Revenue Memorandum Circular stating the
applicability of the MCIT to PAL does more than just
clarify a previous regulation and goes beyond mere
internal administration and thus cannot be given
effect without previous notice or publication to those
who will be affected thereby.
Section 13 of Presidential Decree No. 1520 is not
unusual. A public utility is granted special tax
treatment (including tax exceptions/exemptions)
under its franchise, as an inducement for the
acceptance of the franchise and the rendition of
public service by the said public utility.22 In this case,
in addition to being a public utility providing airtransport service, PAL is also the official flag carrier
of the country.
The imposition of MCIT on PAL, as the CIR insists,
would result in a situation that contravenes the
objective of Section 13 of Presidential Decree No.
1590. In effect, PAL would not just have two, but
three tax alternatives, namely, the basic corporate
income tax, MCIT, or franchise tax. More
troublesome is the fact that, as between the basic
corporate income tax and the MCIT, PAL shall be
made to pay whichever is higher, irrefragably, in
violation of the avowed intention of Section 13 of
Presidential Decree No. 1590 to make PAL pay for
the lower amount of tax.