2. CIR v. St.

Luke’s Medical Center ● The effect of the introduction of Section 27 (B) is to subject the taxable
G.R. No. 195909 – G.R. No. 195960 income of two specific institutions, namely, proprietary non-profit
FACTS: educational institutions and proprietary non-profit hospitals, among the
● St. Luke’s Medical Center, Inc. (“St. Luke’s”) is a hospital organized as a institutions covered by Section 30, to the 10% preferential rate under
non-stock and non-profit corporation. It provides service to both paying Section 27 (B) instead of the ordinary 30% corporate rate under the last
and non-paying clients. paragraph of Section 30 in relation to Section 27 (A) (1).
● The BIR assessed St. Luke’s of deficiency taxes for the taxable year 1998 ● The only qualifications for hospitals are that they must be proprietary and
on the ground that St. Luke’s was actually operating for profit in 1998 non-profit.
because only 13% of its revenues came from charitable purposes. o “Proprietary” means private, following the definition of a “proprietary
● St. Luke's contended that the BIR should not consider its total revenues, educational institution” as “any private school maintained and
because its free services to patients was 65.20% of its 1998 operating administered by private individuals or groups” with a government
income of P334,642,615. St. Luke's also claimed that its income does not permit.
inure to the benefit of any individual. o “Non-profit” means no net income or asset accrues to or benefits any
● St. Luke's maintained that it is a non-stock and non-profit institution for member or specific person, with all the net income or asset devoted to
charitable and social welfare purposes under Section 30 (E) and (G) of the institution’s purposes and all its activities conducted for profit.
the NIRC. It argued that the making of profit per se does not destroy its ● “Non-profit” does not necessarily mean “charitable.”
income tax exemption. ● Charity is essentially a gift to an indefinite number of persons which lessens
● As such, the BIR imposed the 10% preferential tax rate on the income of the burden of government. In other words, charitable institutions provide for
proprietary non-profit hospitals, arguing that the tax exemption on non- free goods and services to the public which would otherwise fall on the
profit hospitals (which were previously categorized as non-stock, non- shoulders of government.
profit corporations under Section 26 of the NIRC) was removed with the ● Section 30(E) of the NIRC provides that a charitable institution must be: (1) a
inclusion of Section 27(B) which provides that non-profit hospitals are non-stock corporation or association; (2) organized exclusively for charitable
subject to the preferential rate of 10% income tax. purposes; (3) operated exclusively for charitable purposes; and (4) no part of
its net income or asset shall belong to or inure to the benefit of any member,
ISSUE: Whether or not St. Luke’s liable for deficiency income tax in 1998 organizer, officer or any specific person. Thus, both the organization and
under Sec. 27 (B) of the NIRC, which imposes a preferential rate of 10% of the operations of the charitable institution must be devoted “exclusively” for
income of proprietary non-profit hospitals. charitable purposes.
● Thus, although St. Luke’s is a non-stock, non-profit institution, considering
RULING: The Court ruled in the affirmative. that it receives income from paying patients, it is not an institution “operated
● The Court held that Sec. 27(B) of the NIRC does not remove the income tax exclusively” for charitable purposes.
exemption of proprietary non-profit hospitals under Section 30 (E) and (G). ● Clearly, revenues from paying patients are income received from “activities
● Section 27 (B) on one hand, and Section 30 (E) and (G) on the other hand, can conducted for profit”. Services to paying patients are activities conducted for
be construed together without the removal of such tax exemption. profit.
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● Activities for profit should not escape the reach of taxation.
● Being a non-stock and non-profit corporation does not completely exempt an
institution from tax. An institution cannot use its corporate form to prevent
its profitable activities from being taxed.
● Finally, the Court held that St. Luke’s is not liable for interest and surcharges,
as it has good reasons to rely on the letter dated 6 June 19990 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. Lhuiller, 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.”

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 7. CIR v DLSU Issue: Whether DLSU's income and revenues proved to have been used
G.R. No. 196596. November 9, 2016 actually, directly and exclusively for educational purposes are exempt from
duties and taxes (YES)
Facts:
● Article XIV, Section 4 (3) of the 1987 Constitution, which reads:
● BIR issued to DLSU Letter of Authority authorizing its revenue officers
to examine the latter's books of accounts and other accounting (3) All revenues and assets of non-stock, non-profit educational
records for all internal revenue taxes for the period Fiscal Year Ending institutions used actually, directly, and exclusively for educational
2003 and Unverified Prior Years. purposes shall be exempt from taxes and duties.Upon the dissolution
● the BIR through a Formal Letter of Demand assessed DLSU the or cessation of the corporate existence of such institutions, their
following deficiency taxes: (1) income tax on rental earnings from assets shall be disposed of in the manner provided by law.
restaurants/canteens and bookstores operating within the campus;
(2) value-added tax (VAT) on business income; and (3) documentary The case of CIR v YMCA analyzed and explained the meaning of Article XIV,
stamp tax (DST) on loans and lease contracts. Section 4 (3) of the Constitution. The Court significantly laid down the
● The BIR demanded the payment of P17,303,001.12, inclusive of requisites for availing the tax exemption under Article XIV, Section 4
surcharge, interest and penalty for taxable years 2001, 2002 and (3),namely:
2003.
1. the taxpayer falls under the classification non-stock, non-profit
● DLSU protested the assessment.
educational institution; and
DLSU’s Argument: DLSU, a non-stock, non-profit educational 2. the income it seeks to be exempted from taxation is used actually,
institution,principally anchored its petition on Article XIV, Section 4 (3) of the directly and exclusively for educational purposes.
Constitution: All revenues and assets of non-stock, non-profit educational
The Court adopts YMCA as precedent and hold that:
institutions used actually, directly, and exclusively for educational purposes
shall be exempt from taxes and duties. 1. The last paragraph of Section 30 of the Tax Code is without force and
effect with respect to non-stock, non-profit educational institutions,
Commissioner’s Argument: rental income is taxable regardless of how such
provided,that the non-stock, non-profit educational institutions
income is derived, used or disposed of. Commissioner contends that Article
prove that its assets and revenues are used actually, directly and
XIV, Section 4 (3) of the Constitution must be harmonized with Section 30 (H)
exclusively for educational purposes.
of the Tax Code that the income of whatever kind and character of [a non-
2. The tax-exemption constitutionally-granted to non-stock, non-profit
stock and non-profit educational institution] from any of [its] activities
educational institutions, is not subject to limitations imposed by law.
conducted for profit regardless of the disposition made of such income, shall
be subject to tax. The tax exemption granted by the Constitution to non-stock, non-profit
educational institutions is conditioned only on the actual, direct and

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exclusive use of their assets, revenues and income for educational ● On the other hand, when it also shows that it uses its assets in the
purposes. form of real property for educational purposes, it shall be exempted
from RPT
● Article VI, Section 28 (3) of the Constitution which exempts from
● To illustrate, if a university leases a portion of its school building to a
tax only the assets (all lands, buildings, and improvements,actually,
bookstore or cafeteria, the leased portion is not actually, directly and
directly, and exclusively used for religious, charitable, or
exclusively used for educational purposes, even if the bookstore or
educational purposes),
canteen caters only to university students, faculty and staff.
● Article XIV, Section 4 (3) categorically states that "[a]ll revenues
● The leased portion of the building may be subject to real property
and assets ...used actually, directly, and exclusively for educational
tax. The test of exemption from taxation is the use of the property
purposes shall be exempt from taxes and duties
for purposes mentioned in the Constitution. The lease of a portion of
● There is a broader tax privilege to non-stock, non-profit educational
a school building for commercial purposes, removes such asset from
institutions as recognition of their role in assisting the State provide
the property tax exemption granted under the Constitution because
a public good.
the asset is not used actually, directly and exclusively for educational
● Further, a plain reading of the Constitution would show that Article
purposes. The commercial use of the property is also not incidental
XIV, Section 4 (3) does not require that the revenues and income
to and reasonably necessary for the accomplishment of the main
must have also been sourced from educational activities or
purpose of a university, which is to educate its students.
activities related to the purposes of an educational institution.
● However, if the university actually, directly and exclusively uses for
● The phrase all revenues is unqualified by any reference to the
educational purposes the revenues earned from the lease of its
source of revenues.
school building, such revenues shall be exempt from taxes and duties.
● so long as the revenues and income are used actually, directly and
The tax exemption no longer hinges on the use of the asset from
exclusively for educational purposes, then said revenues and
which the revenues were earned, but on the actual, direct and
income shall be exempt from taxes and duties.
exclusive use of the revenues for educational purposes.
Revenues v. Assets ● To avail of the exemption, the taxpayer must factually prove that it
used actually, directly and exclusively for educational purposes the
● Revenues consist of the amounts earned by a person or entity from
revenues or income sought to be exempted.
the conduct of business operations.
● The crucial point of inquiry then is on the use of the assets or on the
● Assets,on the other hand, are the tangible and intangible properties
use of the revenues.
owned by a person or entity.
● Thus, when a non-stock, non-profit educational institution proves Proprietary Educational Institutions v. Non-stock non-profit educational
that it uses its revenues actually, directly, and exclusively for institutions
educational purposes, it shall be exempted from income tax, VAT,
and LBT. ● The tax exemption privilege granted to non-stock, non-profit
educational institutions is conditioned only on the actual, direct and

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 exclusive use of their revenues and assets for educational purposes.
It is NOT subject to limitations imposed by law.
● The exemption that may be availed of by proprietary educational
institutions is subject to limitations imposed by law.
● While a non-stock, non-profit educational institution is classified as a
tax-exempt entity under Section 30 (Exemptions from Tax on
Corporations) of the Tax Code, a proprietary educational institution
is covered by Section 27 (Rates of Income Tax on Domestic
Corporations).
○ Section 30 provides that exempt organizations like non-
stock, non-profit educational institutions shall not be taxed
on income received by them as such.
○ Section 27 (B),on the other hand, states that "[p]roprietary
educational institutions ...which are nonprofit shall pay a
tax of ten percent (10%) on their taxable income
...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
...[the regular corporate income tax of 30%] shall be
imposed on the entire taxable income
● a proprietary educational institution is entitled only to the reduced
rate of 10% corporate income tax. The reduced rate is applicable only
if: (1) the proprietary educational institution is non-profit and (2) its
gross income from unrelated trade, business or activity does not
exceed 50% of its total gross income.
● Consistent with Article XIV, Section 4 (3) of the Constitution, these
limitations do not apply to non-stock, non-profit educational
institutions.
● we declare the last paragraph of Section 30 of the Tax Code without
force and effect for being contrary to the Constitution insofar as it
subjects to tax the income and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for
educational purpose.
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 Atlas Consolidated mining and Development corp v CIR Stockholders relation service
G.R. No. L-26911. January 27, 1981 fee 25,523.14
Case: These are two (2) petitions for review from the decision of the CTA in
CTA Case No. 1312 which arose from the 1957 and 1958 deficiency income U.S. stock listing expenses 8,326.70
tax assessments made by the Commissioner of Internal Revenue, where Atlas
Suit expenses 6,666.65
was assessed P546,295.16 for 1957 and P215,493.96 for 1958 deficiency
income taxes. Provision for contingencies 60,000.00
● Court of Tax Appeals rendered a decision on October 25, 1966
Facts: allowing the abovementioned disallowed items except the items
● Atlas is a corporation engaged in the mining industry registered denominated by Atlas as stockholders relation service fee and suit
under the laws of the Philippines. expenses – unallowable
● On August 20, 1962, the Commissioner assessed against Atlas the
sum of P546,295.16 and P215,493.96 or a total of P761,789.12 as Atlas’ Argument: the amount of P25,523.14 paid in 1958 as annual public
deficiency income taxes for the years 1957 and 1958. relations expenses is a deductible expense from gross income under Section
● It is the opinion of the Commissioner that Atlas is not entitled to 30(a) (1) of the National Internal Revenue Code. Atlas claimed that it was paid
exemption from the income tax under Section 4 of Republic Act 909 for services of a public relations firm, P.K. Macker & Co., a reputable public
1 because same covers only gold mines, while the assessment of relations consultant in New York City, U.S.A., hence, an ordinary and
deficiency income tax of P761,789.12 covers the disallowance of necessary business expense in order "to compete with other corporations
items claimed by Atlas as deductible from gross income. also interested in the investment market in the United States."
● the Secretary of Finance ruled that the exemption provided in
Republic Act 909 embraces all new mines and old mines whether gold Petition for Review of Atlas
or other minerals Issue: whether or not the expenses paid for the services rendered by a public
● Commissioner recomputed Atlas deficiency income tax liabilities relations firm P.K. Macker & Co. labelled as stockholders relation service fee
● Commissioner issued a revised assessment entirely eliminating the is an allowable deduction as business expense under Section 30(a) (1) of the
assessment of P546,295.16 for the year 1957. The assessment for National Internal Revenue Code .(NO)
1958 was reduced
● Atlas appealed to the Court of Tax Appeals, assailing the disallowance Ruling:
of the following items claimed as deductible from its gross income for Ordinary and Necessary
1958: ● when a taxpayer claims a deduction, he must point to some specific
Transfer agent's fee P59,477.42 provision of the statute in which that deduction is authorized and
must be able to prove that he is entitled to the deduction which the
law allows.

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 ● the law allowing expenses as deduction from gross income for ● the information about Atlas given out and played up in the mass
purposes of the income tax is Section 30 (a) (1) of the National communication media resulted in full subscription of the additional
Internal Revenue which allows a deduction of "all the ordinary and shares issued by Atlas
necessary expenses paid or incurred during the taxable year in ● the questioned item, stockholders relation service fee, was in effect
carrying on any trade or business." spent for the acquisition of additional capital, ergo, a capital
● statutory test of deductibility where it is axiomatic that to be expenditure.
deductible as a business expense, three conditions are imposed, ● That the expense in question was incurred to create a favorable
namely: (1) the expense must be ordinary and necessary, (2) it must image of the corporation in order to gain or maintain the public's and
be paid or incurred within the taxable year, and (3) it must be paid or its stockholders' patronage, does not make it deductible as business
incurred in carrying in a trade or business. expense.
● In addition, not only must the taxpayer meet the business test, he ● efforts to establish reputation are akin to acquisition of capital assets
must substantially prove by evidence or records the deductions and, therefore, expenses related thereto are not business expense
claimed under the law, otherwise, the same will be disallowed. The but capital expenditures
mere allegation of the taxpayer that an item of expense is ordinary ● To avail of the claimed deduction under Section 30(a)(1) of the
and necessary does not justify its deduction National Internal Revenue Code, it is incumbent upon the taxpayer to
● an expense will be considered "necessary" where the expenditure is adduce substantial evidence to establish a reasonably proximate
appropriate and helpful in the development of the taxpayer's relation between the expenses to the ordinary conduct of the
business. It is "ordinary" when it connotes a payment which is normal business of the taxpayer. A logical link or nexus between the expense
in relation to the business of the taxpayer and the surrounding and the taxpayer's business must be established by the taxpayer.
circumstances. The term "ordinary" does not require that the
payments be habitual or normal in the sense that the same taxpayer Petition for Review of CIR
will have to make them often; the payment may be unique or non- 1st Issue: of whether or not the business expenses deducted from Atlas'
recurring to the particular taxpayer affected. gross income in 1958 may be allowed in the absence of proof of payments
● The right to a deduction depends in each case on the particular facts ● As consistently ruled by this Court, the findings of facts by the Court
and the relation of the payment to the type of business in which the of Tax Appeals will not be reviewed in the absence of showing of
taxpayer is engaged gross error or abuse. We, therefore, hold that it was too late for the
● the answer to the question as to whether the expenditure is an Commissioner to raise the issue of fact of payment for the first time
allowable deduction as a business expense must be determined from in his memorandum in the Court of Tax Appeals and in this instant
the nature of the expenditure itself, which in turn depends on the appeal to the Supreme Court.
extent and permanency of the work accomplished by the
expenditure. (FOCUS) 2nd: THE COURT OF TAX APPEALS ERRED IN ALLOWING THE
DEDUCTION FROM GROSS INCOME OF LISTING EXPENSES ALLEGEDLY
Stockholder’s Relation Service Fee is a Capital Expenditure INCURRED BY RESPONDENT;
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 ● Commissioner contended that such expense should be disallowed for ● As ruled by the Court of Tax Appeals, the said amount was in effect
not being ordinary and necessary and not incurred in trade or added to Atlas' taxable income.
business
● CTA: Chesapeake Corporation of Virginia vs. Commissioner of 4th: THE COURT OF TAX APPEALS ERRED IN DISALLOWING ONLY THE
Internal Revenue where the Tax Court allowed the deduction of stock AMOUNT OF P6,666.65 AS SUIT EXPENSES, THE CORRECT AMOUNT THAT
exchange fee in dispute, which is an annually recurring cost for the SHOULD HAVE BEEN DISALLOWED BEING P17,499.98.
annual maintenance of the listing ● petitioner deducted from its 1958 gross income the amount of
● SC: Chesapeake decision controlling with the facts and circumstances P23,333.30 as attorney's fees and litigation expenses in the defense
of the instant case. of title to the Toledo Mining properties purchased by Atlas from
● In Dome Mines, Ltd. case, the stock listing fee was disallowed as a Mindanao Lode Mines Inc. in Civil Case No. 30566
deduction not only because the expenditure did not meet the ● On the ground that the litigation expense was a capital expenditure
statutory test but also because the same was paid only once, and the under Section 121 of the Revenue Regulations No. 2, the investigating
benefit acquired thereby continued indefinitely – single payment revenue examiner recommended the disallowance of P13,333.30,
made to the stock exchange was a capital expenditure but reduced to 6,666,65
● in the Chesapeake Corporation case, fee paid to the stock exchange ● SC: As held by the U.S. Tax Court in the case of Safety Tube Corp. vs.
was annual and recurring. Commissioner of Internal Revenue, it is well settled that litigation
● instant case, payments were made annually. For this reason, said expenses incurred in defense or protection of title are capital in
listing fee is an ordinary and necessary business expense. nature and not deductible.
● However, the investigating revenue examiner recommended a
3rd: THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE AMOUNT partial disallowance of P13,333.30 instead of the entire amount of
OF P60,000 REPRESENTED BY RESPONDENT AS "PROVISION FOR P23,333.30.
CONTINGENCIES" WAS ADDED BACK BY RESPONDENT TO ITS GROSS ● This Court will pass upon this particular question since there is a clear
INCOME IN COMPUTING THE INCOME TAX DUE FROM IT FOR 1958; error committed by officials concerned in the computation of the
● Commissioner: contended that the Court of Tax Appeals erred when deductible amount.
it held that the amount of P60,000 as "provisions for contingencies" ● Upon taxation depends the Government's ability to serve the people
was in effect added back to Atlas' income. for whose benefit taxes are collected. To safeguard such interest,
● SC: in the absence of grave abuse of discretion or error on the part of neglect or omission of government officials entrusted with the
the tax court its findings of facts may not be disturbed by the collection of taxes should not be allowed to bring harm or detriment
Supreme Court. to the people
● It is not within the province of this Court to resolve whether or not ● Thus, the amount of P17,499.98 (3/4 of P23,333.30) representing suit
the P60,000 representing "provision for contingencies" was in fact expenses be disallowed as deduction instead of P6,666.65 only.
added to or deducted from the taxable income

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