ST. LUKE'S MEDICAL CENTER, INC. - v - CIR
G.R. No. 195909
COMMISSIONER OF INTERNAL REVENUE vs. ST. LUKE'S MEDICAL CENTER, INC.
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC. vs. COMMISSIONER OF INTERNAL
REVENUE
September 26, 2012, CARPIO, J.
Facts:
St. Luke's Medical Center, Inc. is a
hospital organized as a non-stock and non-profit corporation. In 2002, the BIR assessed
St. Luke's deficiency taxes amounting to ₱76M for 1998, comprised of deficiency
income tax, value-added tax, withholding tax on compensation and expanded
withholding tax. The BIR reduced the amount to ₱63M during trial in the First
Division of the CTA.
On 14 January 2003, St. Luke's filed an
administrative protest with the BIR against the deficiency tax assessments. The
BIR did not act on the protest within the 180-day period under Section 228 of
the NIRC. Thus, St. Luke's appealed to the CTA.
The BIR argued before the CTA that
Section 27(B) of the NIRC, which imposes a 10% preferential tax rate on the
income of proprietary non-profit hospitals, should be applicable to St. Luke's.
The BIR claimed that St. Luke's was actually operating for profit in 1998
because only 13% of its revenues came from charitable purposes. Moreover, the
hospital's board of trustees, officers and employees directly benefit from its
profits and assets.
St. Luke's contended that the BIR should
not consider its total revenues, because its free services to patients was
65.20% of its 1998 operating income. St. Luke's also claimed that its
income does not inure to the benefit of any individual. St. Luke's maintained
that it is a non-stock and non-profit institution for charitable and social
welfare purposes 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.
Ruling
of CTA: The CTA held that Section 27(B) of the present NIRC does not apply to
St. Luke's. The CTA explained that to apply the 10% preferential rate, Section
27(B) requires a hospital to be "non-profit." On the other hand, Congress
specifically used the word "non-stock" to qualify a charitable
"corporation or association" in Section 30(E) of the NIRC. According
to the CTA, this is unique in the present tax code, indicating an intent to
exempt this type of charitable organization from income tax. Section 27(B) does
not require that the hospital be "non-stock." The CTA stated,
"it is clear that non-stock, non-profit hospitals operated exclusively for
charitable purpose are exempt from income tax on income received by them as
such, applying the provision of Section 30(E) of the NIRC of 1997, as
amended."
Issue:
Whether or not St. Luke's is liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the
income of proprietary non-profit hospitals.
Ruling:
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.
Section 30(E) of the
NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong
to or inure to the benefit of any member, organizer, officer or any specific
person.
There is no dispute that St. Luke's is
organized as a non-stock and non-profit charitable institution. However, this does
not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a
charitable institution is not ipso facto tax exempt. 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: 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.
The
Court finds that St. Luke's is a corporation that is not "operated exclusively"
for charitable or social welfare purposes insofar as its revenues from paying
patients are concerned. This ruling is based not only on a strict
interpretation of a provision granting tax exemption, but also on the clear and
plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires
that an institution be "operated exclusively" for charitable or
social welfare purposes to be completely exempt from income tax. An institution
under Section 30(E) or (G) does not lose its tax exemption if it earns income
from its for-profit activities. Such income from for-profit activities, under
the last paragraph of Section 30, is merely subject to income tax, previously
at the ordinary corporate rate but now at the preferential 10% rate pursuant to
Section 27(B).
A tax exemption is effectively a social
subsidy granted by the State because an exempt institution is spared from
sharing in the expenses of government and yet benefits from them. Tax
exemptions for charitable institutions should therefore be limited to
institutions beneficial to the public and those which improve social welfare. A
profit-making entity should not be allowed to exploit this subsidy to the
detriment of the government and other taxpayers.
St. Luke's fails to meet the requirements
under Section 30(E) and (G) of the NIRC to be completely tax exempt from all
its income. However, it remains a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute any of its profits to its
members and such profits are reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities.
Note:
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. St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency
income tax in 1998 based on the 10% preferential income tax rate under Section
27(B) 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.
Note: I made this case digest when I was still a law student. The ones posted on my blog were not due for submission as part of any academic requirement. I want to remind you that there is no substitute to reading the full text of the case! Use at your own risk.
Note: I made this case digest when I was still a law student. The ones posted on my blog were not due for submission as part of any academic requirement. I want to remind you that there is no substitute to reading the full text of the case! Use at your own risk.
