Chamber of Real Estate and Builders Associations, Inc., v. The H on. ExecutiveSecretary Alberto Romulo, et al G.R. No. 160756.

March 9, 2010Facts: Petitioner Chamber of Real Estate and Builders Associations, Inc. (CR EBA), an association of real estatedevelopers and builders in the Philippines, questioned the validity of Section 27(E) of the Tax Code which imposes the minimum corporate income tax (MCIT) on corporations. Under the Tax Code, a corporation can become subject to the MCIT at the rate of 2% of gross income, beginning on the 4 th taxable year immediately following the year in which it commenced its business operations, when such MCIT is greater than the normal corporate income tax. If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. CREBA argued, among others, that the use of gross income as MCIT base amounts to a confiscation of capital because gross income, unlike net income, is not realized gain. CREBA also sought to invalidate the provisions of RR No. 298, as amended, otherwise known as the Consolidated Withholding Tax Regulations, which prescribe the rules and procedures for the collection of CWT on sales of real properties classified as ordinary assets, on the grounds that these regulations: Use gross selling price (GSP) or fair market value(FMV) as basis for determining the income tax on the sale of real estate classified as ordinary assets, instead of the entitys net taxable income as provided for under the Tax Code; Mandate the collection of income tax on a per transaction basis, contrary to the Tax Code provision which imposes income tax on net income at the end of the taxable period; Go against the due process clause because the government collects income tax even when the net income has not yet been determined; gain is never assured by mere receipt of the selling price; and Contravene the equal protection clause because the CWT is being charged upon real estate enterprises, but not on other business enterprises, more particularly, those in the manufacturing sector, which do business similar to that of a real estate enterprise.

the carry-forward of any excess of the MCIT paid over the normal income tax which shall be credited against the normal income tax for the three immediately succeeding years. Thirdly, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and legitimate business reverses. (2) Yes. Despite the imposition of CWT on GSP or FMV, the income tax base for sales of real property classified as ordinary assets remains as the entitys net taxable income as provided in the Tax Code, i.e., gross income less allowable costs and deductions. The seller shall file its income tax return and credit the taxes withheld by the withholding agent-buyer against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax credit. The use of the GSP or FMV as basis to determine the CWT is for purposes of practicality and convenience. The knowledge of the withholding agentbuyer is limited to the particular transaction in which he is a party. Hence, his basis can only be the GSP or FMV which figures are reasonably known to him. Also, the collection of income tax via the CWT on a per transaction basis, i.e., upon consummation of the sale, is not contrary to the Tax Code which calls for the payment of the net income at the end of the taxable period. The taxes withheld are in the nature of advance tax payments by a taxpayer in order to cancel its possible future tax obligation. They are instalments on the annual tax which may be due at the end of the taxable year. 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 very essence of the withholding tax method of tax collection. On the alleged violation of the equal protection clause, the taxing power has the authority to make reasonable classifications for purposes of taxation. Inequalities which result from singling out a particular class for taxation, or exemption, infringe no constitutional limitation. The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises. What distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of transactions involved. The income from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme. On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal and substantial amounts. CIR v St. Lukes Medical Center Facts: St. Lukes Medical Center, Inc. (St. Lukes) is a hospital organized as a non-stock and non-profit corporation. 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

Issues: (1) Is the imposition of MCIT constitutional? (2) Is the imposition of CWT on income from sales of real properties classified as ordinary assets constitutional? Held: 1) Yes. The imposition of the MCIT is constitutional. An income tax is arbitrary and confiscatory if it taxes capital, because it is income, and not capital, which is subject to income tax. However, MCIT is imposed on gross income which is computed by deducting from gross sales 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. Various safeguards were incorporated into the law imposing MCIT. Firstly, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the MCIT is imposed only on the 4th taxable year immediately following the year in which the corporation commenced its operations. Secondly, the law allows

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 individ uals 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 nonprofit 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 c oncerns exemption from real property tax and not income tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens the burden of government.

In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated by its relief from doing public works which would have been funded by appropriations from the Treasury. The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution. (Emphasis supplied) Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that the institution actually, directly and exclusively use the property for a charitable purpose.(Emphasis supplied) To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the property actually, directly and exclusively for charitable purposes. (Emphasis supplied) To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be organized and operat ed exclusively for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be operated exclusively for social welfare.(Emphasis supplied) However, the last paragraph of Section 30 of the NIRC qualifies the words organized and operated exclusively by providing that: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis supplied) In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts any activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. Thus, even if the charitable institution must be organized and operated exclusively for charitable purposes, it is nevertheless allowed to engage in activities conducted for profit without losing its tax exempt status for its not-for-profit activities. The only consequence is that the income of whatever kind and character of a charitable institution from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax. Prior to the introduction of Section 27(B), the tax rate on such income from forprofit activities was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%. (Emphasis supplied)

The Court finds that St. 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 forprofit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B). (Emphasis supplied) St. 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. 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.