Commissioner of Internal Revenue v St Luke’s | G.R. No. 195909 | Sep 26, 212 | Carpio, J.

Petitioners: Commissioner of Internal Revenue

Respondents: St Luke’s Medical Center

SUMMARY: St Luke’s was assessed by the BIR for deficiency taxes amounting to 76M which was comprised of VAT and
income tax among other things. St Luke’s argues that as a non-stock & non-profit hospital it is exempt from the payment
of the income tax deficiency. The CTA eventually ruled in favor of the hospital which lowered the tax deficiency to 6M due
to the exemption from income tax. The SC reversed this on the ground that even though St Luke’s is indeed a non-stock
& non-profit institution which is exempt from the taxation for income derived from non-profit activity, the large revenues
derived from for-profit activity are subject to income taxation.

FACTS:
 St Luke’s Medical Center is non-stock, non-profit hospital. It’s articles of incorporation states that its purpose is
o To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, charitable and
scientific hospital which shall give curative, rehabilitative and spiritual care to the sick, diseased and
disabled persons; provided that purely medical and surgical services shall be performed by duly licensed
physicians and surgeons who may be freely and individually contracted by patients;
o To provide a career of health science education and provide medical services to the community through
organized clinics in such specialties as the facilities and resources of the corporation make possible;
o To carry on educational activities related to the maintenance and promotion of health as well as provide
facilities for scientific and medical researches which, in the opinion of the Board of Trustees, may be
justified by the facilities, personnel, funds, or other requirements that are available;
o To cooperate with organized medical societies, agencies of both government and private sector; establish
rules and regulations consistent with the highest professional ethics;
 December, 2002: BIR assessed St. Luke’s deficiency taxes amounting to P76M for 1998, comprised of deficiency
income tax, VAT, withholding tax on compensation and expanded withholding tax.
o The BIR reduced the amount to P63M during trial CTA
 January 2003, St. Luke’s filed an administrative protest with the BIR. BIR didn’t act on it
 St. Luke’s appealed to the CTA.
o BIR argued that NIRC s27(B) imposes a 10% preferential tax rate on the income of proprietary nonprofit
hospitals, should be applicable to St. Luke’s.
 It’s a new provision intended to amend the exemption on non-profit hospitals that were
previously categorized as non-stock, non-profit corporations
 It is a specific provision which prevails over the general exemption
 The BIR claimed that St. Luke’s was operating for profit in 1998 because only 13% of its revenues
came from charitable purposes.
o St Luke’s argues that the BIR should not consider its total revenues, because its free services to patients
65% 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 NIRC s30(E) and (G).
 It argued that the making of profit per se does not destroy its income tax exemption.
 CTA ruled that St. Luke’s is a non-stock and non-profit charitable institution covered by NIRC s30(E) and (G). This
ruling would exempt all income derived by St. Luke’s from services to its patients, whether paying or non-paying.
o CTA ruled that a charitable institution does not lose its charitable character and its exemption from
taxation merely because recipients of its benefits who are able to pay are required to do so, where funds
derived in this manner are devoted to the charitable purposes of the institution. The generation of income
from paying patients does not per se destroy the charitable nature of St. Luke’s.
o Hence, the P63M in taxes was reduced to P6M
 BIR appeals said decision

ISSUES + RULING:
 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? St Luke’s is not
exempt, hence liable
o BIR argues that NIRC s27(B) that the 10% income tax rate specifically pertains to proprietary educational
institutions and proprietary non-profit hospitals.
 Congress intended to remove the exemption that non-profit hospitals previously enjoyed under
Section 27(E) of the NIRC of 1977, which is now substantially reproduced in NIRC s30(E)
 NIRC s27(B) provides that “Proprietary educational institutions and hospitals which are non-profit
shall pay a tax of ten percent (10%) on their taxable income”
o St. Luke’s claims tax exemption under Section 30(E) and (G) of the NIRC.
 Contends that it is a charitable institution and an organization promoting social welfare.
 The argument of St. Luke’s focus on the wording of Section 30(E) exempting from income tax non-
stock, non-profit charitable institutions
 The legislative intent behind NIRC s27(b) was only to remove the exemption for “proprietary non-
profit” hospitals.
 SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:
 (E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans,
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;
 G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
 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.
o SC: Partly grants the petition of the BIR but on a different ground.
 NIRC s27(B) does not remove the income tax exemption of proprietary non-profit hospitals under
s30(E) and (G).
 s27(B) and s30(E) and (G) can be construed together without the removal of such tax exemption.
 The effect of the introduction of s27(B) is to subject the taxable income of proprietary non-profit
hospitals, among the institutions covered by Section 30, to the 10% preferential rate under s27(B)
instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to
s27(A).
 The only qualifications for hospitals are that they must be proprietary and non-profit.
 Proprietary means private, 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
institution’s purposes and all its activities conducted not for profit.
 Non-profit does not necessarily mean “charitable.”
 Lung center v QC: Charity in was defined 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.
o Charitable institutions provide for free goods and services to the public which
would otherwise fall on the shoulders of government
 An organization may be considered as non-profit if it does not distribute any part of its
income to stockholders or members.
 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 s30.
 Charitable institutions are not ipso facto entitled to a tax exemption.
 The requirements for a tax exemption are specified by the law granting it.
 The Consti 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 NIRC s30(E) is materially different from Constitution.
 NIRC s30(E) defines the corporation or association that is exempt from income tax.
 The Constitution does not define a charitable institution, but requires that the institution
“actually, directly and exclusively” use the property for a charitable purpose.
 NIRC s30(E) provides that a charitable institution must be:
 A non-stock corporation or association;
 Organized exclusively for charitable purposes;
 Operated exclusively for charitable purposes; and
 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.
 Thus, both the organization and operations of the charitable institution must be devoted
“exclusively” for charitable purposes.
 The organization of the institution refers to its corporate form, as shown by its articles of
incorporation, by-laws and other constitutive documents.
 NIRC s30(E) specifically requires that the corporation or association be nonstock, which is
defined by the Corporation Code as “one where no part of its income is distributable as
dividends to its members, trustees, or officers” and that any profit “obtained as an
incident to its operations shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the corporation was organized
 But under Lung Center v QC any profit by a charitable institution must not only be plowed back
“whenever necessary or proper,” but must be “devoted or used altogether to the charitable
object which it is intended to achieve.”
 The operations of the charitable institution generally refer to its regular activities.
 NIRC s30(E) requires that these operations be exclusive to charity
o that no part of the net income or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific person.
o the use of lands, buildings and improvements of the institution is but a part of its
operations
o Instance case:
 St. Luke’s is organized as a non-stock and non-profit charitable institution.
 But 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, the Constitution requires that a charitable
institution use the property “actually, directly and exclusively” for charitable purposes.
 To be exempt from income taxes, NIRC s30(E) requires that a charitable institution must
be “organized and operated exclusively” for charitable purposes.
 Likewise, to be exempt from income taxes, NIRC s30(G) requires that the institution be
“operated exclusively” for social welfare.
 But the last paragraph of NIRC s30 qualifies the words “organized and operated exclusively”
 It 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.
 This paragraph qualifies the requirements in Section 30(E) that the “[n]on-stock
corporation or association [must be] organized and operated exclusively for x x x
charitable x x x purposes x x x.” It
 It also qualifies the requirement in s30(G) that the civic organization must be “operated
exclusively” for the promotion of social welfare.
o Thus, even if the charitable institution must be “organized and operated exclusively” for charitable
purposes, it is allowed to engage in “activities conducted for profit” without losing its tax exempt status
for its not-for-profit activities.
  The 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.”
o Prior to the introduction of NIRC s27(B), the tax rate on such income from for-profit activities was the
ordinary corporate rate under Section 27(A).
 But with the introduction of Section 27(B), the tax rate is now 10%.
o It can’t be disputed that a hospital which receives P1.73 billion from paying patients is not an institution
“operated exclusively” for charitable purposes.
 Indeed, St. Luke’s admits that it derived profits from its paying patients.
 St. Luke’s declared P1,730,367,965 as “Revenues from Services to Patients” in contrast to its “Free
Services” expenditure of P218,187,498.
o Services to paying patients are activities conducted for profit.
 They cannot be considered any other way.
 There is a “purpose to make profit over and above the cost” of services
o St Luke’s claims that its charity expenditure of P218M is 65.20% of its operating income in 1998.
 But if a part of the remaining 34% of the operating income is reinvested in property, equipment
or facilities used for services to paying and non-paying patients, then it cannot be said that the
income is “devoted or used altogether to the charitable object which it is intended to achieve.”56
 The income is plowed back to the corporation not entirely for charitable purposes, but for profit
as well.
 NIRC s30 expressly qualifies that income from activities for profit is taxable “regardless of the
disposition made of such income.”
o 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 s30(E) and (G).
 NIRC s30(E) and (G) requires that an institution be “operated exclusively” for charitable or social
welfare purposes to be completely exempt from income tax.
 An institution under s30(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 s 30, is merely subject to
income tax, previously at the ordinary corporate rate but now at the preferential 10% rate
pursuant to s27(B).

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY GRANTED. The Decision
of the Court of Tax Appeals En Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746
are MODIFIED. 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(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.