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Republic of the Philippines all the net income or asset devoted to the institution’s purposes and all its

stitution’s purposes and all its activities


SUPREME COURT conducted not for profit.
Manila Same; “Non-profit” does not necessarily mean “charitable.”―“Non-profit” does
not necessarily mean “charitable.” In Collector of Internal Revenue v. Club Filipino
SECOND DIVISION Inc. de Cebu, 5 SCRA 321 (1962), this Court considered as non-profit a sports club
organized for recreation and entertainment of its stockholders and members. The
G.R. No. 195909 September 26, 2012 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-
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, making enterprise.
vs. Same; Tax Exemptions; Charity is essentially a gift to an indefinite number of
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT. persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise
x-----------------------x fall on the shoulders of government; The government forgoes taxes which should have
been spent to address public needs, because certain private entities already assume a
G.R. No. 195960 part of the burden.―To be a charitable institution, however, an organization must
meet the substantive test of charity in Lung Center of the Philippines vs. Quezon City,
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER, 433 SCRA 119 (2004). The issue in Lung Center concerns exemption from real
vs. property tax and not income tax. However, it provides for the test of charity in our
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. jurisdiction. Charity is essentially a gift to an indefinite number of persons which
lessens the burden of government. In other words, charitable institutions
Taxation; Tax Exemptions; The Supreme Court holds that Section 27(B) of the provide for free goods and services to the public which would otherwise fall
National Internal Revenue Code (NIRC) does not remove the income tax exemption of on the shoulders of government. Thus, as a matter of efficiency, the government
proprietary non-profit hospitals under Section 30(E) and (G).―The Court partly forgoes taxes which should have been spent to address public needs, because
grants the petition of the BIR but on a different ground. We hold that Section 27(B) certain private entities already assume a part of the burden. This is the rationale for
of the NIRC does not remove the income tax exemption of proprietary non-profit the tax exemption of charitable institutions. The loss of taxes by the government is
hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) compensated by its relief from doing public works which would have been funded
and (G) on the other hand, can be construed together without the removal of such by appropriations from the Treasury.
tax exemption. The effect of the introduction of Section 27(B) is to subject the Same; Same; Charitable institutions are not ipso facto entitled to a tax
taxable income of two specific institutions, namely, proprietary non-profit exemption. The requirements for a tax exemption are specified by the law granting
educational institutions and proprietary non-profit hospitals, among the it.―Charitable institutions, however, are not ipso facto entitled to a tax
institutions covered by Section 30, to the 10% preferential rate under Section 27(B) exemption. The requirements for a tax exemption are specified by the law granting
instead of the ordinary 30% corporate rate under the last paragraph of Section 30 it. The power of Congress to tax implies the power to exempt from tax. Congress can
in relation to Section 27(A)(1). create tax exemptions, subject to the constitutional provision that “[n]o law
Same; Preferential Tax Rate; Section 27(B) of the National Internal Revenue granting any tax exemption shall be passed without the concurrence of a majority
Code (NIRC) imposes a 10% preferential tax rate on the income of (1) proprietary non- of all the Members of Congress.” The requirements for a tax exemption are strictly
profit educational institutions and (2) proprietary non-profit hospitals.―Section construed against the taxpayer because an exemption restricts the collection of
27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) taxes necessary for the existence of the government.
proprietary non-profit educational institutions and (2) proprietary non-profit Same; Same; Income Taxation; Real Estate Taxes; For real property taxes, the
hospitals. The only qualifications for hospitals are that they must be proprietary and incidental generation of income is permissible because the test of exemption is the use
non-profit. “Proprietary” means private, following the definition of a “proprietary of the property; The effect of failing to meet the use requirement is simply to remove
educational institution” as “any private school maintained and administered from the tax exemption that portion of the property not devoted to charity.―For real
by private individuals or groups” with a government permit. “Non-profit” means property taxes, the incidental generation of income is permissible because the test
no net income or asset accrues to or benefits any member or specific person, with of exemption is the use of the property. The Constitution provides that “[c]haritable
institutions, churches and personages or convents appurtenant thereto, mosques,
non-profit cemeteries, and all lands, buildings, and improvements, actually, directly,
and exclusively used for religious, charitable, or educational purposes shall be profit activities was the ordinary corporate rate under Section 27(A). With the
exempt from taxation.” The test of exemption is not strictly a requirement on the introduction of Section 27(B), the tax rate is now 10%.
intrinsic nature or character of the institution. The test requires that the institution Same; Income Taxation; Preferential Tax Rate; The Supreme Court finds that St.
use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held Luke’s is a corporation that is not “operated exclusively” for charitable or social
that the Lung Center of the Philippines did not lose its charitable character when it welfare purposes insofar as its revenues from paying patients are concerned; Such
used a portion of its lot for commercial purposes. The effect of failing to meet the income from for-profit activities, under the last paragraph of Section 30, is merely
use requirement is simply to remove from the tax exemption that portion of the subject to income tax, previously at the ordinary corporate rate but now at the
property not devoted to charity. preferential 10% rate pursuant to Section 27(B).―The Court finds that St. Luke’s is a
Same; Same; The Constitution exempts charitable institutions only from real corporation that is not“operated exclusively” for charitable or social welfare
property taxes. In the National Internal Revenue Code (NIRC), Congress decided to purposes insofar as its revenues from paying patients are concerned. This ruling is
extend the exemption to income taxes.―The Constitution exempts charitable based not only on a strict interpretation of a provision granting tax exemption, but
institutions only from real property taxes. In the NIRC, Congress decided to extend also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the
the exemption to income taxes. However, the way Congress crafted Section 30(E) of NIRC requires that an institution be “operated exclusively” for charitable or social
the NIRC is materially different from Section 28(3), Article VI of the Constitution. welfare purposes to be completely exempt from income tax. An institution under
Section 30(E) of the NIRC defines the corporation or association that is exempt from Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-
income tax. On the other hand, Section 28(3), Article VI of the Constitution does not profit activities. Such income from for-profit activities, under the last paragraph of
define a charitable institution, but requires that the institution “actually, directly Section 30, is merely subject to income tax, previously at the ordinary corporate
and exclusively” use the property for a charitable purpose. rate but now at the preferential 10% rate pursuant to Section 27(B).
Same; Same; Real Estate Taxes; Income Taxation; To be exempt from real Same; Tax Exemptions; A tax exemption is effectively a social subsidy granted by
property taxes, Section 28(3), Article VI of the Constitution requires that a charitable the State because an exempt institution is spared from sharing in the expenses of
institution use the property “actually, directly and exclusively” for charitable purposes. government and yet benefits from them.―A tax exemption is effectively a social
To be exempt from income taxes, Section 30(E) of the National Internal Revenue Code subsidy granted by the State because an exempt institution is spared from sharing
(NIRC) requires that a charitable institution must be “organized and operated in the expenses of government and yet benefits from them. Tax exemptions for
exclusively” for charitable purposes. Likewise, to be exempt from income taxes, Section charitable institutions should therefore be limited to institutions beneficial to the
30(G) of the National Internal Revenue Code (NIRC) requires that the institution be public and those which improve social welfare. A profit-making entity should not be
“operated exclusively” for social welfare.―There is no dispute that St. Luke’s is allowed to exploit this subsidy to the detriment of the government and other
organized as a non-stock and non-profit charitable institution. However, this does taxpayers.
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 DECISION
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 CARPIO, J.:
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 The Case
purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC
requires that the institution be “operated exclusively” for social welfare. These are consolidated 1 petitions for review on certiorari under Rule 45 of the
Same; Same; Even if the charitable institution must be “organized and operated Rules of Court assailing the Decision of 19 November 2010 of the Court of Tax
exclusively” for charitable purposes, it is nevertheless allowed to engage in “activities Appeals (CTA) En Banc and its Resolution 2 of 1 March 2011 in CTA Case No. 6746.
conducted for profit” without losing its tax exempt status for its not-for-profit This Court resolves this case on a pure question of law, which involves the
activities.―Even if the charitable institution must be “organized and operated interpretation of Section 27(B) vis-à-vis Section 30(E) and (G) of the National
exclusively” for charitable purposes, it is nevertheless allowed to engage in Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
“activities conducted for profit” without losing its tax exempt status for its not-for- proprietary non-profit hospitals.
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 The Facts
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-
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and (G) for non-stock, non-profit charitable institutions and civic organizations
and non-profit corporation. Under its articles of incorporation, among its promoting social welfare. 6
corporate purposes are:
The BIR claimed that St. Luke's was actually operating for profit in 1998 because
(a) To establish, equip, operate and maintain a non-stock, non-profit only 13% of its revenues came from charitable purposes. Moreover, the hospital's
Christian, benevolent, charitable and scientific hospital which shall give board of trustees, officers and employees directly benefit from its profits and
curative, rehabilitative and spiritual care to the sick, diseased and assets. St. Luke's had total revenues of ₱1,730,367,965 or approximately ₱1.73
disabled persons; provided that purely medical and surgical services shall billion from patient services in 1998. 7
be performed by duly licensed physicians and surgeons who may be freely
and individually contracted by patients; St. Luke's contended that the BIR should not consider its total revenues, because
its free services to patients was ₱218,187,498 or 65.20% of its 1998 operating
(b) To provide a career of health science education and provide medical income (i.e., total revenues less operating expenses) of ₱334,642,615. 8 St. Luke's
services to the community through organized clinics in such specialties as also claimed that its income does not inure to the benefit of any individual.
the facilities and resources of the corporation make possible;
St. Luke's maintained that it is a non-stock and non-profit institution for charitable
(c) To carry on educational activities related to the maintenance and and social welfare purposes under Section 30(E) and (G) of the NIRC. It argued
promotion of health as well as provide facilities for scientific and medical that the making of profit per se does not destroy its income tax exemption.
researches which, in the opinion of the Board of Trustees, may be justified
by the facilities, personnel, funds, or other requirements that are The petition of the BIR before this Court in G.R. No. 195909 reiterates its
available; arguments before the CTA that Section 27(B) applies to St. Luke's. The petition
raises the sole issue of whether the enactment of Section 27(B) takes proprietary
(d) To cooperate with organized medical societies, agencies of both non-profit hospitals out of the income tax exemption under Section 30 of the NIRC
government and private sector; establish rules and regulations consistent and instead, imposes a preferential rate of 10% on their taxable income. The BIR
with the highest professional ethics; prays that St. Luke's be ordered to pay ₱57,659,981.19 as deficiency income and
expanded withholding tax for 1998 with surcharges and interest for late payment.
xxxx3
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's treatment and withholding of a part of its income, 9 as well as the payment of
deficiency taxes amounting to ₱76,063,116.06 for 1998, comprised of deficiency surcharge and delinquency interest. There is no ground for this Court to undertake
income tax, value-added tax, withholding tax on compensation and expanded such a factual review. Under the Constitution 10 and the Rules of Court, 11 this
withholding tax. The BIR reduced the amount to ₱63,935,351.57 during trial in the Court's review power is generally limited to "cases in which only an error or
First Division of the CTA. 4 question of law is involved." 12 This Court cannot depart from this limitation if a
party fails to invoke a recognized exception.
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- The Ruling of the Court of Tax Appeals
day period under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA.
The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a Division Decision dated 23 February 2009 which held:
10% preferential tax rate on the income of proprietary non-profit hospitals,
should be applicable to St. Luke's. According to the BIR, Section 27(B), introduced WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby
in 1997, "is a new provision intended to amend the exemption on non-profit PARTIALLY GRANTED. Accordingly, the 1998 deficiency VAT assessment issued
hospitals that were previously categorized as non-stock, non-profit corporations by respondent against petitioner in the amount of ₱110,000.00 is hereby
under Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which CANCELLED and WITHDRAWN. However, petitioner is hereby ORDERED to PAY
prevails over the general exemption on income tax granted under Section 30(E) deficiency income tax and deficiency expanded withholding tax for the taxable
year 1998 in the respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the income. In other words, it should always strive, whenever possible, to have a
sum of ₱6,275,370.38, x x x. surplus." 23

xxxx The CTA held that Section 27(B) of the present NIRC does not apply to St.
Luke's. 24 The CTA explained that to apply the 10% preferential rate, Section 27(B)
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) requires a hospital to be "non-profit." On the other hand, Congress specifically
delinquency interest on the total amount of ₱6,275,370.38 counted from October used the word "non-stock" to qualify a charitable "corporation or association" in
15, 2003 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of Section 30(E) of the NIRC. According to the CTA, this is unique in the present tax
1997. 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
SO ORDERED. 13 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." 25
The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be
paid, arose from the failure of St. Luke's to prove that part of its income in 1998
(declared as "Other Income-Net") 14 came from charitable activities. The CTA The Issue
cancelled the remainder of the ₱63,113,952.79 deficiency assessed by the BIR
based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En The sole issue is whether St. Luke's is liable for deficiency income tax in 1998
Banc held was not applicable to St. Luke's. 15 under Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on
the income of proprietary non-profit hospitals.
The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution
covered by Section 30(E) and (G) of the NIRC. This ruling would exempt all income The Ruling of the Court
derived by St. Luke's from services to its patients, whether paying or non-paying.
The CTA reiterated its earlier decision in St. Luke's Medical Center, Inc. v. St. Luke's Petition in G.R. No. 195960
Commissioner of Internal Revenue, 16 which examined the primary purposes of St.
Luke's under its articles of incorporation and various documents 17 identifying St. As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No.
Luke's as a charitable institution. 195960 because the petition raises factual issues. Under Section 1, Rule 45 of the
Rules of Court, "[t]he petition shall raise only questions of law which must be
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay distinctly set forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits
City, 18 which states that "a charitable institution does not lose its charitable factual review "when the Court of Appeals [in this case, the CTA] manifestly
character and its consequent exemption from taxation merely because recipients overlooked certain relevant facts not disputed by the parties and which, if
of its benefits who are able to pay are required to do so, where funds derived in properly considered, would justify a different conclusion." 27
this manner are devoted to the charitable purposes of the institution x x x." 19 The
generation of income from paying patients does not per se destroy the charitable This Court does not see how the CTA overlooked relevant facts. St. Luke's itself
nature of St. Luke's. stated that the CTA "disregarded the testimony of [its] witness, Romeo B. Mary,
being allegedly self-serving, to show the nature of the 'Other Income-Net' x x
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal x." 28 This is not a case of overlooking or failing to consider relevant evidence. The
Revenue, 20 which ruled that the old NIRC (Commonwealth Act No. 466, as CTA obviously considered the evidence and concluded that it is self-serving. The
amended) 21 "positively exempts from taxation those corporations or associations CTA declared that it has "gone through the records of this case and found no other
which, otherwise, would be subject thereto, because of the existence of x x x net evidence aside from the self-serving affidavit executed by [the] witnesses [of St.
income." 22 The NIRC of 1997 substantially reproduces the provision on charitable Luke's] x x x." 29
institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is
lost whenever there is net income, the Court in Jesus Sacred Heart College The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay
declared: "[E]very responsible organization must be run to at least insure its the 25% surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay
existence, by operating within the limits of its own resources, especially its regular the deficiency tax within the time prescribed for its payment in the notice of
assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under remove the exemption for "proprietary non-profit" hospitals. 35 The relevant
Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the amount of provisions of Section 30 state:
₱6,275,370.38 in the dispositive portion of the CTA First Division Decision
includes only deficiency interest under Section 249(A) and (B) of the NIRC and not SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall
delinquency interest. 32 not be taxed under this Title in respect to income received by them as such:

The Main Issue xxxx

The issue raised by the BIR is a purely legal one. It involves the effect of the (E) Nonstock corporation or association organized and operated exclusively for
introduction of Section 27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) religious, charitable, scientific, athletic, or cultural purposes, or for the
on the income tax exemption of charitable and social welfare institutions. The 10% rehabilitation of veterans, no part of its net income or asset shall belong to or
income tax rate under Section 27(B) specifically pertains to proprietary inure to the benefit of any member, organizer, officer or any specific person;
educational institutions and proprietary non-profit hospitals. The BIR argues that
Congress intended to remove the exemption that non-profit hospitals previously xxxx
enjoyed under Section 27(E) of the NIRC of 1977, which is now substantially
reproduced in Section 30(E) of the NIRC of 1997. 33 Section 27(B) of the present
NIRC provides: (G) Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare;
SEC. 27. Rates of Income Tax on Domestic Corporations. -
xxxx
xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational properties, real or personal, or from any of their activities conducted for profit
institutions and hospitals which are non-profit shall pay a tax of ten percent (10%) regardless of the disposition made of such income, shall be subject to tax imposed
on their taxable income except those covered by Subsection (D) hereof: Provided, under this Code. (Emphasis supplied)
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 or hospitals from all sources, the tax prescribed in Subsection (A) The Court partly grants the petition of the BIR but on a different ground. We hold
hereof shall be imposed on the entire taxable income. For purposes of this that Section 27(B) of the NIRC does not remove the income tax exemption of
Subsection, the term 'unrelated trade, business or other activity' means any trade, proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one
business or other activity, the conduct of which is not substantially related to the hand, and Section 30(E) and (G) on the other hand, can be construed together
exercise or performance by such educational institution or hospital of its primary without the removal of such tax exemption. The effect of the introduction of
purpose or function. A 'proprietary educational institution' is any private school Section 27(B) is to subject the taxable income of two specific institutions, namely,
maintained and administered by private individuals or groups with an issued proprietary non-profit educational institutions 36 and proprietary non-profit
permit to operate from the Department of Education, Culture and Sports (DECS), hospitals, among the institutions covered by Section 30, to the 10% preferential
or the Commission on Higher Education (CHED), or the Technical Education and rate under Section 27(B) instead of the ordinary 30% corporate rate under the last
Skills Development Authority (TESDA), as the case may be, in accordance with paragraph of Section 30 in relation to Section 27(A)(1).
existing laws and regulations. (Emphasis supplied)
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It proprietary non-profit educational institutions and (2) proprietary non-profit
contends that it is a charitable institution and an organization promoting social hospitals. The only qualifications for hospitals are that they must be proprietary
welfare. The arguments of St. Luke's focus on the wording of Section 30(E) and non-profit. "Proprietary" means private, following the definition of a
exempting from income tax non-stock, non-profit charitable institutions. 34 St. "proprietary educational institution" as "any private school maintained and
Luke's asserts that the legislative intent of introducing Section 27(B) was only to 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 institution's purposes and The Court in Lung Center declared that the Lung Center of the Philippines is a
all its activities conducted not for profit. charitable institution for the purpose of exemption from real property taxes. This
ruling uses the same premise as Hospital de San Juan 45 and Jesus Sacred Heart
"Non-profit" does not necessarily mean "charitable." In Collector of Internal College 46 which says that receiving income from paying patients does not destroy
Revenue v. Club Filipino Inc. de Cebu, 37this Court considered as non-profit a the charitable nature of a hospital.
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 As a general principle, a charitable institution does not lose its character as such
profits, they were used for overhead expenses and improving its golf course. 38 The and its exemption from taxes simply because it derives income from paying
club was non-profit because of its purpose and there was no evidence that it was patients, whether out-patient, or confined in the hospital, or receives subsidies
engaged in a profit-making enterprise. 39 from the government, so long as the money received is devoted or used altogether
to the charitable object which it is intended to achieve; and no money inures to the
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not private benefit of the persons managing or operating the institution. 47
charitable. The Court defined "charity" in Lung Center of the Philippines v. Quezon
City 40 as "a gift, to be applied consistently with existing laws, for the benefit of an For real property taxes, the incidental generation of income is permissible because
indefinite number of persons, either by bringing their minds and hearts under the the test of exemption is the use of the property. The Constitution provides that
influence of education or religion, by assisting them to establish themselves in life "[c]haritable institutions, churches and personages or convents appurtenant
or [by] otherwise lessening the burden of government." 41A non-profit club for the thereto, mosques, non-profit cemeteries, and all lands, buildings, and
benefit of its members fails this test. An organization may be considered as non- improvements, actually, directly, and exclusively used for religious, charitable, or
profit if it does not distribute any part of its income to stockholders or members. educational purposes shall be exempt from taxation." 48 The test of exemption is
However, despite its being a tax exempt institution, any income such institution not strictly a requirement on the intrinsic nature or character of the institution.
earns from activities conducted for profit is taxable, as expressly provided in the The test requires that the institution use the property in a certain way, i.e. for a
last paragraph of Section 30. charitable purpose. Thus, the Court held that the Lung Center of the Philippines
did not lose its charitable character when it used a portion of its lot for commercial
To be a charitable institution, however, an organization must meet the substantive purposes. The effect of failing to meet the use requirement is simply to remove
test of charity in Lung Center. The issue in Lung Center concerns exemption from from the tax exemption that portion of the property not devoted to charity.
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 The Constitution exempts charitable institutions only from real property taxes. In
which lessens the burden of government. In other words, charitable institutions the NIRC, Congress decided to extend the exemption to income taxes. However,
provide for free goods and services to the public which would otherwise fall on the the way Congress crafted Section 30(E) of the NIRC is materially different from
shoulders of government. Thus, as a matter of efficiency, the government forgoes Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the
taxes which should have been spent to address public needs, because certain corporation or association that is exempt from income tax. On the other hand,
private entities already assume a part of the burden. This is the rationale for the Section 28(3), Article VI of the Constitution does not define a charitable institution,
tax exemption of charitable institutions. The loss of taxes by the government is but requires that the institution "actually, directly and exclusively" use the
compensated by its relief from doing public works which would have been funded property for a charitable purpose.
by appropriations from the Treasury. 42
Section 30(E) of the NIRC provides that a charitable institution must be:
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power (1) A non-stock corporation or association;
of Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that "[n]o law granting any tax (2) Organized exclusively for charitable purposes;
exemption shall be passed without the concurrence of a majority of all the
Members of Congress." 43 The requirements for a tax exemption are strictly
construed against the taxpayer 44 because an exemption restricts the collection of (3) Operated exclusively for charitable purposes; and
taxes necessary for the existence of the government.
(4) No part of its net income or asset shall belong to or inure to the benefit In short, the last paragraph of Section 30 provides that if a tax exempt charitable
of any member, organizer, officer or any specific person. 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
Thus, both the organization and operations of the charitable institution must be requirements in Section 30(E) that the "[n]on-stock corporation or association
devoted "exclusively" for charitable purposes. The organization of the institution [must be] organized and operated exclusively for x x x charitable x x x purposes x x
refers to its corporate form, as shown by its articles of incorporation, by-laws and x." It likewise qualifies the requirement in Section 30(G) that the civic organization
other constitutive documents. Section 30(E) of the NIRC specifically requires that must be "operated exclusively" for the promotion of social welfare.
the corporation or association be non-stock, which is defined by the Corporation
Code as "one where no part of its income is distributable as dividends to its Thus, even if the charitable institution must be "organized and operated
members, trustees, or officers" 49 and that any profit "obtain[ed] as an incident to exclusively" for charitable purposes, it is nevertheless allowed to engage in
its operations shall, whenever necessary or proper, be used for the furtherance of "activities conducted for profit" without losing its tax exempt status for its not-for-
the purpose or purposes for which the corporation was organized." 50 However, profit activities. The only consequence is that the "income of whatever kind and
under Lung Center, any profit by a charitable institution must not only be plowed character" of a charitable institution "from any of its activities conducted for
back "whenever necessary or proper," but must be "devoted or used altogether to profit, regardless of the disposition made of such income, shall be subject to tax."
the charitable object which it is intended to achieve." 51 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
The operations of the charitable institution generally refer to its regular activities. introduction of Section 27(B), the tax rate is now 10%.
Section 30(E) of the NIRC requires that these operations be exclusive to charity.
There is also a specific requirement that "no part of [the] net income or asset shall In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying
belong to or inure to the benefit of any member, organizer, officer or any specific patients. It cannot be disputed that a hospital which receives approximately ₱1.73
person." The use of lands, buildings and improvements of the institution is but a billion from paying patients is not an institution "operated exclusively" for
part of its operations. charitable purposes. Clearly, revenues from paying patients are income received
from "activities conducted for profit." 52 Indeed, St. Luke's admits that it derived
There is no dispute that St. Luke's is organized as a non-stock and non-profit profits from its paying patients. St. Luke's declared ₱1,730,367,965 as "Revenues
charitable institution. However, this does not automatically exempt St. Luke's from from Services to Patients" in contrast to its "Free Services" expenditure of
paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's ₱218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the following
meets the test of charity, a charitable institution is not ipso facto tax exempt. To be "calculation" to support its claim that 65.20% of its "income after expenses was
exempt from real property taxes, Section 28(3), Article VI of the Constitution allocated to free or charitable services" in 1998. 53
requires that a charitable institution use the property "actually, directly and
exclusively" for charitable purposes. To be exempt from income taxes, Section
REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00
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. OPERATING EXPENSES

Professional care of patients ₱1,016,608,394.00


However, the last paragraph of Section 30 of the NIRC qualifies the words
"organized and operated exclusively" by providing that: Administrative 287,319,334.00

Notwithstanding the provisions in the preceding paragraphs, the income of Household and Property 91,797,622.00
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 ₱1,395,725,350.00
regardless of the disposition made of such income, shall be subject to tax imposed
under this Code. (Emphasis supplied)
INCOME FROM OPERATIONS ₱334,642,615.00 100%
of Conference for the Senate, which introduced the phrase "or from any activity
Free Services -218,187,498.00 -
conducted for profit."
65.20%

INCOME FROM OPERATIONS, Net of FREE ₱116,455,117.00 34.80% P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no
SERVICES cree Vd. que es una actividad esencial dicho hospital para el funcionamiento del
colegio de medicina de dicha universidad?

OTHER INCOME 17,482,304.00 xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestación seria


afirmativa; pero considerando que el hospital tiene cuartos de pago, y a los
EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00 mismos generalmente van enfermos de buena posición social económica, lo que se
paga por estos enfermos debe estar sujeto a 'income tax', y es una de las razones
que hemos tenido para insertar las palabras o frase 'or from any activity
conducted for profit.' 57
In Lung Center, this Court declared:
The question was whether having a hospital is essential to an educational
"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; institution like the College of Medicine of the University of Santo Tomas. Senator
debarred from participation or enjoyment; and "exclusively" is defined, "in a Cuenco answered that if the hospital has paid rooms generally occupied by people
manner to exclude; as enjoying a privilege exclusively." x x x The words "dominant of good economic standing, then it should be subject to income tax. He said that
use" or "principal use" cannot be substituted for the words "used exclusively" this was one of the reasons Congress inserted the phrase "or any activity
without doing violence to the Constitution and the law. Solely is synonymous with conducted for profit."
exclusively. 54
The question in Jesus Sacred Heart College involves an educational
The Court cannot expand the meaning of the words "operated exclusively" without institution. 58 However, it is applicable to charitable institutions because Senator
violating the NIRC. Services to paying patients are activities conducted for profit. Cuenco's response shows an intent to focus on the activities of charitable
They cannot be considered any other way. There is a "purpose to make profit over institutions. Activities for profit should not escape the reach of taxation. Being a
and above the cost" of services. 55 The ₱1.73 billion total revenues from paying non-stock and non-profit corporation does not, by this reason alone, completely
patients is not even incidental to St. Luke's charity expenditure of ₱218,187,498 exempt an institution from tax. An institution cannot use its corporate form to
for non-paying patients. prevent its profitable activities from being taxed.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its The Court finds that St. Luke's is a corporation that is not "operated exclusively"
operating income in 1998. However, if a part of the remaining 34.80% of the for charitable or social welfare purposes insofar as its revenues from paying
operating income is reinvested in property, equipment or facilities used for patients are concerned. This ruling is based not only on a strict interpretation of a
services to paying and non-paying patients, then it cannot be said that the income provision granting tax exemption, but also on the clear and plain text of Section
is "devoted or used altogether to the charitable object which it is intended to 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be
achieve." 56 The income is plowed back to the corporation not entirely for "operated exclusively" for charitable or social welfare purposes to be completely
charitable purposes, but for profit as well. In any case, the last paragraph of exempt from income tax. An institution under Section 30(E) or (G) does not lose
Section 30 of the NIRC expressly qualifies that income from activities for profit is its tax exemption if it earns income from its for-profit activities. Such income from
taxable "regardless of the disposition made of such income." 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).
Jesus Sacred Heart College declared that there is no official legislative record
explaining the phrase "any activity conducted for profit." However, it quoted a
deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee
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.1âwphi1

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.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B)
of the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June
1990 by the BIR, which opined that St. Luke's is "a corporation for purely
charitable and social welfare purposes"59 and thus exempt from income tax. 60 In
Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 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." 62

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(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. All other parts of the Decision
and Resolution of the Court of Tax Appeals are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for
violating Section 1, Rule 45 of the Rules of Court.

SO ORDERED.

Leonardo-De Castro*, Brion, Perez, and Perlas-Bernabe, JJ., concur.


subject to the provisions of the decree, is to be administered by the Office of the
EN BANC
President of the Philippines with the Ministry of Health and the Ministry of Human
Settlements. It was organized for the welfare and benefit of the Filipino people
G.R. No. 144104 June 29, 2004 principally to help combat the high incidence of lung and pulmonary diseases in the
Philippines. The raison d’etre for the creation of the petitioner is stated in the
LUNG CENTER OF THE PHILIPPINES, petitioner, decree, viz: x x x Hence, the medical services of the petitioner are to be rendered to
vs. the public in general in any and all walks of life including those who are poor and
QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of the needy without discrimination. After all, any person, the rich as well as the poor,
Quezon City, respondents. may fall sick or be injured or wounded and become a subject of charity.
Same; Same; Same; As a general principle, a charitable institution does not lose
Taxation; Lung Center of the Philippines; Charitable Institutions; Test of its character as such and its exemption from taxes simply because it derives income
Charitable Character; Words and Phrases; To determine whether an enterprise is a from paying patients, whether out-patient, or confined in the hospital, or receives
charitable institution/entity or not, the elements which should be considered include subsidies from the government, so long as the money received is devoted or used
the statute creating the enterprise, its corporate purpose, its constitution and by-laws, altogether to the charitable object which it is intended to achieve, and no money inures
the methods of administration, the nature of the actual work performed, the character to the private benefit of the persons managing or operating the institution.—As a
of the services rendered, the indefiniteness of the beneficiaries, and the use and general principle, a charitable institution does not lose its character as such and its
occupation of the properties; In the legal sense, a charity may be fully defined as a gift, exemption from taxes simply because it derives income from paying patients,
to be applied consistently with existing laws, for the benefit of an indefinite number of whether out-patient, or confined in the hospital, or receives subsidies from the
persons, either by bringing their minds and hearts under the influence of education or government, so long as the money received is devoted or used altogether to the
religion, by assisting them to establish themselves in life or otherwise lessening the charitable object which it is intended to achieve; and no money inures to the private
burden of government. The test whether an enterprise is charitable or not is whether benefit of the persons managing or operating the institution. In Congregational
it exists to carry out a purpose recognized in law as charitable or whether it is Sunday School, etc. v. Board of Review, the State Supreme Court of Illinois held, thus:
maintained for gain, profit, or private advantage.—On the first issue, we hold that … [A]n institution does not lose its charitable character, and consequent exemption
the petitioner is a charitable institution within the context of the 1973 and 1987 from taxation, by reason of the fact that those recipients of its benefits who are able
Constitutions. To determine whether an enterprise is a charitable institution/entity to pay are required to do so, where no profit is made by the institution and the
or not, the elements which should be considered include the statute creating the amounts so received are applied in furthering its charitable purposes, and those
enterprise, its corporate purposes, its constitution and by-laws, the methods of benefits are refused to none on account of inability to pay therefor. The fundamental
administration, the nature of the actual work performed, the character of the ground upon which all exemptions in favor of charitable institutions are based is
services rendered, the indefiniteness of the beneficiaries, and the use and the benefit conferred upon the public by them, and a consequent relief, to some
occupation of the properties. In the legal sense, a charity may be fully defined as a extent, of the burden upon the state to care for and advance the interests of its
gift, to be applied consistently with existing laws, for the benefit of an indefinite citizens.
number of persons, either by bringing their minds and hearts under the influence Same; Same; Same; The Lung Center of the Philippines does not lose its
of education or religion, by assisting them to establish themselves in life or character as a charitable institution simply because the gift or donation is in the form
otherwise lessening the burden of government. It may be applied to almost anything of subsidies granted by the government.—Under P.D. No. 1823, the petitioner is
that tend to promote the well-doing and well-being of social man. It embraces the entitled to receive donations. The petitioner does not lose its character as a
improvement and promotion of the happiness of man. The word “charitable” is not charitable institution simply because the gift or donation is in the form of subsidies
restricted to relief of the poor or sick. The test of a charity and a charitable granted by the government. As held by the State Supreme Court of Utah in Yorgason
organization are in law the same. The test whether an enterprise is charitable or not v. County Board of Equalization of Salt Lake County: Second, the … government
is whether it exists to carry out a purpose reorganized in law as charitable or subsidy payments are provided to the project. Thus, those payments are like a gift
whether it is maintained for gain, profit, or private advantage. or donation of any other kind except they come from the government. In
Same; Same; Same; The Lung Center of the Philippines was organized for the both Intermountain Health Careand the present case, the crux is the presence or
welfare and benefit of the Filipino people principally to help combat the high incidence absence of material reciprocity. It is entirely irrelevant to this analysis that the
of lung and pulmonary diseases in the Philippines; Any person, the rich as well as the government, rather than a private benefactor, chose to make up the deficit resulting
poor, may fall sick or be injured or wounded and become a subject of charity.—Under from the exchange between St. Mark’s Tower and the tenants by making a
P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, contribution to the landlord, just as it would have been irrelevant in Intermountain
Health Care if the patients’ income supplements had come from private individuals
rather than the government. Therefore, the fact that subsidization of part of the cost specified enumeration in a statute had the intention been not to restrict its meaning
of furnishing such housing is by the government rather than private charitable and confine its terms to those expressly mentioned.
contributions does not dictate the denial of a charitable exemption if the facts Same; Same; Same; Same; The exemption must not be so enlarged by
otherwise support such an exemption, as they do here. construction.—The exemption must not be so enlarged by construction since the
Same; Same; Same; Those portions of Lung Center’s real property that are reasonable presumption is that the State has granted in express terms all it intended
leased to private entities are not exempt from real property taxes as these are not to grant at all, and that unless the privilege is limited to the very terms of the statute
actually, directly and exclusively used for charitable purposes.—Even as we find that the favor would be intended beyond what was meant.
the petitioner is a charitable institution, we hold, anent the second issue, that those Same; Same; Same; Same; The tax exemption under Section 28 (3), Article VI of
portions of its real property that are leased to private entities are not exempt from the 1987 Constitution covers property taxes only.—Section 28(3), Article VI of the
real property taxes as these are not actually, directly and exclusively used for 1987 Philippine Constitution provides, thus: (3) Charitable institutions, churches
charitable purposes. and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries,
Same; Same; Same; Statutory Construction; Taxation is the rule and exemption and all lands, buildings, and improvements, actually, directly and exclusively used
is the exception—the effect of an exemption is equivalent to an appropriation.—The for religious, charitable or educational purposes shall be exempt from taxation. The
settled rule in this jurisdiction is that laws granting exemption from tax are tax exemption under this constitutional provision covers property taxes only. As
construed strictissimi juris against the taxpayer and liberally in favor of the taxing Chief Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional
power. Taxation is the rule and exemption is the exception. The effect of an Commission, explained: “. . . what is exempted is not the institution itself . . .; those
exemption is equivalent to an appropriation. Hence, a claim for exemption from tax exempted from real estate taxes are lands, buildings and improvements actually,
payments must be clearly shown and based on language in the law too plain to be directly and exclusively used for religious, charitable or educational purposes.”
mistaken. As held in Salvation Army v. Hoehn: An intention on the part of the Same; Same; Same; Same; Under the 1973 and the present Constitutions, for
legislature to grant an exemption from the taxing power of the state will never be “lands, buildings, and improvements” of the charitable institution to be considered
implied from language which will admit of any other reasonable construction. Such exempt, the same should not only be “exclusively” used for charitable purposes—it is
an intention must be expressed in clear and unmistakable terms, or must appear by required that such property be used “actually” and “directly” for such purposes.—We
necessary implication from the language used, for it is a well settled principle that, note that under the 1935 Constitution, “. . . all lands, buildings, and improvements
when a special privilege or exemption is claimed under a statute, charter or act of used ‘exclusively’ for . . . charitable . . . purposes shall be exempt from taxation.”
incorporation, it is to be construed strictly against the property owner and in favor However, under the 1973 and the present Constitutions, for “lands, buildings, and
of the public. This principle applies with peculiar force to a claim of exemption from improvements” of the charitable institution to be considered exempt, the same
taxation . … should not only be “exclusively” used for charitable purposes; it is required that
Same; Same; Same; Same; It is plain as day that under P.D. 1823, the Lung such property be used “actually” and “directly” for such purposes. In light of the
Center of the Philippines does not enjoy any property tax exemption privileges for its foregoing substantial changes in the Constitution, the petitioner cannot rely on our
real properties as well as the building constructed thereon.—It is plain as day that ruling in Herrera v. Quezon City Board of Assessment Appeals which was
under the decree (P.D. 1823), the petitioner does not enjoy any property tax promulgated on September 30, 1961 before the 1973 and 1987 Constitutions took
exemption privileges for its real properties as well as the building constructed thereon. effect.
If the intentions were otherwise, the same should have been among the Same; Same; Same; Same; Words and Phrases; If real property is used for one or
enumeration of tax exempt privileges under Section 2: It is a settled rule of statutory more commercial purposes, it is not exclusively used for the exempted purposes but is
construction that the express mention of one person, thing, or consequence implies subject to taxation—the words “dominant use” or “principal use” cannot be
the exclusion of all others. The rule is expressed in the familiar maxim, expressio substituted for the words “used exclusively” without doing violence to the
unius est exclusio alterius. The rule of expressio unius est exclusio alterius is Constitutions and the law.—Under the 1973 and 1987 Constitutions and Rep. Act
formulated in a number of ways. One variation of the rule is the principle that what No. 7160 in order to be entitled to the exemption, the petitioner is burdened to
is expressed puts an end to that which is implied. Expressium facit cessare prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b)
tacitum. Thus, where a statute, by its terms, is expressly limited to certain matters, its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
it may not, by interpretation or construction, be extended to other matters. ... The purposes. “Exclusive” is defined as possessed and enjoyed to the exclusion of others;
rule of expressio unius est exclusio alterius and its variations are canons of restrictive debarred from participation or enjoyment; and “exclusively” is defined, “in a
interpretation. They are based on the rules of logic and the natural workings of the manner to exclude; as enjoying a privilege exclusively.” If real property is used for
human mind. They are predicated upon one’s own voluntary act and not upon that one or more commercial purposes, it is not exclusively used for the exempted
of others. They proceed from the premise that the legislature would not have made purposes but is subject to taxation. The words “dominant use” or “principal use”
cannot be substituted for the words “used exclusively” without doing violence to the
Constitutions and the law. Solely is synonymous with exclusively. What is meant by The petitioner accepts paying and non-paying patients. It also renders medical
actual, direct and exclusive use of the property for charitable purposes is the direct services to out-patients, both paying and non-paying. Aside from its income from
and immediate and actual application of the property itself to the purposes for paying patients, the petitioner receives annual subsidies from the government.
which the charitable institution is organized. It is not the use of the income from the
real property that is determinative of whether the property is used for tax-exempt On June 7, 1993, both the land and the hospital building of the petitioner were
purposes. assessed for real property taxes in the amount of ₱4,554,860 by the City Assessor
Same; Same; Same; Portions of the land leased to private entities as well as those of Quezon City.3 Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C-
parts of Lung Center leased to private individuals are not exempt from taxes but 021-01231 (15-2518-A) were issued for the land and the hospital building,
portions of the land occupied by the hospital and portions of the hospital used for its respectively.4 On August 25, 1993, the petitioner filed a Claim for Exemption5 from
patients, whether paying or non-paying, are exempt from real property taxes.—We real property taxes with the City Assessor, predicated on its claim that it is a
hold that the portions of the land leased to private entities as well as those parts of charitable institution. The petitioner’s request was denied, and a petition was,
the hospital leased to private individuals are not exempt from such taxes. On the thereafter, filed before the Local Board of Assessment Appeals of Quezon City (QC-
other hand, the portions of the land occupied by the hospital and portions of the LBAA, for brevity) for the reversal of the resolution of the City Assessor. The
hospital used for its patients, whether paying or non-paying, are exempt from real petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the
property taxes. property is exempt from real property taxes. It averred that a minimum of 60% of
its hospital beds are exclusively used for charity patients and that the major thrust
DECISION of its hospital operation is to serve charity patients. The petitioner contends that it
is a charitable institution and, as such, is exempt from real property taxes. The QC-
CALLEJO, SR., J.: LBAA rendered judgment dismissing the petition and holding the petitioner liable
for real property taxes.6
This is a petition for review on certiorari under Rule 45 of the Rules of Court, as
amended, of the Decision1 dated July 17, 2000 of the Court of Appeals in CA-G.R. SP The QC-LBAA’s decision was, likewise, affirmed on appeal by the Central Board of
No. 57014 which affirmed the decision of the Central Board of Assessment Appeals Assessment Appeals of Quezon City (CBAA, for brevity) 7 which ruled that the
holding that the lot owned by the petitioner and its hospital building constructed petitioner was not a charitable institution and that its real properties were not
thereon are subject to assessment for purposes of real property tax. actually, directly and exclusively used for charitable purposes; hence, it was not
entitled to real property tax exemption under the constitution and the law. The
The Antecedents petitioner sought relief from the Court of Appeals, which rendered judgment
affirming the decision of the CBAA.8
The petitioner Lung Center of the Philippines is a non-stock and non-profit entity
established on January 16, 1981 by virtue of Presidential Decree No. 1823. 2 It is Undaunted, the petitioner filed its petition in this Court contending that:
the registered owner of a parcel of land, particularly described as Lot No. RP-3-B-
3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner Elliptical Road, A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT
Central District, Quezon City. The lot has an area of 121,463 square meters and is ENTITLED TO REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS
covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of Deeds LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE
of Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED FOR
Lung Center of the Philippines. A big space at the ground floor is being leased to CHARITABLE PURPOSES.
private parties, for canteen and small store spaces, and to medical or professional
practitioners who use the same as their private clinics for their patients whom B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX
they charge for their professional services. Almost one-half of the entire area on EXEMPT UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY
the left side of the building along Quezon Avenue is vacant and idle, while a big NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.
portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is
being leased for commercial purposes to a private enterprise known as the The petitioner avers that it is a charitable institution within the context of Section
Elliptical Orchids and Garden Center. 28(3), Article VI of the 1987 Constitution. It asserts that its character as a
charitable institution is not altered by the fact that it admits paying patients and
renders medical services to them, leases portions of the land to private parties, a series of interviews and must submit all the requirements needed by the
and rents out portions of the hospital to private medical practitioners from which Center, usually accompanied by endorsement by an influential agency or
it derives income to be used for operational expenses. The petitioner points out person known only to the Center. These facts were heard and admitted by the
that for the years 1995 to 1999, 100% of its out-patients were charity patients and Petitioner LCP during the hearings before the Honorable QC-BAA and
of the hospital’s 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity Honorable CBAA. These are the reasons of indigent patients, instead of
patients. It asserts that the fact that it receives subsidies from the government seeking treatment with the Center, they prefer to be treated at the Quezon
attests to its character as a charitable institution. It contends that the "exclusivity" Institute. Can such practice by the Center be called charitable?10
required in the Constitution does not necessarily mean "solely." Hence, even if a
portion of its real estate is leased out to private individuals from whom it derives The Issues
income, it does not lose its character as a charitable institution, and its exemption
from the payment of real estate taxes on its real property. The petitioner cited our The issues for resolution are the following: (a) whether the petitioner is a
ruling in Herrera v. QC-BAA9 to bolster its pose. The petitioner further contends charitable institution within the context of Presidential Decree No. 1823 and the
that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes, 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and (b)
it is not precluded from seeking tax exemption under the 1987 Constitution. whether the real properties of the petitioner are exempt from real property taxes.

In their comment on the petition, the respondents aver that the petitioner is not a The Court’s Ruling
charitable entity. The petitioner’s real property is not exempt from the payment of
real estate taxes under P.D. No. 1823 and even under the 1987 Constitution
because it failed to prove that it is a charitable institution and that the said The petition is partially granted.
property is actually, directly and exclusively used for charitable purposes. The
respondents noted that in a newspaper report, it appears that graft charges were On the first issue, we hold that the petitioner is a charitable institution within the
filed with the Sandiganbayan against the director of the petitioner, its context of the 1973 and 1987 Constitutions. To determine whether an enterprise
administrative officer, and Zenaida Rivera, the proprietress of the Elliptical is a charitable institution/entity or not, the elements which should be considered
Orchids and Garden Center, for entering into a lease contract over 7,663.13 square include the statute creating the enterprise, its corporate purposes, its constitution
meters of the property in 1990 for only ₱20,000 a month, when the monthly rental and by-laws, the methods of administration, the nature of the actual work
should be ₱357,000 a month as determined by the Commission on Audit; and that performed, the character of the services rendered, the indefiniteness of the
instead of complying with the directive of the COA for the cancellation of the beneficiaries, and the use and occupation of the properties.11
contract for being grossly prejudicial to the government, the petitioner renewed
the same on March 13, 1995 for a monthly rental of only ₱24,000. They assert that In the legal sense, a charity may be fully defined as a gift, to be applied consistently
the petitioner uses the subsidies granted by the government for charity patients with existing laws, for the benefit of an indefinite number of persons, either by
and uses the rest of its income from the property for the benefit of paying patients, bringing their minds and hearts under the influence of education or religion, by
among other purposes. They aver that the petitioner failed to adduce substantial assisting them to establish themselves in life or otherwise lessening the burden of
evidence that 100% of its out-patients and 170 beds in the hospital are reserved government.12 It may be applied to almost anything that tend to promote the well-
for indigent patients. The respondents further assert, thus: doing and well-being of social man. It embraces the improvement and promotion
of the happiness of man.13 The word "charitable" is not restricted to relief of the
13. That the claims/allegations of the Petitioner LCP do not speak well of its poor or sick.14 The test of a charity and a charitable organization are in law the
record of service. That before a patient is admitted for treatment in the Center, same. The test whether an enterprise is charitable or not is whether it exists to
first impression is that it is pay-patient and required to pay a certain amount carry out a purpose reorganized in law as charitable or whether it is maintained
as deposit. That even if a patient is living below the poverty line, he is charged for gain, profit, or private advantage.
with high hospital bills. And, without these bills being first settled, the poor
patient cannot be allowed to leave the hospital or be discharged without first Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation
paying the hospital bills or issue a promissory note guaranteed and indorsed which, subject to the provisions of the decree, is to be administered by the Office of
by an influential agency or person known only to the Center; that even the the President of the Philippines with the Ministry of Health and the Ministry of
remains of deceased poor patients suffered the same fate. Moreover, before a Human Settlements. It was organized for the welfare and benefit of the Filipino
patient is admitted for treatment as free or charity patient, one must undergo people principally to help combat the high incidence of lung and pulmonary
diseases in the Philippines. The raison d’etre for the creation of the petitioner is 3. To stimulate and, whenever possible, underwrite scientific researches on the
stated in the decree, viz: biological, demographic, social, economic, eugenic and physiological aspects of
lung or pulmonary diseases and their control; and to collect and publish the
Whereas, for decades, respiratory diseases have been a priority concern, findings of such research for public consumption;
having been the leading cause of illness and death in the Philippines,
comprising more than 45% of the total annual deaths from all causes, thus, 4. To facilitate the dissemination of ideas and public acceptance of information
exacting a tremendous toll on human resources, which ailments are likely to on lung consciousness or awareness, and the development of fact-finding,
increase and degenerate into serious lung diseases on account of unabated information and reporting facilities for and in aid of the general purposes or
pollution, industrialization and unchecked cigarette smoking in the country; objects aforesaid, especially in human lung requirements, general health and
physical fitness, and other relevant or related fields;
Whereas, the more common lung diseases are, to a great extent, preventable,
and curable with early and adequate medical care, immunization and through 5. To encourage the training of physicians, nurses, health officers, social
prompt and intensive prevention and health education programs; workers and medical and technical personnel in the practical and scientific
implementation of services to lung patients;
Whereas, there is an urgent need to consolidate and reinforce existing
programs, strategies and efforts at preventing, treating and rehabilitating 6. To assist universities and research institutions in their studies about lung
people affected by lung diseases, and to undertake research and training on diseases, to encourage advanced training in matters of the lung and related
the cure and prevention of lung diseases, through a Lung Center which will fields and to support educational programs of value to general health;
house and nurture the above and related activities and provide tertiary-level
care for more difficult and problematical cases; 7. To encourage the formation of other organizations on the national, provincial
and/or city and local levels; and to coordinate their various efforts and
Whereas, to achieve this purpose, the Government intends to provide material activities for the purpose of achieving a more effective programmatic approach
and financial support towards the establishment and maintenance of a Lung on the common problems relative to the objectives enumerated herein;
Center for the welfare and benefit of the Filipino people. 15
8. To seek and obtain assistance in any form from both international and local
The purposes for which the petitioner was created are spelled out in its Articles of foundations and organizations; and to administer grants and funds that may be
Incorporation, thus: given to the organization;

SECOND: That the purposes for which such corporation is formed are as follows: 9. To extend, whenever possible and expedient, medical services to the public
and, in general, to promote and protect the health of the masses of our people,
1. To construct, establish, equip, maintain, administer and conduct an which has long been recognized as an economic asset and a social blessing;
integrated medical institution which shall specialize in the treatment, care,
rehabilitation and/or relief of lung and allied diseases in line with the concern 10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and
of the government to assist and provide material and financial support in the maladies of the people in any and all walks of life, including those who are poor
establishment and maintenance of a lung center primarily to benefit the people and needy, all without regard to or discrimination, because of race, creed, color
of the Philippines and in pursuance of the policy of the State to secure the well- or political belief of the persons helped; and to enable them to obtain treatment
being of the people by providing them specialized health and medical services when such disorders occur;
and by minimizing the incidence of lung diseases in the country and elsewhere.
11. To participate, as circumstances may warrant, in any activity designed and
2. To promote the noble undertaking of scientific research related to the carried on to promote the general health of the community;
prevention of lung or pulmonary ailments and the care of lung patients,
including the holding of a series of relevant congresses, conventions, seminars 12. To acquire and/or borrow funds and to own all funds or equipment,
and conferences; educational materials and supplies by purchase, donation, or otherwise and to
dispose of and distribute the same in such manner, and, on such basis as the
Center shall, from time to time, deem proper and best, under the particular those who have gone about at all amongst the suffering classes, that the
circumstances, to serve its general and non-profit purposes and deserving poor can with difficulty be persuaded to enter an asylum of any
objectives;lavvphil.net kind confined to the reception of objects of charity; and that their honest
pride is much less wounded by being placed in an institution in which
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and paying patients are also received. The fact of receiving money from some
dispose of properties, whether real or personal, for purposes herein of the patients does not, we think, at all impair the character of the
mentioned; and charity, so long as the money thus received is devoted altogether to the
charitable object which the institution is intended to further.22
14. To do everything necessary, proper, advisable or convenient for the
accomplishment of any of the powers herein set forth and to do every other act The money received by the petitioner becomes a part of the trust fund and must be
and thing incidental thereto or connected therewith.16 devoted to public trust purposes and cannot be diverted to private profit or
benefit.23
Hence, the medical services of the petitioner are to be rendered to the public in
general in any and all walks of life including those who are poor and the needy Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner
without discrimination. After all, any person, the rich as well as the poor, may fall does not lose its character as a charitable institution simply because the gift or
sick or be injured or wounded and become a subject of charity.17 donation is in the form of subsidies granted by the government. As held by the
State Supreme Court of Utah in Yorgason v. County Board of Equalization of Salt
As a general principle, a charitable institution does not lose its character as such Lake County:24
and its exemption from taxes simply because it derives income from paying
patients, whether out-patient, or confined in the hospital, or receives subsidies Second, the … government subsidy payments are provided to the project.
from the government, so long as the money received is devoted or used altogether Thus, those payments are like a gift or donation of any other kind except
to the charitable object which it is intended to achieve; and no money inures to the they come from the government. In both Intermountain Health Careand
private benefit of the persons managing or operating the the present case, the crux is the presence or absence of material
institution.18 In Congregational Sunday School, etc. v. Board of Review,19 the State reciprocity. It is entirely irrelevant to this analysis that the government,
Supreme Court of Illinois held, thus: rather than a private benefactor, chose to make up the deficit resulting
from the exchange between St. Mark’s Tower and the tenants by making a
… [A]n institution does not lose its charitable character, and consequent contribution to the landlord, just as it would have been irrelevant
exemption from taxation, by reason of the fact that those recipients of its in Intermountain Health Care if the patients’ income supplements had
benefits who are able to pay are required to do so, where no profit is come from private individuals rather than the government.
made by the institution and the amounts so received are applied in
furthering its charitable purposes, and those benefits are refused to none Therefore, the fact that subsidization of part of the cost of furnishing such
on account of inability to pay therefor. The fundamental ground upon housing is by the government rather than private charitable contributions
which all exemptions in favor of charitable institutions are based is the does not dictate the denial of a charitable exemption if the facts otherwise
benefit conferred upon the public by them, and a consequent relief, to support such an exemption, as they do here.25
some extent, of the burden upon the state to care for and advance the
interests of its citizens.20 In this case, the petitioner adduced substantial evidence that it spent its income,
including the subsidies from the government for 1991 and 1992 for its patients
As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital and for the operation of the hospital. It even incurred a net loss in 1991 and 1992
Association of South Dakota v. Baker:21 from its operations.

… [T]he fact that paying patients are taken, the profits derived from Even as we find that the petitioner is a charitable institution, we hold, anent the
attendance upon these patients being exclusively devoted to the second issue, that those portions of its real property that are leased to private
maintenance of the charity, seems rather to enhance the usefulness of the entities are not exempt from real property taxes as these are not actually, directly
institution to the poor; for it is a matter of common observation amongst and exclusively used for charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax are rule is expressed in the familiar maxim, expressio unius est exclusio
construed strictissimi juris against the taxpayer and liberally in favor of the taxing alterius.
power. Taxation is the rule and exemption is the exception. The effect of an
exemption is equivalent to an appropriation. Hence, a claim for exemption from The rule of expressio unius est exclusio alterius is formulated in a number
tax payments must be clearly shown and based on language in the law too plain to of ways. One variation of the rule is the principle that what is expressed
be mistaken.26 As held in Salvation Army v. Hoehn:27 puts an end to that which is implied. Expressium facit cessare tacitum.
Thus, where a statute, by its terms, is expressly limited to certain matters,
An intention on the part of the legislature to grant an exemption from the it may not, by interpretation or construction, be extended to other
taxing power of the state will never be implied from language which will matters.
admit of any other reasonable construction. Such an intention must be
expressed in clear and unmistakable terms, or must appear by necessary ...
implication from the language used, for it is a well settled principle that,
when a special privilege or exemption is claimed under a statute, charter The rule of expressio unius est exclusio alterius and its variations are
or act of incorporation, it is to be construed strictly against the property canons of restrictive interpretation. They are based on the rules of logic
owner and in favor of the public. This principle applies with peculiar force and the natural workings of the human mind. They are predicated upon
to a claim of exemption from taxation . …28 one’s own voluntary act and not upon that of others. They proceed from
the premise that the legislature would not have made specified
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, enumeration in a statute had the intention been not to restrict its meaning
specifically provides that the petitioner shall enjoy the tax exemptions and and confine its terms to those expressly mentioned.30
privileges:
The exemption must not be so enlarged by construction since the reasonable
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock presumption is that the State has granted in express terms all it intended to grant
corporation organized primarily to help combat the high incidence of lung at all, and that unless the privilege is limited to the very terms of the statute the
and pulmonary diseases in the Philippines, all donations, contributions, favor would be intended beyond what was meant.31
endowments and equipment and supplies to be imported by authorized
entities or persons and by the Board of Trustees of the Lung Center of the Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
Philippines, Inc., for the actual use and benefit of the Lung Center, shall be
exempt from income and gift taxes, the same further deductible in full for
the purpose of determining the maximum deductible amount under (3) Charitable institutions, churches and parsonages or convents
Section 30, paragraph (h), of the National Internal Revenue Code, as appurtenant thereto, mosques, non-profit cemeteries, and all lands,
amended. buildings, and improvements, actually, directly and exclusively used for
religious, charitable or educational purposes shall be exempt from
taxation.32
The Lung Center of the Philippines shall be exempt from the payment of
taxes, charges and fees imposed by the Government or any political
subdivision or instrumentality thereof with respect to equipment The tax exemption under this constitutional provision covers property taxes
purchases made by, or for the Lung Center.29 only.33 As Chief Justice Hilario G. Davide, Jr., then a member of the 1986
Constitutional Commission, explained: ". . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings and
It is plain as day that under the decree, the petitioner does not enjoy any property improvements actually, directly and exclusively used for religious, charitable or
tax exemption privileges for its real properties as well as the building constructed educational purposes."34
thereon. If the intentions were otherwise, the same should have been among the
enumeration of tax exempt privileges under Section 2:
Consequently, the constitutional provision is implemented by Section 234(b) of
Republic Act No. 7160 (otherwise known as the Local Government Code of 1991)
It is a settled rule of statutory construction that the express mention of as follows:
one person, thing, or consequence implies the exclusion of all others. The
SECTION 234. Exemptions from Real Property Tax. – The following are manner to exclude; as enjoying a privilege exclusively." 40 If real property is used
exempted from payment of the real property tax: for one or more commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation.41 The words "dominant use" or "principal use"
... cannot be substituted for the words "used exclusively" without doing violence to
the Constitutions and the law.42 Solely is synonymous with exclusively.43
(b) Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, non-profit or religious cemeteries What is meant by actual, direct and exclusive use of the property for charitable
and all lands, buildings, and improvements actually, directly, purposes is the direct and immediate and actual application of the property itself
and exclusivelyused for religious, charitable or educational to the purposes for which the charitable institution is organized. It is not the use of
purposes.35 the income from the real property that is determinative of whether the property is
used for tax-exempt purposes.44
We note that under the 1935 Constitution, "... all lands, buildings, and
improvements used ‘exclusively’ for … charitable … purposes shall be exempt from The petitioner failed to discharge its burden to prove that the entirety of its real
taxation."36 However, under the 1973 and the present Constitutions, for "lands, property is actually, directly and exclusively used for charitable purposes. While
buildings, and improvements" of the charitable institution to be considered portions of the hospital are used for the treatment of patients and the dispensation
exempt, the same should not only be "exclusively" used for charitable purposes; it of medical services to them, whether paying or non-paying, other portions thereof
is required that such property be used "actually" and "directly" for such are being leased to private individuals for their clinics and a canteen. Further, a
purposes.37 portion of the land is being leased to a private individual for her business
enterprise under the business name "Elliptical Orchids and Garden Center."
In light of the foregoing substantial changes in the Constitution, the petitioner Indeed, the petitioner’s evidence shows that it collected ₱1,136,483.45 as rentals
cannot rely on our ruling in Herrera v. Quezon City Board of Assessment in 1991 and ₱1,679,999.28 for 1992 from the said lessees.
Appeals which was promulgated on September 30, 1961 before the 1973 and 1987
Constitutions took effect.38 As this Court held in Province of Abra v. Hernando:39 Accordingly, we hold that the portions of the land leased to private entities as well
as those parts of the hospital leased to private individuals are not exempt from
… Under the 1935 Constitution: "Cemeteries, churches, and parsonages or such taxes.45 On the other hand, the portions of the land occupied by the hospital
convents appurtenant thereto, and all lands, buildings, and improvements and portions of the hospital used for its patients, whether paying or non-paying,
used exclusively for religious, charitable, or educational purposes shall be are exempt from real property taxes.
exempt from taxation." The present Constitution added "charitable
institutions, mosques, and non-profit cemeteries" and required that for IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The
the exemption of "lands, buildings, and improvements," they should not respondent Quezon City Assessor is hereby DIRECTED to determine, after due
only be "exclusively" but also "actually" and "directly" used for religious hearing, the precise portions of the land and the area thereof which are leased to
or charitable purposes. The Constitution is worded differently. The private persons, and to compute the real property taxes due thereon as provided
change should not be ignored. It must be duly taken into consideration. for by law.
Reliance on past decisions would have sufficed were the words "actually"
as well as "directly" not added. There must be proof therefore of SO ORDERED.
the actual and direct use of the lands, buildings, and improvements for
religious or charitable purposes to be exempt from taxation. … Davide, Jr., Puno, Vitug, Panganiban, Quisumbing, Ynares-Santiago, Sandoval-
Gutierrez, Carpio, Austria-Martinez, Corona, Carpio Morales, Azcuna, and Tinga,
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be JJ., concur.
entitled to the exemption, the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.
"Exclusive" is defined as possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and "exclusively" is defined, "in a