CIR v ST Lukes 1

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit
corporation.
(BIR) assessed St. Luke's deficiency taxes, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax.
St. Luke's filed an administrative protest with the BIR against the deficiency tax assessments. The
BIR did not act on the protest within the 180-day period. Thus, St. Luke's appealed to the CTA.
BIR’s Contention

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary non-profit hospitals, should be applicable to
St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to
amend the exemption on non-profit hospitals that were previously categorized as non-stock, non-profit
corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which prevails
over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, non-
profit charitable institutions and civic organizations promoting social welfare. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and
employees directly benefit from its profits and assets.
ST Luke’s Contention
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 income (i.e., total revenues less
operating expenses) of ₱334,642,615. 8 St. Luke's also claimed that its income does not inure to the
benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.

The Issue

The sole issue is whether 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.

The Ruling of the Court

The Court partly grants the petition of the BIR but on a different ground. We hold that Section
27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals
under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other
hand, can be construed together without the removal of such tax exemption. The effect of the
introduction of Section 27(B) is to subject the taxable income of two specific institutions,
namely, proprietary non-profit educational institutions 36 and proprietary non-profit hospitals,
among the institutions covered by Section 30, to the 10% preferential rate under Section 27(B)
instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to
Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary
non-profit educational institutions and (2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be proprietary and non-profit. "Proprietary" means
private, following the definition of a "proprietary educational institution" as "any private school
maintained and administered by private 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 all its activities conducted not for
profit.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the "income of
whatever kind and character" of a charitable institution "from any of its activities conducted
for profit, regardless of the disposition made of such income, shall be subject to tax." Prior to
the introduction of Section 27(B), the tax rate on such income from for-profit activities was
the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the
tax rate is now 10%.

An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from
its for-profit activities. Such income from for-profit activities, under the last paragraph of
Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now
at the preferential 10% rate pursuant to Section 27(B).

CIR v ST Lukes 2

Factual Antecedents

respondent St. Luke’s Medical Center, Inc. (SLMC) received from the Large Taxpayers Service
Assessment Notice 6 assessing respondent SLMC deficiency income tax under Section 27(B).
SLMC filed with petitioner Commissioner of Internal Revenue (CIR) an administrative
protest8assailing the assessments. SLMC claimed that as a non-stock, non-profit charitable and
social welfare organization under Section 30(E) and (G)9 of the 1997 NIRC, as amended, it is exempt
from paying income tax.

SLMC received petitioner CIR's Final Decision 2008 increasing the deficiency income for the taxable
year 2005 tax to ₱82,419,522.21 and for the taxable year 2006 to ₱60,259,885.94,.
Aggrieved, SLMC elevated the matter to the CTA:
the CTA Division rendered a Decision13 finding SLMC not liable for deficiency income tax under Section
27(B) of the 1997 NIRC, as amended, since it is exempt from paying income tax under Section 30(E)
and (G) of the same Code.

the CTA En Banc affirmed the cancellation and setting aside of the Audit Results/Assessment Notices
issued against SLMC.

Issue

Meanwhile, the Court rendered a Decision in G.R. Nos. 195909 and 195960, entitled Commissioner
of Internal Revenue v. St. Luke's Medical Center, Inc.,18 finding SLMC not entitled to the tax exemption
under Section 30(E) and (G) of the NIRC of 1997 as it does not operate exclusively for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned.
Considering the foregoing, SLMC then filed a Manifestation and Motion20 informing the Court that on
April 30, 2013, it paid the BIR the amount of basic taxes due for taxable years 1998, 2000-2002, and
2004-2007

In view of the payment it made, SLMC moved for the dismissal of the instant case on the ground of
mootness.
CIR opposed the motion claiming that the payment confirmation submitted by SLMC is not a
competent proof of payment as it is a mere photocopy and does not even indicate the quarter/sand/or
year/s said payment covers.

CIR 's Arguments

CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax under
Section 27(B) of the 1997 NIRC.29 It likewise asserts that SLMC is liable to pay compromise penalty
pursuant to Section 248(A)30 of the 1997 NIRC for failing to file its quarterly income tax returns.31

As to the alleged payment of the basic tax, CIR contends that this does not render the instant case
moot as the payment confirmation submitted by SLMC is not a competent proof of payment of its tax
liabilities.32

SLMC's Arguments

SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R. Nos. 195909
and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.)33 positing that
earning a profit by a charitable, benevolent hospital or educational institution does not result in the
withdrawal of its tax exempt privilege.34 SLMC further claims that the income it derives from operating
a hospital is not income from "activities conducted for profit."35 Also, it maintains that in accordance
with the ruling of the Court in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v.
St. Luke's Medical Center, Inc.),36 it is not liable for compromise penalties.37

In any case, SLMC insists that the instant case should be dismissed in view of its payment of the
basic taxes due for taxable years 1998, 2000-2002, and 2004-2007 to the BIR on April 30, 2013.38

Our Ruling

SLMC is liable for income tax under

Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are
concerned

To be clear, for an institution to be completely exempt from income tax, Section 30(E) and (G)
of the 1997 NIRC requires said institution to operate exclusively for charitable or social
welfare purpose. But in case an exempt institution under Section 30(E) or (G) of the said
Code earns income from its for-profit activities, it will not lose its tax exemption. However, its
income from for-profit activities will be subject to income tax at the preferential 10% rate
pursuant to Section 27(B) thereof.

SLMC is not liable for Compromise

Penalty.

the imposition of surcharges and interest under Sections 24843 and 24944 of the 1997 NIRC were
deleted on the basis of good faith and honest belief on the part of SLMC that it is not subject to tax.
Thus, following the ruling of the Court in the said case, SLMC is not liable to pay compromise
penalty under Section 248(A) of the 1997 NIRC.

The Petition is rendered moot by the

payment made by SLMC on April 30,
2013.

However, in view of the payment of the basic taxes made by SLMC on April 30, 2013, the instant
Petition has become moot. 1avv phi 1

While the Court agrees with the CIR that the payment confirmation from the BIR presented by SLMC
is not a competent proof of payment as it does not indicate the specific taxable period the said payment
covers, the Court finds that the Certification issued by the Large Taxpayers Service of the BIR dated
May 27, 2013, and the letter from the BIR dated November 26, 2013 with attached Certification of
Payment and application for abatement are sufficient to prove payment especially since CIR never
questioned the authenticity of these documents.