CIR V. ST. LUKE'S MEDICAL CENTER, INC.

profit charitable institutions and civic organizations promoting

social welfare.
○ St. Luke’s was actually operating for profit in 1998 because only 13%
DOCTRINE: Section 30(E) and (G) of the NIRC requires that an institution be “operated of its revenues came from charitable purposes. Moreover, the
exclusively” for charitable or social welfare purposes to be completely exempt from income hospital’s board of trustees, officers and employees directly benefit
tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns from its profits and assets. St. Luke’s had total revenues of
income from its for-profit activities. Such income from for-profit activities, under the last approximately P1.73 billion from patient services in 1998.
paragraph of Section 30, is merely subject to income tax, previously at the ordinary ● St. Luke’s arguments:
corporate rate but now at the preferential 10% rate pursuant to Section 27(B). ○ BIR should not consider its total revenues, because its free services
SUMMARY: BIR assessed St. Luke’s, a non-stock and non-profit corporation. St. Luke’s to patients was 65.20% of its 1998 operating income (i.e., total
protested, claiming exemption from income tax under Section 30(E) and (G) for non-stock, revenues less operating expenses).
non-profit charitable institutions and civic organizations promoting social welfare. BIR ○ Its income does not inure to the benefit of any individual.
argued that St. Luke’s is covered by the 10% income tax rate under Sec. 27 (B), for ○ St. Luke’s maintained that it is a non-stock and non-profit
proprietary non-profit educational institutions and hospitals, and that Sec. 27 (B) removed institution for charitable and social welfare purposes under
the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 30(E) and (G) of the NIRC. It argued that the making of
CTA ruled in favor of St. Luke’s. SC ruled that Sec. 27 (B) does not remove Sec. 30 (E) and profit per se does not destroy its income tax exemption.
(G), and that the two provisions can be read together. (See Doctrine). SC ruled that since ● CTA en banc affirmed CTA First Division which ruled that:
St. Luke’s earned income from activities conducted for profit in 1998, the same is liable for ○ St. Luke’s is a non-stock and non-profit charitable institution covered
the 10% rate under Sec. 27 (B). by Section 30(E) and (G) of the NIRC. This would exempt all
income derived by St. Luke’s from services to its patients,
whether paying or non-paying.
FACTS: ■ Hospital de San Juan de Dios, Inc. v. Pasay City - A
● St. Luke’s Medical Center, Inc. is a hospital organized as a non-stock and charitable institution does not lose its charitable character
non-profit corporation1. (see footnote for its “corporate purposes”) and its consequent exemption from taxation merely
● Dec. 16 2002 - BIR assessed St. Luke’s deficiency taxes amounting to P76M+ because recipients of its benefits who are able to pay are
for 1998, comprised of deficiency income tax, value-added tax, withholding required to do so, provided funds derived in this manner are
tax on compensation and expanded withholding tax. (The BIR reduced the devoted to the charitable purposes of the institution.
amount during trial before CTA First Division.) ○ Section 27(B) of the present NIRC does not apply to St. Luke’s.
● January 2003 - St. Luke’s filed an administrative protest with the BIR against The CTA explained that to apply the 10% preferential rate, Section
the deficiency tax assessments. The BIR did not act on the protest within the 27(B) requires a hospital to be “non-profit.” On the other hand,
180-day period under Section 228 of the NIRC. Thus, St. Luke’s appealed to Congress specifically used the word “non-stock” to qualify a
the CTA. charitable “corporation or association” in Section 30(E). Section
● BIR’s arguments: 27(B) does not require that the hospital be “non-stock.” It is clear
○ Section 27(B) of the NIRC, which imposes a 10% preferential tax that non-stock, non-profit hospitals operated exclusively for
rate on the income of proprietary non-profit hospitals, should be charitable purpose are exempt from income tax on income received
applicable to St. Luke’s. Section 27(B), introduced in 1997, “is a new by them as such, applying the provision of Section 30(E), NIRC.
provision intended to amend the exemption on non-profit hospitals ○ Hence, CTA cancelled the deficiency assessed by the BIR based on
that were previously categorized as non-stock, non-profit the 10% tax rate under Section 27(B) of the NIRC. But it ordered the
corporations under Section 26 of the 1997 Tax Code. It is a specific payment of the deficiency income tax of P5M + due to the the failure
provision which prevails over the general exemption on income of St. Luke’s to prove that part of its income in 1998 (declared as
tax granted under Section 30(E) and (G) for non-stock, non- “Other Income-Net”) came from charitable activities.

1 (c) To carry on educational activities related to the maintenance and promotion of health as well
Under its articles of incorporation, among its corporate purposes are:
(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, as provide facilities for scientific and medical researches which, in the opinion of the Board of
charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to the Trustees, may be justified by the facilities, personnel, funds, or other requirements that are
sick, diseased and disabled persons; provided that purely medical and surgical services shall be available;
performed by duly licensed physicians and surgeons who may be freely and individually (d) To cooperate with organized medical societies, agencies of both government and private
contracted by patients; sector; establish rules and regulations consistent with the highest professional ethics;
(b) To provide a career of health science education and provide medical services to the community
through organized clinics in such specialties as the facilities and resources of the corporation make
possible;
ISSUE: W/N St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) ○ Section 30(E) of the NIRC defines the corporation or association that
of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary is exempt from income tax. On the other hand, Section 28(3), Article
non-profit hospitals. -YES VI of the Constitution does not define a charitable institution, but
requires that the institution “actually, directly and exclusively” use the
RULING: property for a charitable purpose.
● Section 27(B) of the NIRC does not remove the income tax exemption of ● Section 30(E) of the NIRC provides that a charitable institution must be:
proprietary non-profit hospitals under Section 30(E) and (G). Section 1. A non-stock corporation or association;
27(B) on one hand, and Section 30(E) and (G) on the other hand, can be 2. Organized exclusively for charitable purposes;
construed together without the removal of such tax exemption. 3. Operated exclusively for charitable purposes; and
● Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income 4. No part of its net income or asset shall belong to or inure to the
of (1) proprietary non-profit educational institutions and (2) proprietary non- benefit of any member, organizer, officer or any specific person.
profit hospitals. The only qualifications for hospitals are that they must be ● Thus, both the organization and operations of the charitable institution
proprietary and non-profit. “Proprietary” means private, following the definition must be devoted “exclusively” for charitable purposes.
of a “proprietary educational institution” as “any private school maintained and ● The organization of the institution refers to its corporate form, as shown by
administered by private individuals or groups” with a government permit. “Non- its articles of incorporation, by-laws and other constitutive documents. Section
profit” means no net income or asset accrues to or benefits any member or 30(E) of the NIRC specifically requires that the corporation or association be
specific person, with all the net income or asset devoted to the institution’s non-stock, which is defined by the Corporation Code as “one where no part of
purposes and all its activities conducted not for profit. its income is distributable as dividends to its members, trustees, or officers”
● “Non-profit” does not necessarily mean “charitable.” and that any profit “obtained as an incident to its operations shall, whenever
○ CIR v. Club Filipino Inc. de Cebu: The Court considered as non- necessary or proper, be used for the furtherance of the purpose or purposes
profit a sports club organized for recreation and entertainment of for which the corporation was organized.”
its stockholders and members. The club was primarily funded by ● The operations of the charitable institution generally refer to its regular
membership fees and dues. If it had profits, they were used for activities. Section 30(E) of the NIRC requires that these operations be
overhead expenses and improving its golf course. The club was non- exclusive to charity. There is also a specific requirement that “no part of the
profit because of its purpose and there was no evidence that it was net income or asset shall belong to or inure to the benefit of any member,
engaged in a profit-making enterprise. organizer, officer or any specific person.”
○ Lung Center of the Philippines v. Quezon City : “Charity” is “a gift, ● There is no dispute that St. Luke’s is organized as a nonstock and non-profit
to be applied consistently with existing laws, for the benefit of an charitable institution. However, this does not automatically exempt St.
indefinite number of persons, either by bringing their minds and Luke’s from paying taxes. This only refers to the organization of St.
hearts under the influence of education or religion, by assisting Luke’s. Even if St. Luke’s meets the test of charity, a charitable institution
them to establish themselves in life or by otherwise lessening is not ipso facto tax exempt.
the burden of government.” A non-profit club for the benefit of its ○ To be exempt from real property taxes, Section 28(3), Article VI of
members fails this test. An organization may be considered as non- the Constitution requires that a charitable institution use the property
profit if it does not distribute any part of its income to stockholders or “actually, directly and exclusively” for charitable purposes.
members. ○ To be exempt from income taxes, Section 30(E) of the NIRC
● To be a charitable institution an organization must meet the substantive test requires that a charitable institution must be “organized and
of charity in Lung Center. Charitable institutions provide for free goods operated exclusively” for charitable purposes.
and services to the public which would otherwise fall on the shoulders ○ Likewise, to be exempt from income taxes, Section 30(G) of the
of government. Thus, as a matter of efficiency, the government forgoes taxes NIRC requires that the institution be “operated exclusively” for
which should have been spent to address public needs, because certain social welfare
private entities already assume a part of the burden. This is the rationale for ● HOWEVER, the last paragraph of Section 30 of the NIRC qualifies the words
the tax exemption of charitable institutions. The loss of taxes by the “organized and operated exclusively” by providing that: Notwithstanding the
government is compensated by its relief from doing public works which would provisions in the preceding paragraphs, the income of whatever kind and
have been funded by appropriations from the Treasury. character of the foregoing organizations from any of their properties, real or
● Charitable institutions, however, are not ipso facto entitled to a tax personal, or from any of their activities conducted for profit regardless
exemption. The requirements for a tax exemption are specified by the law of the disposition made of such income, shall be subject to tax imposed
granting it. under this Code
● The Constitution exempts charitable institutions only from real property taxes. ○ In short, the last paragraph of Section 30 provides that if a tax
In the NIRC, Congress decided to extend the exemption to income taxes. exempt charitable institution conducts “any” activity for profit,
However, the way Congress crafted Section 30(E) of the NIRC is materially such activity is not tax exempt even as its not-for-profit
different from Section 28(3), Article VI of the Constitution. activities remain tax exempt.
 ○ Thus, even if the charitable institution must be “organized and
operated exclusively” for charitable purposes, it is nevertheless
allowed to engage in “activities conducted for profit” without
losing its tax exempt status for its not-for-profit activities. The
only consequence is that the “income of whatever kind and
character” of a charitable institution “from any of its activities
conducted for profit, regardless of the disposition made of such
income, shall be subject to tax.” Prior to the introduction of Section
27(B), the tax rate on such income from 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%.
● IN THIS CASE, St. Luke’s had total revenues of P1.73 Billion in 1998 from
services to paying patients. It cannot be disputed that a hospital which
receives approximately P1.73 billion from paying patients is not an
institution “operated exclusively” for charitable purposes. Clearly,
revenues from paying patients are income received from “activities
conducted for profit.” St. Luke’s admits that it derived profits from its paying
patients. St. Luke’s declared P1.73B as “Revenues from Services to Patients”
in contrast to its “Free Services” expenditure of P218M.
● 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.
● HOWEVER, SC held that St. Luke’s is not liable for surcharges and interest
on such deficiency income tax since it relied on a letter earlier issued by BIR
which opined that St. Luke’s is “a corporation for purely charitable and social
welfare purposes” and thus exempt from income tax. In Michael J. Lhuillier,
Inc. v. CIR 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.”

DISPOSITION: 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.