Commissioner of Internal Revenue vs. St. Luke'S Medical Center, Inc

CIR vs. St.
Lukeʼs
January 22, 2018 zenhashy
COMMISSIONER OF INTERNAL
REVENUE vs. ST. LUKE’S
MEDICAL CENTER, INC.
G.R. No. 195909, September 26, 2012
Facts:
1. Lukeʼs Medical Center, Inc. is a hospital

organized as a non-stock and non-profit
corporation.
C. The BIR assessed St. Lukeʼs deficiency
taxes amounting to P76,063,116.06 for
1998, comprised of deficiency income
tax, VAT, withholding tax on
compensation and expanded withholding
tax.
R. Lukeʼs filed an administrative protest with
the BIR against the deficiency tax
assessments.
T. 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.
Lukeʼ
Z. The BIR claimed that St. Lukeʼs was
actually operating for profit in 1998
because only 13% of its revenues came
from charitable purposes. Moreover, the
hospitalʼs board of trustees, officers and
employees directly benefit from its
profits and assets. St. Lukeʼs had total
revenues of P1,730,367,965 or
approximately P1.73 billion from patient
services in 1998.
\. Lukeʼs contended that the BIR should not
consider its total revenues, because its
free services to patients was
P218,187,498 or 65.20% of its 1998
operating income of P334,642,615. St.
Lukeʼs also claimed that its income does
not inure to the benefit of any individual.
^. Lukeʼs 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.
Issue: Whether St. Lukeʼs is liable for

deficiency income tax in 1998 under Section
27(B) of the NIRC, which imposes a
preferential tax rate of 10% on the income of
proprietary non-profit hospitals.
Ruling:
The issue raised by the BIR is a purely legal

one. It involves the effect of the introduction
of Section 27(B) in the NIRC of 1997 vis-à-vis
Section 30(E) and (G) on the income tax
exemption of charitable and social welfare
institutions. The 10% income tax rate under
Section 27(B) specifically pertains to
proprietary educational institutions and
proprietary non-profit hospitals.
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 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).
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
institutionʼs purposes and all its activities
conducted not for profit.
“Non-profit” does not necessarily mean

“charitable.”
The Court defined “charity” in Lung Center of

the Philippines v. Quezon City as “a gift, to be
applied consistently with existing laws, for the
benefit of an indefinite number of persons,
either by bringing their minds and hearts
under the influence of education or religion,
by assisting them to establish themselves in
life or by otherwise lessening the burden of
government.”
To be a charitable institution, however, an

organization must meet the substantive test
of charity in Lung Center. The issue in Lung
Center concerns exemption from real
property tax and not income tax. However, it
provides for the test of charity in our
jurisdiction.
In other words, charitable institutions provide

for free goods and services to the public
which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency,
the government forgoes taxes which should
have been spent to address public needs,
because certain private entities already
assume a part of the burden. This is the
rationale for the tax exemption of charitable
institutions.
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
requirements for a tax exemption are strictly
construed against the taxpayer because an
exemption restricts the collection of taxes
necessary for the existence of the
government.
The Court in Lung Center declared that the

Lung Center of the Philippines is a charitable
institution for the purpose of exemption from
real property taxes. This ruling uses the same
premise as Hospital de San Juan and Jesus
Sacred Heart College which says that
receiving income from paying patients does
not destroy the charitable nature of a hospital.
For real property taxes, the incidental

generation of income is permissible because
the test of exemption is the use of the
property. The test of exemption is not strictly
a requirement on the intrinsic nature or
character of the institution. The test requires
that the institution use the property in a
certain way, i.e. for a 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 purposes. The effect of failing to
meet the use requirement is simply to remove
from the tax exemption that portion of the
property not devoted to charity.
In the NIRC, Congress decided to extend the

exemption to income taxes. However, the way
Congress crafted Section 30(E) of the NIRC is
materially different from Section 28(3), Article
VI of the Constitution. Section 30(E) of the
NIRC defines the corporation or association
that is exempt from income tax. On the other
hand, Section 28(3), Article VI of the
Constitution does not define a charitable
institution, but requires that the institution
“actually, directly and exclusively” use the
property for a charitable purpose.
Section 30(E) of the NIRC provides that a

charitable institution must be:
A non-stock corporation or association;

Organized exclusively for charitable
purposes;
Operated exclusively for charitable
purposes;
No part of its net income or asset shall
belong to or inure to the benefit of any
member, organizer, officer or any specific
person.
Thus, both the organization and operations

of the charitable institution must be
devoted “exclusively” for charitable
purposes. The organization of the institution
refers to its corporate form, as shown by its
articles of incorporation, by-laws and other
constitutive documents.
Section 30(E) of the NIRC specifically requires

that 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 members,
trustees, or officers” and that any profit
“obtained as an incident to its operations
shall, whenever necessary or proper, be used
for the furtherance of the purpose or
purposes for which the corporation was
organized.”
However, the last paragraph of Section 30 of

the NIRC qualifies the words “organized and
operated exclusively” by providing that:
Notwithstanding the provisions in the
preceding paragraphs, the income of
whatever kind and character of the foregoing
organizations from any of their properties, real
or personal, or from any of their activities
conducted for profit regardless of the
disposition made of such income, shall be
subject to tax imposed under this Code.
In 1998, St. Lukeʼs had total revenues of

P1,730,367,965 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.” Indeed, St. Lukeʼs
admits that it derived profits from its paying
patients. St. Lukeʼs declared P1,730,367,965
as “Revenues from Services to Patients” in
contrast to its “Free Services” expenditure of
P218,187,498.
Services to paying patients are activities

conducted for profit. They cannot be
considered any other way. There is a “purpose
to make profit over and above the cost” of
services. The P1.73 billion total revenues from
paying patients is not even incidental to St.
Lukeʼs charity expenditure of P218,187,498 for
non-paying patients.
The Court finds that St. Lukeʼs is a

corporation that is not “operated exclusively”
for charitable or social welfare purposes
insofar as its revenues from paying patients
are concerned. This ruling is based not only
on a strict interpretation of a provision
granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G).
Section 30(E) and (G) of the NIRC requires
that an institution be “operated exclusively”
for charitable or social welfare purposes to be
completely exempt from income tax.
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CIR vs. St.

G.R. No. 195909, September 26, 2012

1. Lukeʼs Medical Center, Inc. is a hospital

Issue: Whether St. Lukeʼs is liable for

The issue raised by the BIR is a purely legal

Section 27(B) of the NIRC does not remove

The effect of the introduction of Section 27(B)

The only qualifications for hospitals are that

“Non-profit” does not necessarily mean

The Court defined “charity” in Lung Center of

To be a charitable institution, however, an

In other words, charitable institutions provide

Charitable institutions, however, are not ipso

The Court in Lung Center declared that the

For real property taxes, the incidental

In the NIRC, Congress decided to extend the

Section 30(E) of the NIRC provides that a

A non-stock corporation or association;

Thus, both the organization and operations

Section 30(E) of the NIRC specifically requires

However, the last paragraph of Section 30 of

In 1998, St. Lukeʼs had total revenues of

Services to paying patients are activities

The Court finds that St. Lukeʼs is a

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