CIR v. St.

Luke’s  To be a charitable institution an organization must meet

September 26, 2012; J. Carpio, Second Division: the substantive test of charity in Lung Center. The issue
in Lung Center concerns exemption from real property
FACTS: tax and not income tax. However, it provides for the test
The BIR assessed St. Luke’s for deficiency taxes on: of charity in our jurisdiction.
1. Income tax;  Charity is essentially a gift to an indefinite number of
2. VAT; persons which lessens the burden of government. In
3. Withholding tax on compensation; and other words, charitable institutions provide for free
4. Expanded withholding tax. goods and services to the public which would otherwise
fall on the shoulders of government.
The BIR argued that the 10% preferential tax rate on income  Thus, as a matter of efficiency, the government forgoes
of proprietary non-profit hospitals should be applicable to St. taxes which should have been spent to address public
Luke’s, and that they are no longer exempted for income needs, because certain private entities already assume a
taxes because of the newly introduced Sec. 27 (B) in the Tax part of the burden. This is the rationale for the tax
Code. They also claimed that St. Luke’s was actually operating exemption of charitable institutions.
for profit in 1998 because only 13% of its revenues came from  Charitable institutions, however, are not ipso facto
charitable purposes, and that the hospital’s board of trustees entitled to a tax exemption. The Constitution provides
directly benefited from its profits and assets. that charitable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit
St. Luke’s argued that the BIR should not consider its total cemeteries, and all lands, buildings, and improvements,
revenues because its free services to patients amounted to actually, directly, and exclusively used for religious,
65.20% in its 1998 operating income and 34.80% reinvested charitable, or educational purposes shall be exempt
in property, equipment, or facilities, used for services to from taxation.
paying and non-paying patients. They also denied that any  The test of exemption is not strictly a requirement on
income received inured to the benefit of any individual. It also the intrinsic nature or character of the institution. The
maintained that it is still a tax-exempt entity under Sec. 30 (E) test requires that the institution use the property in a
and (G) of the Tax Code as a non-stock and non-profit certain way.
institution for charitable and social welfare purposes. The  Thus, the Court held that the Lung Center did not lose its
arguments of St. Luke's focus on the wording of Section 30 (E) charitable character when it used a portion of its lot for
exempting from income tax non-stock, non-profit charitable commercial purposes. The effect of failing to meet the
institutions. St. Luke's asserts that the legislative intent of use requirement is simply to remove from the tax
introducing Section 27 (B) was only to remove the exemption exemption that portion of the property not devoted to
for "proprietary non-profit" hospitals. charity.

ISSUE: Exemption for charitable Exemption for charitable

Whether the introduction of Sec. 27 (B) of the Tax Code institutions under Section institutions under Section
imposing a preferential tax of 10% to non-profit proprietary 28 (3), Article VI of the 30 (E) of the Tax Code
hospitals rendered the hospitals which are also charitable and Constitution
social welfare institutions under Sec. 30 (E) and (G) no longer Exempts only real property Exemptions income taxes.
exempted? taxes.
Does not define a Defines a charitable
RULING: charitable institution. institution as:
No, Section 27 (B) on one hand, and Section 30 (E) and (G) 1. A non-stock
on the other hand, can be construed together without the corporation or
removal of such tax exemption. The effect of the association;
introduction of Section 27 (B) is to subject the taxable income 2. Organized exclusively
of two specific institutions, namely, proprietary non-profit for charitable purposes;
educational institutions and proprietary non-profit hospitals, 3. Operated exclusively
among the institutions covered by Section 30, to the 10% for charitable purposes;
preferential rate under Section 27 (B) instead of the ordinary and
30% corporate rate. 4. No part of its net
income or asset shall
"Non- profit" means no net income or asset accrues to or belong to or inure to
benefits any member or specific person, with all the net the benefit of any
income or asset devoted to the institution's purposes and all member, organizer,
its activities conducted not for profit. It does not necessarily officer or any specific
mean charitable. person.
Exemption only extends to Exemption extends only to
Lung Center v. QC Case:
 the properties actually, the income utilized
directly, and exclusively actually, directly, and
used for charitable exclusively for charitable
purposes. purposes.
Test is on the use of the Test is on the intrinsic
property. nature or character of the
institution.

In this case:
There is no dispute that St. Luke's is organized as a non-stock
and non-profit charitable institution. However, this does not
automatically exempt St. Luke's from paying taxes. This only
refers to the organization of St. Luke's. Even if St. Luke's
meets the test of charity, a charitable institution is not ipso
facto tax exempt.
 To be exempt from real property taxes, Section 28 (3),
Article VI of the Constitution requires that a charitable
institution use the property "actually, directly and
exclusively" for charitable purposes.
 To be exempt from income taxes, Section 30 (E) and
(G) of the NIRC requires that a charitable institution
must be "organized and operated exclusively" for
charitable and social welfare purposes.

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
preferential tax at 10%.
 But if the total of the income of whatever kind and
character exceeds 50% of the total income of the
corporation, it shall be taxed at 30%.

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 because its for-profit activities was only
34.80% of its total operating income.