CIR v. St. Luke’s (2012)

Doctrines:

• “Non-profit” does not necessarily mean “charitable.” 
• An organization may be considered as non-profit if it does not distribute any part of its income to stockholders or members. However, despite its being a tax exempt institution, any income such institution earns from activities conducted for profit is taxable, as expressly provided in the last paragraph of Section 30 (NIRC). 

Facts: St. Luke’s Medical Center, Inc. is a hospital organized as a non-stock and non-profit corporation. BIR assessed St. Luke’s deficiency taxes but the amount was reduced during the trial in CTA 1st Division. 

St. Lukes filed an administrative protest with the BIR but it was not acted within the 180-day period. St. Luke’s appealed to the CTA. 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. CTA En Banc affirmed the CTA 1st Division ruling, the 1998 deficiency VAT assessment is cancelled and withdrawn but St. Lukes is liable for deficiency income tax and deficiency expanded withholding tax as well as 20% delinquency interest. 

Issue: Whether or not St. Lukes is liable for deficiency income tax

Held: The Court partly grants the petition of the BIR but on a different ground. SC held 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 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). 

“Non-profit” does not necessarily mean “charitable.” In Collector of Internal Revenue v. Club Filipino Inc. de Cebu, the Court considered as non-profit a 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 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-making enterprise.

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not 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 were used for overhead expenses and improving its golf course. The club was non-profit because of its purpose and there was no themselves in life or [by] otherwise lessening the burden of government.” A non-profit club for the benefit of its members fails this test. An organization may be considered as non-profit if it does not distribute any part of its income to stockholders or members. However, despite its being a tax exempt institution, any income such institution earns from activities conducted for profit is taxable, as expressly provided in the last paragraph of Section 30. 

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. 

St. Luke’s Medical Center, Inc. is liable 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.