CIR Vs ST Lukes

Income Tax
Topic:
Case Number : G.R. No. 195909 &195960
Case Name: CIR Vs. St. Lukes Medical Center
FACTS
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a
non-stock and non-profit corporation. Under its articles of incorporation,
among its corporate purposes are:
(a) To establish, equip, operate and maintain a non-stock, non-profit Christian,

benevolent, charitable and scientific hospital which shall give curative,
rehabilitative and spiritual care to the sick, diseased and disabled persons;
provided that purely medical and surgical services shall be performed by duly
licensed physicians and surgeons who may be freely and individually
contracted by patients;
(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;
(c) To carry on educational activities related to the maintenance and promotion

of health as well as provide facilities for scientific and medical researches
which, in the opinion of the Board of Trustees, may be justified by the facilities,
personnel, funds, or other requirements that are available;
(d) To cooperate with organized medical societies, agencies of both government

and private sector; establish rules and regulations consistent with the highest
professional ethics;
The BIR assessed St. Luke's based on the argument that Section 27(B) of the
Tax Code should apply to it and hence all of St. Luke's income should be
subject to the 10% tax therein as it is a more specific provision and should
prevail over Section 30 which is a general provision. St. Luke's countered by
saying that its free services to patients were 65% of its operating income and
that no part of its income inures to the benefit of any individual.
ISSUE/S
Whether or not St. Luke’s liable for deficiency income tax under Sec. 27 (B) of
the NIRC which imposes a 10% preferential rate.
HELD
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(8) 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. All other parts of
the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.
Explaination:
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.
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.
“Non-profit” does not necessarily mean “charitable.” In Collector of Internal

Revenue v. Club Filipino Inc. de Cebu, this 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 Constitution exempts charitable institutions only from real property taxes.

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.
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) of the NIRC requires that a

charitable institution must be “organized and operated
exclusively” for charitable purposes. Likewise, to be exempt from income
taxes, Section 30(G) of the NIRC requires that the institution be “operated
exclusively” for social welfare.
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 short, the last paragraph of Section 30 provides that if a tax exempt

charitable institution conducts “any” activity for profit, such activity is not tax
exempt even as its not-for-profit 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%.
The Court finds that St. Luke’s 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. 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).
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.
St. Luke’s is therefore liable for deficiency income tax in 1998 under Section
27(B) of the NIRC. However, St. Luke’s has good reasons to rely on the letter
dated 6 June 1990 by the BIR, which opined that St. Luke’s is “a corporation
for purely charitable and social welfare purposes” and thus exempt from
income tax.

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Income Tax

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian,

(c) To carry on educational activities related to the maintenance and promotion

(d) To cooperate with organized medical societies, agencies of both government

“Non-profit” does not necessarily mean “charitable.” In Collector of Internal

The Constitution exempts charitable institutions only from real property taxes.

To be exempt from real property taxes, Section 28(3), Article VI of the

To be exempt from income taxes, Section 30(E) of the NIRC requires that a

Notwithstanding the provisions in the preceding paragraphs, the income of

In short, the last paragraph of Section 30 provides that if a tax exempt

Thus, even if the charitable institution must be “organized and operated

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