XII.

IAET

THE MANILA WINE MERCHANTS, INC. v. COMMISSIONER OF INTERNAL REVENUE

G.R. No. L-26145 | 1984-02-20

FACTS:
Petitioner, a domestic corporation, is principally engaged in the importation and sale of
whisky, wines, liquors and distilled spirits. In 1957, the respondent caused the examination of
herein petitioner's book of account and found the latter of having unreasonably accumulated
surplus of P429 thousand for the calendar year 1947 to 1957, in excess of the reasonable
needs of the business.

The Commissioner of Internal Revenue demanded upon the Manila Wine Merchants, Inc.
payment of surtax and interest on the latter's unreasonable accumulation of profits and
surplus for the year 1957. Respondent contends that petitioner has accumulated earnings
beyond the reasonable needs of its business because the average ratio of the cash dividends
declared and paid by petitioner from 1947 to 1957 was 40.33% of the total surplus available
for distribution at the end of each calendar year. Another basis of respondent in assessing
petitioner for accumulated earnings tax is its substantial investment of surplus or profits in
unrelated business and U.S.A. Treasury Bonds.

On the other hand, petitioner contends that in 1957, it distributed 100% of its net earnings
after income tax and part of the surplus for prior years. Petitioner appealed to the Court of Tax
Appeals, which found that the average percentage of cash dividends distributed was 85.77%
for a period of 11 years from 1946 to 1957 and not only 40.33% of the total surplus available
for distribution at the end of each calendar year actually distributed by the petitioner to its
stockholders. However, as to the U.S.A. Treasury Bonds, the Court of Tax Appeals ruled that
its purchase was in no way related to the petitioner's business of importing and selling wines,
whisky, liquors and distilled spirits. The Court of Tax Appeals denied the motion for
reconsideration filed by petitioner, hence, this petition.

ISSUE:
Whether or not the purchase of the U.S.A. Treasury Bonds was an investment within the
reasonable needs of the Corporation, which justifies their accumulation of earnings or profits

HELD:
No, the purchase of U.S.A. Treasury Bonds is not within the reasonable needs of the
Company.

An accumulation of earnings or profits (including undistributed earnings or profits of prior

years) is unreasonable if it is not required for the purpose of the business, considering all the
circumstances of the case.

To determine the "reasonable needs" of the business in order to justify an accumulation of

earnings, the Courts of the United States have invented the so-called "Immediacy Test"
which construed the words "reasonable needs of the business" to mean the immediate needs
of the business, and it was generally held that if the corporation did not prove an immediate
need for the accumulation of the earnings and profits, the accumulation was not for the
reasonable needs of the business, and the penalty tax would apply.
The records reveal that from the time the petitioner purchased the U.S.A. Treasury shares,
until it finally liquidated the same, the petitioner never had the occasion to use the said shares
in aiding or financing its importation. To justify an accumulation of earnings and profits for the
reasonably anticipated future needs, such accumulation must be used within a reasonable
time after the close of the taxable year.

Petitioner likewise advanced the argument that the U.S.A. Treasury shares were held for a
few more years in view of a plan to buy a lot and construct a building of their own; that at that
time (1957), the Company was not yet qualified to own real property in the Philippines, hence
the petitioner had to wait until sixty percent (60%) of the stocks of the Company would be
owned by Filipino citizens before making definite plans.

These arguments of petitioner indicate that it considers the U.S.A. Treasury shares was
likewise conditioned upon the completion of the 60% citizenship requirement of stock
ownership of the Company in order to qualify it to purchase and own a lot. From these
assertions of petitioner, the Court cannot gather anything definite or certain.

In order to determine whether profits are accumulated for the reasonable needs of the
business as to avoid the surtax upon shareholders, the controlling intention of the taxpayer is
that which is manifested at the time of accumulation not subsequently declared intentions
which are merely the product of afterthought. A speculative and indefinite purpose will not
suffice. Definiteness of plan coupled with action taken towards its consummation are
essential.

COMMISSIONER OF INTERNAL REVENUE v. ANTONIO TUASON, INC.

G.R. No. 85749 | 1989-05-15

FACTS:
The petitioner, Commissioner of Internal Revenue, assessed Antonio Tuason, Inc. the
following:
1) Deficiency income tax for the years 1975, 1976 and 1978;
2) Deficiency corporate quarterly income tax for the first quarter of 1975
3) 25% surtax on unreasonable accumulation of surplus for the years 1975 to 1978

The private respondent did not object to the first and second items and paid the amounts
demanded. However, it protested the assessment of a 25% surtax on the third item on the
ground that the accumulation of surplus profits during the years in question was solely for the
purpose of expanding its business operations as a real estate broker. The request for
reinvestigation was granted. However, no investigation was conducted nor a decision
rendered on Antonio Tuazon Inc.'s protest.

In the meantime, the Revenue Commissioner issued warrants of distraint and levy to enforce
collection of the total amount originally assessed including the amounts already paid. The
private respondent filed a petition for review in the Court of Tax Appeals with a request that an
order be issued restraining the Commissioner and/or his representatives from enforcing the
warrants of distraint and levy. A writ of injunction was issued by the Tax Court ordering the
Commissioner to refrain from enforcing said warrants of distraint and levy. In view of the
reversal of the Commissioner's decision by the Court of Tax Appeals, the petitioner appealed
to this Court.

ISSUE:
Whether or not the accumulation of profits by the respondent was justified on the ground that
it is used for the purpose of expanding its business operations

HELD:
Yes, but only in as much as P700 thousand of the accumulated profits.

It is not disputed that Antonio Tuason, Inc. accumulated surplus profits amounting to P3.26
million for 1975 up to 1978 to build up sufficient capital for its expansion program which
included the construction in 1979-1981 of an apartment building, and the purchase in 1980 of
a condominium unit which was intended for resale or lease.

However, since the Company as of the time of the assessment in 1981, had invested in its
business operations only P700 thousand out of its accumulated surplus profits of P3.26 million
for 1975-1978, its remaining accumulated surplus profits of P2.49 million are subject to the
25% surtax.

The touchstone of liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose
of using the undistributed earnings and profits for the reasonable needs of the business, that
purpose would not fall within the interdiction of the statute.

It is plain to see that the company's failure to distribute dividends to its stockholders in 1975-
1978 was for reasons other than the reasonable needs of the business, thereby falling within
the interdiction of Section 25 of the Tax Code of 1977.

CYANAMID PHILIPPINES, INC. v. COURT OF APPEALS

G.R. No. 108067 | 2000-01-20

FACTS:
Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a
wholly owned subsidiary of American Cyanamid Co. based in Maine, USA.

The CIR sent an assessment letter to the petitioner and demanded the payment of deficiency
income tax of P120 thousand pesos for taxable year 1981. The petitioner protested the
assessments. Petitioner claimed, among others, that the surtax for the undue accumulation of
earnings was not proper because the said profits were retained to increase petitioner's
working capital and it would be used for reasonable business needs of the Company.

The CIR, however, refused to allow the cancellation of the assessment notices and rendered
its resolution. Petitioner appealed to the Court of Tax Appeals. Petitioner claimed that CIR's
assessment representing the 25% surtax on its accumulated earnings for the year 1981 had
no legal basis for the following reasons: (a) petitioner accumulated its earnings and profits for
reasonable business requirements to meet working capital needs and retirement of
indebtedness; (b) petitioner is a wholly owned subsidiary of American Cyanamid Company, a
corporation organized under the laws of the State of Maine, in the United States of America.
In denying the petition, the Court of Tax Appeals held that there was no need for the petitioner
to set aside a portion of its retained earnings as working capital reserve as it claims since it
had considerable liquid funds. Moreover, the Court further reject petitioner's argument that the
accumulated earnings tax does not apply to a publicly-held corporation. Under Section 25 of
the NIRC as amended by Section 5 of P.D. No. 1379, the exceptions to the accumulated
earnings tax are expressly enumerated.

The petitioner appealed to the Court of Appeals, which affirmed the decision of the Court of
Tax Appeals. Hence, this petition.

ISSUE:
Whether or not the petitioner is liable for the accumulated earnings tax for the year 1981

HELD:
Yes, the petitioner is liable for the accumulated earnings tax.

The tax on improper accumulation of surplus is essentially a penalty tax designed to compel
corporations to distribute earnings so that the said earnings by shareholders could, in turn, be
taxed.

PD 1739 enumerated the corporations exempt from the imposition of improperly accumulated
tax: (a) banks; (b) non-bank financial intermediaries; (c) insurance companies; and (d)
corporations organized primarily and authorized by the Central Bank of the Philippines to hold
shares of stocks of banks. Petitioner does not fall among those exempt classes. Besides, the
rule on enumeration is that the express mention of one person, thing, act, or consequence is
construed to exclude all others.

Moreover, as of 1981 the working capital of Cyanamid was P25. 78 million, or more than twice
its current liabilities. That current ratio of Cyanamid, therefore, projects adequacy in working
capital. Said working capital was expected to increase further when more funds were
generated from the succeeding year's sales, hence, there appears to be no reason to expect
an impending "working capital deficit" which could have necessitated an increase in working
capital, as rationalized by petitioner.

In order to determine whether profits are accumulated for the reasonable needs to avoid the
surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is
manifest at the time of accumulation, not intentions declared subsequently, which are mere
afterthoughts. Furthermore, the accumulated profits must be used within a reasonable time
after the close of the taxable year. In the instant case, the petitioner did not establish, by clear
and convincing evidence, that such accumulation of profit was for the immediate needs of the
business.

BIR Ruling 025-02

FACTS: Abbott-Phils. is a corporation duly organized and existing under the laws of the
Philippines with office address at 102 Epifanio De Los Santos Avenue, Mandaluyong City. It is
engaged in the business of manufacturing, buying, selling, importing, exporting, dealing of
various drugs, pharmaceutical products and supplies as provided in its Articles of
Incorporation.

Abbott-Phils. is a wholly owned subsidiary of Abbott Laboratories (USA) (Abbott-US). Abbott-

US is a corporation organized and existing under the laws of the State of Illinois, USA whose
shares are listed and traded in the New York Stock Exchange (NYSE) and six other stock
exchanges. As of year-end 2000, Abbott-US had 101,272 shareholders holding a combined
1,545,934,133 shares of common stock.

ISSUE: Whether or not Abbot-Phils. is a publicly-owned corporation and hence, exempt from
the Improperly Accumulated EarningsTax (IAET)

HELD: YES.

Pursuant to Section 4 of Revenue Regulations No. 2-2001, "Implementing the Provision on

Improperly Accumulated Earnings Tax under Section 29 of the Tax Code of 1997"

For purposes of these Regulations, closely-held corporations are those corporations at least
fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of
the total combined voting power of all classes of stock entitled to vote is owned directly or
indirectly by or for not more than twenty (20) individuals. Domestic corporations not falling
under the aforesaid definition are, therefore, publicly-held corporations.

For purposes of determining whether the corporation is a closely held corporation, insofar as
such determination is based on stock ownership, the following rates shall be applied.

(1) Stock Not Owned by Individuals - Stock owned directly or indirectly by or for a corporation,
partnership, estate or trust shall be considered as being owned proportionately by its
shareholders, partners or beneficiaries.

(2) Family and Partnership Ownership - An individual shall be considered as owning the stock
owned, directly or indirectly, by or for his family, or by or for his partner. For purposes of this
paragraph, the `family of an individual' includes his brothers or sisters (whether by whole or
halfblood) spouse, ancestors and lineal descendants.

(3) Option to Acquire Stocks - If any person has an option to acquire stock, such stock shall
be considered as owned by such person. For purposes of this paragraph, an option to acquire
such an option and each one of a series of option shall be considered as an option to acquire
such stock.

(4) Constructive Ownership as Actual Ownership - Stock constructively owned by reason of

the application of paragraph (1) or (3) hereof shall, for purposes of applying paragraph (1) or
(2), be treated as actually owned by such person, but stock constructively owned by the
individual by reason of the application of paragraph (2) hereof shall not be treated as owned
by him for purposes of again applying such paragraph in order to make another the
constructive owner of such stock.
Such being the case, since Abbott-Phils. is a wholly-owned subsidiary of Abbott-US, such
shares will be considered as being owned proportionately by the Abbott-US shareholders. The
ownership of a domestic corporation for purposes of determining whether it is a closely held
corporation or a publicly held corporation is ultimately traced to the individual shareholders of
the parent company. Thus, where at least 50% of the outstanding capital stock or at least
50% of the total combined voting power of all classes of stock entitled to vote in a corporation
is owned directly or indirectly by at least 21 or more individuals, the corporation is considered
publicly-held corporation as the term is defined under the Regulations.

Further, Section 29 of the Tax Code of 1997 provides, viz :

"Sec. 29. Imposition of Improperly Accumulated Earnings Tax. - (A) . . .
(B) Corporations Subject to Improperly Accumulated Earnings Tax. -
(1) In General. - The improperly accumulated earnings tax imposed in the preceding
Section shall apply to every corporation formed or availed for the purpose of avoiding
the income tax with respect to its shareholders or the shareholders of any other
corporation, by permitting earnings and profits to accumulate instead of being divided
or distributed.

(2) Exceptions. - The improperly accumulated earnings tax as provided for under this
Section shall not apply to:
(a) Publicly-held corporation;
(b) Banks and other non-bank financial intermediaries; and (c) Insurance
Companies. (Emphasis ours)

Accordingly, this Office confirms your opinion that Abbott-Phils. is considered a publicly-held
corporation exempt from the Improperly Accumulated Earnings Tax (IAET), based on the
representation that as of the year-end 2000, Abbott-US had 101,272 shareholders holding a
combined 1,545,934,133 shares of common stock and the twenty largest shareholders of
Abbott-US as of September 30, 2001 own an aggregate of 30.1 percent of Abbott-US' issued
and outstanding shares.

XIII. TAX EXEMPT CORPORATIONS

COLLECTOR OF INTERNAL REVENUE v. V.G. SINCO EDUCATIONAL CORPORATION

G.R. No. L-9276 | 1956-10-23

FACTS:
V. G. Sinco Educational Institution was organized by Vicente G. Sinco. This corporation was
non-stock and continued the operations of Foundation College of Dumaguete.The
investigation revealed that the college realized a taxable net income for the year 1949 and
1950. For the years 1951 to 1953, the income tax returns of the college reported a taxable net
profit for the year 1951; loss for the year 1952 and a profit for the year 1953. The Collector of
Internal Revenue assessed against the college an income tax for the years 1950 and 1951,
which was paid by the college.

Two years thereafter, the corporation commenced an action in the Court of First Instance of
Negros Oriental for the refund of this amount alleging that it is exempt from income tax under
Section 27 (e) of the National Internal Revenue Code. The case was remanded to the Court of
Tax Appeals which, after due trial, decided the case in favor of the corporation.
Invoking Section 27 (e) of the National Internal Revenue Code, the Appellee claims that it is
exempt from the payment of the income tax because it is organized and maintained
exclusively for the educational purposes and no part of its net income inures to the benefit of
any private individual. On the other hand, the Appellant maintains that part of the net income
accumulated by the Appellee inured to the benefit of V. G. Sinco, president and founder of the
corporation, and therefore the Appellee is not entitled to the exemption prescribed by the law.

ISSUE:
Whether or not the College, organized and maintained exclusively for educational purposes, is
exempt from income tax

HELD:
Yes, the College is exempt from income tax.

As it has been established, the Appellee is a non-profit institution and since its organization, it
has never distributed any dividend or profit to its stockholders. Part of its income went to the
payment of its teachers or professors and to the other expenses of the college incident to an
educational institution, but none of the income has ever been channeled to the benefit of any
individual stockholder. The authorities are clear to the effect that whatever payment is made
to those who work for a school or college as a remuneration for their services is not
considered as distribution of profit as would make the school one conducted for profit.

It is not denied that the Appellee charges tuition fees and other fees for the different services
it renders to the students and in fact it is its only source of income, but such fact does not in
itself make the school a profit-making enterprise that would place it beyond the purview of the
law. Needless to say, every responsible organization must be so run as to, at least, insure its
existence, by operating within the limits of its own resources, especially its regular income. In
other words, it should always strive, whenever possible, to have a surplus.

Another point raised by Appellant to show that Appellee is not entitled to the exemption of the
law refers to the use made by it of part of its income in acquiring additional buildings and
equipment which, it is claimed would in the end redound to the benefit of its stockholders.
While the acquisition of additional facilities may redound to the benefit of the institution itself, it
cannot be positively asserted that the same will redound to the benefit of its stockholders, for
no one can predict the financial condition of the institution upon its dissolution. At any rate, it
has been held by several authorities that the mere provision for the distribution of its assets to
the stockholders upon dissolution does not remove the right of an educational institution from
tax exemption.

CIR v. CA and YMCA

FACTS:

Private respondent YMCA is a non-stock, non-profit institution, which conducts various

programs and activities that are beneficial to the public, especially the young people, pursuant
to its religious, educational and charitable objectives.

In 1980, YMCA earned an income of P676,829.80 from leasing out a portion of its premises to
small shop owners, like restaurants and canteen operators, and P44,259.00 from parking fees
collected from non-members.

CIR issued an assessment to private respondent, in the total amount of P415,615.01

including surcharge and interest, for deficiency income tax, deficiency expanded withholding
taxes on rentals and professionals fees and deficiency withholding tax on wages. YMCA
protested the assessment before the CTA.

CTA rendered a decision in favor of YMCA, stating that the earnings from the rentals and
parking charges is channeled to support its many activities and attainment of its objectives the
membership dues being very insufficient to support its program. CA initially reversed the
decision of the CTA, but subsequently reversed itself upon motion for reconsideration. Hence,
this petition.

Petitioner’s contention/s:

1. While the income received by the organizations enumerated in Section 27 is, as a

rule, exempted from the payment of tax “in respect to income received by them as such,”
the exemption does not apply to income derived “xxx 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 xxx”

2. Rented income derived by a tax-exempt organization from the lease of its properties,
real or personal, is not, therefore, exempt from income taxation, even if such income is
exclusively used for the accomplishment of its objectives.

YMCA contends that it is a non-stock, non-profit educational institution whose revenues and
assets are used actually, directly and exclusively for educational purposes so it is exempt
from taxes on its properties and income.

ISSUE:

WON the income derived from the rentals of real property owned by the YMCA – established
as “a welfare, educational and charitable non-profit corporation” – is subject to income tax
under the NIRC

HELD:

YES. Petition is GRANTED.

[See Section 27,NIRC]

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of
strict interpretation in construing tax exemptions. A claim of statutory exemption from taxation
should be manifest and unmistakeable from the language of the law on which it is based.
Thus, the claimed exemption “must expressly be granted in a statute stated in a language too
clear to be mistaken.”

In the instant case, the exemption claimed by YMCA is expressly disallowed by the very
wording of the last paragraph of Section 27 of the NIRC which mandates that the income of
exempt organizations from any of their properties, real or personal, be subject to the imposed
by the same Code.

Private respondent is exempt from the payment of property tax, but not income tax on
the rentals from its property.The tax exemption under Article VI, Section 28(3) of the
Constitution covers only property taxes.

Laws allowing tax exemption are construed strictissimi juris. For YMCA to be granted the
exemption it claims under the aforecited provision, it must prove that (1) it falls under the
classification non-stock, non-profit educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly, and exclusively for educational purposes.
No evidence was submitted by YMCA to prove that it met the said requisites.

YMCA is not an educational institution within the purview of Article XIV, Section 4(3) of the
Constitution

The term “educational institution” or “institution of learning” refers to schools. The school
system is synonymous with formal education, which refers to the hierarchically structured and
chronological graded learnings organized and provided by the formal school system and for
which certification is required in order for the learner t progress through the grades or move to
the higher levels.

COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE’S MEDICAL CENTER, INC.

G.R. No. 195909 | 2012-09-26

FACTS:
St. Luke's Medical Center, Inc. is a hospital organized as a non-stock and non-profit
corporation. The Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to P76.06 million for 1998 comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax. The BIR reduced the amount
to P63. 94 million during trial in the First Division of the Court of Tax Appeals (CTA).

St. Luke's filed an administrative protest with the BIR. The BIR did not act on the protest, thus,
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.

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. Luke's. The BIR claimed that St. Luke's was actually operating for profit in 1998. It had
total revenues of approximately P1.73 billion from patient services in 1998 and only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers
and employees directly benefit from its profits and assets.

The CTA En Banc ruled that St. Luke's is a non-stock and non-profit charitable institution. This
ruling would exempt all income derived by St. Luke's from services to its patients, whether
paying or non-paying. The CTA examined the primary purposes of St. Luke's under its articles
of incorporation and various documents identifying St. Luke's as a charitable institution.
Hence, the present petition.

ISSUE:
Whether or not the enactment of Section 27(B) takes proprietary non-profit hospitals out of the
income tax exemption under Section 30 of the NIRC and instead, imposes a preferential rate
of 10% on their taxable income

HELD:
No, Sec. 27(B) does not remove the income tax exemption of proprietary non-profit hospitals
under Section 30(E) and (G).

Section 27(B), providing a preferential 10% income tax rate, specifically pertains to
proprietary educational institutions and proprietary non-profit hospitals. On the other hand,
Section 30(E) exempts from income tax non-stock, non-profit charitable institutions. 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 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”. To be a charitable institution, however,

an organization must meet the substantive test of charity. Charity is essentially a gift to an
indefinite number of persons which lessens the burden 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.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients so long as the
money received is devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons managing or operating the
institution.

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. 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. 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.

In 1998, St. Luke's had total revenues of P1.73 billion 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”.

COMMISSIONER OF INTERNAL REVENUE v. DE LA SALLE UNIVERSITY, INC.

G.R. No. 195909 and G.R. No. 195960 | 2012-09-26

FACTS:
In 2004, the Bureau of Internal Revenue (BIR) issued to De La Salle University, Inc. (DLSU) a
Letter of Authority (LOA) authorizing its revenue officers to examine the latter's books of
accounts for the fiscal period ending in 2003.

The BIR assessed the following deficiency taxes: (a) income tax on rental earnings from
restaurants/canteens and bookstores operating within the campus; (b) value-added tax (VAT)
on business income; and (c) documentary stamp tax (DST) on loans and lease contracts.

DLSU protested the assessment, but the Commissioner failed to act on the protest. Thus,
DLSU filed a petition for review with the CTA Division. DLSU principally anchored its petition
on Article XIV, Section 4 (3) of the Constitution which provided that “All revenues and assets
of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties”.

The CTA Division partially granted DLSU's petition for review. The BIR Commissioner (CIR)
appealed to the CTA En Banc arguing that DLSU's use of its revenues and assets for non-
educational or commercial purposes removed these items from the exemption coverage
under the Constitution.

DLSU also filed a separate petition for review with the CTA En Banc. The CTA En Banc
found that DLSU was able to prove that a portion of the assessed rental income was used
actually, directly and exclusively for educational purposes; hence, exempt from tax. However,
it further held that while DLSU successfully proved that a portion of its rental income was
transmitted and used to pay the loan obtained to fund the construction of the Sports Complex,
the rental income from other sources were not shown to have been actually, directly and
exclusively used for educational purposes. Both DLSU and the Commissioner came to the
Supreme Court to question the CTA En Banc's rulings.

ISSUE:
Whether or not the respondent, as a non-stock, non-profit educational institution, is exempt
from tax

HELD:
Yes, the revenues and assets of DLSU used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties.

Article XIV, Section 4 (3) of the 1987 Constitution refers to two kinds of educational
institutions: (1) non-stock, non-profit educational institutions and (2) proprietary educational
institutions. DLSU falls under the first category.

There is a marked distinction between the tax treatment of the two types of educational
institutions. The tax exemption granted to non-stock, non-profit educational institutions is
conditioned only on the actual, direct and exclusive use of their revenues and assets for
educational purposes. While tax exemptions may also be granted to proprietary educational
institutions, these exemptions may be subject to limitations imposed by Congress.

The Tax Code provides that exempt organizations like non-stock, non-profit educational
institutions shall not be taxed on income received by them as such. On the other hand, a
proprietary educational institution is entitled only to the reduced rate of 10% corporate income
tax. The reduced rate is applicable only if: (1) the proprietary educational institution is non
profit and (2) its gross income from unrelated trade, business or activity does not exceed 50%
of its total gross income.

Furthermore, a plain reading of the Constitution would show that Article XIV, Section 4 (3)
does not require that the revenues and income must have also been sourced from
educational activities or activities related to the purposes of an educational institution. The
phrase all revenues is unqualified by any reference to the source of revenues. Thus, so long
as the revenues and income are used actually, directly and exclusively for educational
purposes, then said revenues and income shall be exempt from taxes and duties.

Revenues consist of the amounts earned by a person or entity from the conduct of business
operations. Assets, on the other hand, are the tangible and intangible properties owned by a
person or entity. Thus, when a non-stock, non-profit educational institution proves that it uses
its revenues actually, directly, and exclusively for educational purposes, it shall be exempted
from income tax, VAT, and local business tax. On the other hand, when it also shows that it
uses its assets in the form of real property for educational purposes, it shall be exempted
from real property tax (RPT).

Therefore, the leased portion of the building may be subject to real property tax, as held in
Abra Valley College, Inc. v. Aquino. We ruled in that case that the test of exemption from
taxation is the use of the property for purposes mentioned in the Constitution. We also
held that the exemption extends to facilities which are incidental to and reasonably necessary
for the accomplishment of the main purposes.

For all these reasons, the Court holds that the income and revenues of DLSU proven to have
been used actually, directly and exclusively for educational purposes are exempt from duties
and taxes.