.R. No.

78953 July 31, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents.
Elison G. Natividad for accused-appellant.

SARMIENTO, J.:p
Central in this controversy is the issue as to whether or not a taxpayer who merely states as a
footnote in his income tax return that a sum of money that he erroneously received and already
spent is the subject of a pending litigation and there did not declare it as income is liable to pay the
50% penalty for filing a fraudulent return.
This question is the subject of the petition for review before the Court of the portion of the
Decision 1 dated July 27, 1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled,
"Melchor J. Javier, Jr. vs. Ruben B. Ancheta, in his capacity as Commissioner of Internal Revenue," which
orders the deletion of the 50% surcharge from Javier's deficiency income tax assessment on his income
for 1977.
The respondent CTA in a Resolution 2 dated May 25, 1987, denied the Commissioner's Motion for
Reconsideration 3 and Motion for New Trial 4 on the deletion of the 50% surcharge assessment or
imposition.
The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA
and incorporated in the assailed decision now under review, read as follows:
xxx xxx xxx
2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private
respondent herein), received from the Prudential Bank and Trust Company in Pasay
City the amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa,
through some banks in the United States, among which is Mellon Bank, N.A.
3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court
of First Instance of Rizal (now Regional Trial Court), (docketed as Civil Case No.
26899), against the petitioner (private respondent herein), his wife and other
defendants, claiming that its remittance of US$1,000,000.00 was a clerical error and
should have been US$1,000.00 only, and praying that the excess amount of
US$999,000.00 be returned on the ground that the defendants are trustees of an
implied trust for the benefit of Mellon Bank with the clear, immediate, and continuing
duty to return the said amount from the moment it was received.

4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an
Information with the then Circuit Criminal Court (docketed as CCC-VII-3369-P.C.)
charging the petitioner (private respondent herein) and his wife with the crime of
estafa, alleging that they misappropriated, misapplied, and converted to their own
personal use and benefit the amount of US$999,000.00 which they received under
an implied trust for the benefit of Mellon Bank and as a result of the mistake in the
remittance by the latter.
5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income
Tax Return for the taxable year 1977 showing a gross income of P53,053.38 and a
net income of P48,053.88 and stating in the footnote of the return that "Taxpayer was
recipient of some money received from abroad which he presumed to be a gift but
turned out to be an error and is now subject of litigation."
6. That on or before December 15, 1980, the petitioner (private respondent herein)
received a letter from the acting Commissioner of Internal Revenue dated November
14, 1980, together with income assessment notices for the years 1976 and 1977,
demanding that petitioner (private respondent herein) pay on or before December 15,
1980 the amount of P1,615.96 and P9,287,297.51 as deficiency assessments for the
years 1976 and 1977 respectively. . . .
7. That on December 15, 1980, the petitioner (private respondent herein) wrote the
Bureau of Internal Revenue that he was paying the deficiency income assessment
for the year 1976 but denying that he had any undeclared income for the year 1977
and requested that the assessment for 1977 be made to await final court decision on
the case filed against him for filing an allegedly fraudulent return. . . .
8. That on November 11, 1981, the petitioner (private respondent herein) received
from Acting Commissioner of Internal Revenue Romulo Villa a letter dated October 8,
1981 stating in reply to his December 15, 1980 letter-protest that "the amount of
Mellon Bank's erroneous remittance which you were able to dispose, is definitely
taxable." . . . 5
The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax Appeals on December 10,
1981.
The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote the
concluding portion:
We note that in the deficiency income tax assessment under consideration,
respondent (petitioner here) further requested petitioner (private respondent here) to
pay 50% surcharge as provided for in Section 72 of the Tax Code, in addition to the
deficiency income tax of P4,888,615.00 and interest due thereon. Since petitioner
(private respondent) filed his income tax return for taxable year 1977, the 50%

surcharge was imposed, in all probability, by respondent (petitioner) because he

considered the return filed false or fraudulent. This additional requirement, to our
mind, is much less called for because petitioner (private respondent), as stated
earlier, reflected in as 1977 return as footnote that "Taxpayer was recipient of some
money received from abroad which he presumed to be gift but turned out to be an
error and is now subject of litigation."
From this, it can hardly be said that there was actual and intentional fraud, consisting
of deception willfully and deliberately done or resorted to by petitioner (private
respondent) in order to induce the Government to give up some legal right, or the
latter, due to a false return, was placed at a disadvantage so as to prevent its lawful
agents from proper assessment of tax liabilities. (Aznar vs. Court of Tax Appeals, L20569, August 23, 1974, 56 (sic) SCRA 519), because petitioner literally "laid his
cards on the table" for respondent to examine. Error or mistake of fact or law is not
fraud. (Insular Lumber vs. Collector, L-7100, April 28, 1956.). Besides, Section 29 is
not too plain and simple to understand. Since the question involved in this case is of
first impression in this jurisdiction, under the circumstances, the 50% surcharge
imposed in the deficiency assessment should be deleted. 7
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated the
matter to us, by the present petition, raising the main issue as to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY?

On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not appeal the decision
which held him liable for the basic deficiency income tax (excluding the 50% surcharge for fraud)."
However, he submitted in the same memorandum "that the issue may be raised in the case not for the
purpose of correcting or setting aside the decision which held him liable for deficiency income tax, but
only to show that there is no basis for the imposition of the surcharge." This subsequent disavowal
therefore renders moot and academic the posturings articulated in as Comment 10 on the non-taxability of
the amount he erroneously received and the bulk of which he had already disbursed. In any event, an
appeal at that time (of the filing of the Comments) would have been already too late to be seasonable.
The petitioner, through the office of the Solicitor General, stresses that:
xxx xxx xxx
The record however is not ambivalent, as the record clearly shows that private
respondent is self-convinced, and so acted, that he is the beneficial owner, and of
which reason is liable to tax. Put another way, the studied insinuation that private
respondent may not be the beneficial owner of the money or income flowing to him
as enhanced by the studied claim that the amount is "subject of litigation" is belied by
the record and clearly exposed as a fraudulent ploy, as witness what transpired upon
receipt of the amount.
Here, it will be noted that the excess in the amount erroneously remitted by MELLON
BANK for the amount of private respondent's wife was $999,000.00 after opening a
dollar account with Prudential Bank in the amount of $999,993.70, private

respondent and his wife, with haste and dispatch, within a span of eleven (11)
electric days, specifically from June 3 to June 14, 1977, effected a total massive
withdrawal from the said dollar account in the sum of $975,000.00 or
P7,020,000.00. . . . 11
In reply, the private respondent argues:
xxx xxx xxx
The petitioner contends that the private respondent committed fraud by not declaring
the "mistaken remittance" in his income tax return and by merely making a footnote
thereon which read: "Taxpayer was the recipient of some money from abroad which
he presumed to be a gift but turned out to be an error and is now subject of
litigation." It is respectfully submitted that the said return was not fraudulent. The
footnote was practically an invitation to the petitioner to make an investigation, and to
make the proper assessment.
The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v.
Comm., 50 F [2d] 782), that is, it must be stronger than the "mere preponderance of
evidence" which would be sufficient to sustain a judgment on the issue of correctness
of the deficiency itself apart from the fraud penalty. (Frank A. Neddas, 40 BTA 672).
The following circumstances attendant to the case at bar show that in filing the
questioned return, the private respondent was guided, not by that "willful and
deliberate intent to prevent the Government from making a proper assessment"
which constitute fraud, but by an honest doubt as to whether or not the "mistaken
remittance" was subject to tax.
First, this Honorable Court will take judicial notice of the fact that so-called "million
dollar case" was given very, very wide publicity by media; and only one who is not in
his right mind would have entertained the idea that the BIR would not make an
assessment if the amount in question was indeed subject to the income tax.
Second, as the respondent Court ruled, "the question involved in this case is of first
impression in this jurisdiction" (See p. 15 of Annex "A" of the Petition). Even in the
United States, the authorities are not unanimous in holding that similar receipts are
subject to the income tax. It should be noted that the decision in the Rutkin case is a
five-to-four decision; and in the very case before this Honorable Court, one out of
three Judges of the respondent Court was of the opinion that the amount in question
is not taxable. Thus, even without the footnote, the failure to declare the "mistaken
remittance" is not fraudulent.
Third, when the private respondent filed his income tax return on March 15, 1978 he
was being sued by the Mellon Bank for the return of the money, and was being
prosecuted by the Government for estafa committed allegedly by his failure to return
the money and by converting it to his personal benefit. The basic tax amounted to
P4,899,377.00 (See p. 6 of the Petition) and could not have been paid without using

part of the mistaken remittance. Thus, it was not unreasonable for the private
respondent to simply state in his income tax return that the amount received was still
under litigation. If he had paid the tax, would that not constitute estafa for using the
funds for his own personal benefit? and would the Government refund it to him if the
courts ordered him to refund the money to the Mellon Bank? 12
xxx xxx xxx

Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue
Code), a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due
from him or of the deficiency tax in case payment has been made on the basis of the return filed
before the discovery of the falsity or fraud.
We are persuaded considerably by the private respondent's contention that there is no fraud in the
filing of the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on
his income tax return filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from
abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation
that it was an "error or mistake of fact or law" not constituting fraud, that such notation was
practically an invitation for investigation and that Javier had literally "laid his cards on the table." 13
In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax return was discussed in
this manner:
. . . The fraud contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception willfully and deliberately done or resorted to
in order to induce another to give up some legal right. Negligence, whether slight or
gross, is not equivalent to the fraud with intent to evade the tax contemplated by law.
It must amount to intentional wrong-doing with the sole object of avoiding the tax. It
necessarily follows that a mere mistake cannot be considered as fraudulent intent,
and if both petitioner and respondent Commissioner of Internal Revenue committed
mistakes in making entries in the returns and in the assessment, respectively, under
the inventory method of determining tax liability, it would be unfair to treat the
mistakes of the petitioner as tainted with fraud and those of the respondent as made
in good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at
most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for the
purpose of tax evasion. 15
A "fraudulent return" is always an attempt to evade a tax, but a merely "false return"
may not be, Rick v. U.S., App. D.C., 161 F. 2d 897, 898. 16
In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading
of the government agency concerned, the Bureau of Internal Revenue, headed by the herein
petitioner. The government was not induced to give up some legal right and place itself at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because

Javier did not conceal anything. Error or mistake of law is not fraud. The petitioner's zealousness to
collect taxes from the unearned windfall to Javier is highly commendable. Unfortunately, the
imposition of the fraud penalty in this case is not justified by the extant facts. Javier may be guilty of
swindling charges, perhaps even for greed by spending most of the money he received, but the
records lack a clear showing of fraud committed because he did not conceal the fact that he had
received an amount of money although it was a "subject of litigation." As ruled by respondent Court
of Tax Appeals, the 50% surcharge imposed as fraud penalty by the petitioner against the private
respondent in the deficiency assessment should be deleted.
WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is
AFFIRMED. No costs.

Commissioner of Internal Revenue (CIR) vs. Melchor Javier, Jr. - 199 SCRA 825 Case
Digest
Facts:
In 1977, Victoria Javier received a $1 Million remittance in her bank account from
her sister abroad, Dolores Ventosa. Melchor Javier, Jr., the husband of Victoria
immediately withdrew the said amount and then appropriated it for himself.
Later, the Mellon Bank, a foreign bank in the U.S.A. filed a complaint against the
Javiers for estafa. Apparently, Ventosa only sent $1,000.00 to her sister Victoria but
due to a clerical error in Mellon Bank, what was sent was the $1 Million.
Meanwhile, Javier filed his income tax return. In his return, he place a footnote
which states:
Taxpayer was recipient of some money received from abroad which he presumed to
be a gift but turned out to be an error and is now subject of litigation.
The Commissioner of Internal Revenue (CIR) then assessed Javier a tax liability
amounting to P4.8 Million. The CIR also imposed a 50% penalty against Javier as the
CIR deemed Javiers return as a fraudulent return.
ISSUE:
Whether or not Javier is liable to pay the 50% penalty.
HELD:
No. It is true that a fraudulent return shall cause the imposition of a 50% penalty
upon a taxpayer filing such fraudulent return. However, in this case, although Javier
may be guilty of estafa due to misappropriating money that does not belong to him,
as far as his tax return is concerned, there can be no fraud. There is no fraud in the

filing of the return. Javiers notation on his income tax return can be considered as a
mere mistake of fact or law but not fraud. Such notation was practically an
invitation for investigation and that Javier had literally laid his cards on the table.
The government was never defrauded because by such notation, Javier opened
himself for investigation.
It must be noted that the fraud contemplated by law is actual and not constructive.
It must be intentional fraud, consisting of deception willfully and deliberately done
or resorted to in order to induce another to give up some legal right.

199 SCRA 825 Taxation Law NIRC Remedies 50% Penalty for Fraudulent Returns
In 1977, Victoria Javier received a $1 Million remittance in her bank account from her sister
abroad, Dolores Ventosa. Melchor Javier, Jr., the husband of Victoria immediately withdrew
the said amount and then appropriated it for himself.
Later, the Mellon Bank, a foreign bank in the U.S.A. filed a complaint against the Javiers for
estafa. Apparently, Ventosa only sent $1,000.00 to her sister Victoria but due to a clerical
error in Mellon Bank, what was sent was the $1 Million.
Meanwhile, Javier filed his income tax return. In his return, he place a footnote which states:
Taxpayer was recipient of some money received from abroad which he presumed to be a
gift but turned out to be an error and is now subject of litigation.
The Commissioner of Internal Revenue (CIR) then assessed Javier a tax liability amounting
to P4.8 Million. The CIR also imposed a 50% penalty against Javier as the CIR deemed
Javiers return as a fraudulent return.
ISSUE: Whether or not Javier is liable to pay the 50% penalty.
HELD: No. It is true that a fraudulent return shall cause the imposition of a 50% penalty
upon a taxpayer filing such fraudulent return. However, in this case, although Javier may be
guilty of estafa due to misappropriating money that does not belong to him, as far as his tax
return is concerned, there can be no fraud. There is no fraud in the filing of the
return. Javiers notation on his income tax return can be considered as a mere mistake of
fact or law but not fraud. Such notation was practically an invitation for investigation and that
Javier had literally laid his cards on the table. The government was never defrauded
because by such notation, Javier opened himself for investigation.
It must be noted that the fraud contemplated by law is actual and not constructive. It must
be intentional fraud, consisting of deception willfully and deliberately done or resorted to in
order to induce another to give up some legal right.

G.R. No. 48532 August 31, 1992

HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T.
ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP,
LEANDRO G. SANTILLAN, and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 48533 August 31, 1992
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DYLIACCO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA,
BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A.
RIALP and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioners.

NOCON, J.:
Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax Appeals,
promulgated September 26, 1977 1 denying petitioners' claim for tax refunds, and order the
Commissioner of Internal Revenue to refund to them their income taxes which they claim to have been
erroneously or illegally paid or collected.
As summarized by the Solicitor General, the facts of the cases are as follows:
Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine
Manufacturing Corporation, with offices at Sarmiento Building, Ayala Avenue, Makati,
Rizal. Said corporation is a subsidiary of Procter & Gamble, a foreign corporation
based in Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners were
assigned, for certain periods, to other subsidiaries of Procter & Gamble, outside of
the Philippines, during which petitioners were paid U.S. dollars as compensation for
services in their foreign assignments. (Paragraphs III, Petitions for Review, C.T.A.
Cases Nos. 2511 and 2594, Exhs. D, D-1 to D-19). When petitioners in C.T.A. Case
No. 2511 filed their income tax returns for the year 1970, they computed the tax due
by applying the dollar-to-peso conversion on the basis of the floating rate ordained
under B.I.R. Ruling No. 70-027 dated May 14, 1970, as follows:
From January 1 to February 20, 1970 at the conversion rate of P3.90
to U.S. $1.00;

From February 21 to December 31, 1970 at the conversion rate of

P6.25 to U.S. $1.00
Petitioners in C.T.A. Case No. 2594 likewise used the above conversion rate in
converting their dollar income for 1971 to Philippine peso. However, on February 8,
1973 and October 8, 1973, petitioners in said cases filed with the office of the
respondent Commissioner, amended income tax returns for the above-mentioned
years, this time using the par value of the peso as prescribed in Section 48 of
Republic Act No. 265 in relation to Section 6 of Commonwealth Act No. 265 in
relation to Section 6 of Commonwealth Act No. 699 as the basis for converting their
respective dollar income into Philippine pesos for purposes of computing and paying
the corresponding income tax due from them. The aforesaid computation as shown
in the amended income tax returns resulted in the alleged overpayments, refund
and/or tax credit. Accordingly, claims for refund of said over-payments were filed with
respondent Commissioner. Without awaiting the resolution of the Commissioner of
the Internal Revenue on their claims, petitioners filed their petitioner for review in the
above-mentioned cases.
Respondent Commissioner filed his Answer to petitioners' petition for review in C.T.A.
Case No. 2511 on July 31, 1973, while his Answer in C.T.A. Case No. 2594 was filed
on August 7, 1974.
Upon joint motion of the parties on the ground that these two cases involve common
question of law and facts, that respondent Court of Tax Appeals heard the cases
jointly. In its decision dated September 26, 1977, the respondent Court of Tax
Appeals held that the proper conversion rate for the purpose of reporting and paying
the Philippine income tax on the dollar earnings of petitioners are the rates
prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71.
Accordingly, the claim for refund and/or tax credit of petitioners in the above-entitled
cases was denied and the petitions for review dismissed, with costs against
petitioners. Hence, this petition for review on certiorari. 2
Petitioners claim that public respondent Court of Tax Appeals erred in holding:
1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.
2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes in the prevailing
free market rate of exchange and not the par value of the peso; and
3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes
into Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate should be the rate
used.
Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims as
follows:

At the outset, it is submitted that the subject matter of these two cases are Philippine
income tax for the calendar years 1970 (CTA Case No. 2511) and 1971 (CTA Case
No. 2594) and, therefore, should be governed by the provisions of the National
Internal Revenue Code and its implementing rules and regulations, and not by the
provisions of Central Bank Circular No. 42 dated May 21, 1953, as contended by
petitioners.
Section 21 of the National Internal Revenue Code, before its amendment by
Presidential Decrees Nos. 69 and 323 which took effect on January 1, 1973 and
January 1, 1974, respectively, imposed a tax upon the taxable net income received
during each taxable year from all sources by a citizen of the Philippines, whether
residing here or abroad.
Petitioners are citizens of the Philippines temporarily residing abroad by virtue of
their employment. Thus, in their tax returns for the period involved herein, they gave
their legal residence/address as c/o Procter & Gamble PMC, Ayala Ave., Makati,
Rizal (Annexes "A" to "A-8" and Annexes "C" to "C-8", Petition for Review, CTA Nos.
2511 and 2594).
Petitioners being subject to Philippine income tax, their dollar earnings should be
converted into Philippine pesos in computing the income tax due therefrom, in
accordance with the provisions of Revenue Memorandum Circular No. 7-71 dated
February 11, 1971 for 1970 income and Revenue Memorandum Circular No. 41-71
dated December 21, 1971 for 1971 income, which reiterated BIR Ruling No. 70-027
dated May 4, 1970, to wit:
For internal revenue tax purposes, the free marker rate of conversion
(Revenue Circulars Nos. 7-71 and 41-71) should be applied in order
to determine the true and correct value in Philippine pesos of the
income of petitioners. 3
After a careful examination of the records, the laws involved and the jurisprudence on the matter, We
are inclined to agree with respondents Court of Tax Appeals and Commissioner of Internal Revenue
and thus vote to deny the petition.
This basically an income tax case. For the proper resolution of these cases income may be defined
as an amount of money coming to a person or corporation within a specified time, whether as
payment for services, interest or profit from investment. Unless otherwise specified, it means cash or
its equivalent. 4 Income can also be though of as flow of the fruits of one's labor. 5
Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign
exchange transactions. For a foreign exchange transaction is simply that a transaction in foreign
exchange, foreign exchange being "the conversion of an amount of money or currency of one
country into an equivalent amount of money or currency of another." 6 When petitioners were assigned
to the foreign subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and
were ALSO spending in said currency. There was no conversion, therefore, from one currency to another.

Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of
petitioner fell under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7
The issue now is, what exchange rate should be used to determine the peso equivalent of the
foreign earnings of petitioners for income tax purposes. Petitioners claim that since the dollar
earnings do not fall within the classification of foreign exchange transactions, there occurred no
actual inward remittances, and, therefore, they are not included in the coverage of Central Bank
Circular No. 289 which provides for the specific instances when the par value of the peso
shall not be the conversion rate used. They conclude that their earnings should be converted for
income tax purposes using the par value of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products,
receipts of sale of foreign exchange or foreign borrowings and investments but not income tax. He
also claims that he had to use the prevailing free market rate of exchange in these cases because of
the need to ascertain the true and correct amount of income in Philippine peso of dollar earners for
Philippine income tax purposes.
A careful reading of said CB Circular No. 289 8 shows that the subject matters involved therein are export products,
invisibles, receipts of foreign exchange, foreign exchange payments, new foreign borrowing and
investments nothing by way of income tax payments. Thus, petitioners are in error by concluding that since C.B. Circular No. 289 does not
apply to them, the par value of the peso should be the guiding rate used for income tax purposes.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came to them within a specified period of time of
two yeas as payment for their services.
Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows:
Sec. 21. Rates of tax on citizens or residents. A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every
individual, whether a citizen of the Philippines residing therein or abroad or an alien
residing in the Philippines, determined in accordance with the following schedule:
xxx xxx xxx
And in the implementation for the proper enforcement of the National Internal Revenue Code,
Section 338 thereof empowers the Secretary of Finance to "promulgate all needful rules and
regulations" to effectively enforce its provisions. 9
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to
prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX
PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of
the authority given to the Secretary of Finance by the Legislature which enacted the Internal Revenue
Code. And these are presumed to be a valid interpretation of said code until revoked by the Secretary of
Finance himself. 12

Petitioners argue that since there were no remittances and acceptances of their salaries and wages
in US dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners
forget that they are citizens of the Philippines, and their income, within or without, and in these cases
wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any
exemption.
Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of
exchange prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for
respondent Commissioner to refund any taxes to petitioner as said Revenue Memorandum
Circulars, being of long standing and not contrary to law, are valid. 13
Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of the
government" and one of the duties of a Filipino citizen is to pay his income tax.
WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the respondent Court of
Tax Appeals of petitioners' claims for tax refunds for the income tax period for 1970 and 1971 is
AFFIRMED. Costs against petitioners.

Conwi, et.al. vs. CTA and CIR

Post under case digests, Taxation at Thursday, January 26, 2012 Posted by Schizophrenic Mind

Facts: Petitioners are employees of Procter and Gamble

(Philippine Manufacturing Corporation, subsidiary of
Procter & Gamble, a foreign corporation).During the years
1970 and 1971, petitioners were assigned to other
subsidiaries of Procter & Gamble outside the Philippines,
for which petitioners were paid US dollars as
compensation.
Petitioners filed their ITRs for 1970 and 1971, computing
tax due by applying the dollar-to-peso conversion based
on the floating rate under BIR Ruling No. 70-027. In 1973,
petitioners filed amened ITRs for 1970 and 1971, this time
using the par value of the peso as basis. This resulted in
the alleged overpayments, refund and/or tax credit, for
which claims for refund were filed.

CTA held that the proper conversion rate for the purpose
of reporting and paying the Philippine income tax on the
dollar earnings of petitioners are the rates prescribed
under Revenue MemorandumCirculars Nos. 7-71 and 4171. The refund claims were denied.
Issues:
(1) Whether or not petitioners' dollar earnings are receipts
derived from foreign exchange transactions; NO.
(2) Whether or not the proper rate of conversion of
petitioners' dollar earnings for tax purposes in the
prevailing free market rate of exchange and not the par
value of the peso; YES.
Held: For the proper resolution of income tax cases,
income may be defined as an amount of money coming to
a person or corporation within a specified time, whether as
payment for services, interest or profit from investment.
Unless otherwise specified, it means cash or its
equivalent. Income can also be though of as flow of the
fruits of one's labor.
Petitioners are correct as to their claim that their
dollar earnings are not receipts derived from foreign
exchange transactions.
For
a foreign
exchange transaction is simply that a transaction
in foreign
exchange, foreign
exchange being
"the
conversion of an amount of money or currency of one
country into an equivalent amount of money or currency of
another." When petitioners were assigned to the foreign

subsidiaries of Procter & Gamble, they were earning in

their assigned nation's currency and were ALSO spending
in said currency. There was no conversion, therefore, from
one currency to another.
The dollar earnings of petitioners are the fruits of their
labors in the foreign subsidiaries of Procter & Gamble. It
was a definite amount of money which came to them
within a specified period of time of two years as payment
for their services.
And in the implementation for the proper enforcement of
the National Internal Revenue Code, Section 338 thereof
empowers the Secretary of Finance to "promulgate all
needful rules and regulations" to effectively enforce its
provisions
pursuant
to
this
authority,
Revenue Memorandum Circular Nos. 7-71 and 41-71
were issued to prescribed a uniform rate of exchange from
US dollars to Philippine pesos for INTERNAL REVENUE
TAX PURPOSES for the years 1970 and 1971,
respectively. Said revenue circulars were a valid exercise
of the authority given to the Secretary of Finance by the
Legislature which enacted the Internal Revenue Code.
And these are presumed to be a valid interpretation of said
code until revoked by the Secretary of Finance himself.
Petitioners are citizens of the Philippines, and their
income, within or without, and in these cases wholly
without, are subject to income tax. Sec. 21, NIRC, as
amended, does not brook any exemption.

DENIED FOR LACK OF MERIT.

Conwi vs CTA, GR No. 48535, 1992

Income Tax is an amount of money coming to a person or corporation within or

specified time, whether as payment for services, interest or profit from investment.
Unless otherwise specified, it means cash or its equivalent. Income can also be
thought of as a flow of the fruits of ones labor. Earning and spending in the same
foreign currency does not involve conversion hence it does not constitute foreign
exchange transaction.

Foreign exchange is defined as the conversion of an amount of money or currency

of one country into an equivalent amount of money or currency of another.
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS,
brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.

AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land
which they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas
of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred
his rights to his four children, the petitioners, to enable them to build their residences. The company
sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo).
Presumably, the Torrens titles issued to them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the
Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and
D). They derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They
treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner
of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of

P134,336 in addition to individual income tax on their shares thereof He assessed P37,018 as
corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated
interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a "
taxable in full (not a mere capital gain of which is taxable) and required them to pay deficiency
income taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated
interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling
P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code
(Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge
Roaquin dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767
of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold
the same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple.
To consider them as partners would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture by reason of that isolated
transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not
feasible to build their residences on the lots because of the high cost of construction, then they had
no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely
incidental to the dissolution of the co-ownership which was in the nature of things a temporary state.
It had to be terminated sooner or later. Castan Tobeas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la
sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen,
en que la sociedad presupone necesariamente la convencion, mentras que la
comunidad puede existir y existe ordinariamente sin ela; y por razon del fin objecto,
en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es
solo mantener en su integridad la cosa comun y favorecer su conservacion.

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice

que si en nuestro Derecho positive se ofrecen a veces dificultades al tratar de fijar la
linea divisoria entre comunidad de bienes y contrato de sociedad, la moderna
orientacion de la doctrina cientifica seala como nota fundamental de diferenciacion
aparte del origen de fuente de que surgen, no siempre uniforme, la finalidad
perseguida por los interesados: lucro comun partible en la sociedad, y mera
conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2,
Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15
persons contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement
that they would divide the prize The ticket won the third prize of P50,000. The 15 persons were held
liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for
profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case at bar is
fundamentally similar to the De Leon case. Thus, like the De Leon heirs, the Longa
heirs inherited the 'hacienda' in question pro-indiviso from their deceased parents;
they did not contribute or invest additional ' capital to increase or expand the
inherited properties; they merely continued dedicating the property to the use to
which it had been put by their forebears; they individually reported in their tax returns
their corresponding shares in the income and expenses of the 'hacienda', and they
continued for many years the status of co-ownership in order, as conceded by
respondent, 'to preserve its (the 'hacienda') value and to continue the existing
contractual relations with the Central Azucarera de Bais for milling purposes. Longa
vs. Aranas, CTA Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.Co-Ownership who
own properties which produce income should not automatically be considered
partners of an unregistered partnership, or a corporation, within the purview of the
income tax law. To hold otherwise, would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a
property does not produce an income at all, it is not subject to any kind of income
tax, whether the income tax on individuals or the income tax on corporation. (De
Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Araas, 1977 Tax
Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it was held that they were taxable as an
unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father
and son purchased a lot and building, entrusted the administration of the building to an administrator
and divided equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102
Phil. 140, where the three Evangelista sisters bought four pieces of real property which they leased
to various tenants and derived rentals therefrom. Clearly, the petitioners in these two cases had
formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father
donated the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil
Code). We are not prejudging this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are
cancelled. No costs.
Obillos et al vs. CIR/CA
GRN L68118 October 29, 1985
Aquino, J.:
FACTS:
Petitioners sold the lots they inherited from their father and derived a total profit of P33,584 for each of them. They treated
the profit as capital gain and paid an income tax thereof. The CIR required petitioners to pay corporate income tax on their
shares, .20% tax fraud surcharge and 42% accumulated interest. Deficiency tax was assessed on the theory that they had
formed an unregistered partnership or joint venture.
ISSUE:
Whether or not partnership was formed by the siblings thus be assessed of the corporate tax.
RULING:
Petitioners were co-owners and to consider them partners would obliterate the distinction between co-ownership and
partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction.
Art 1769 the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them
have a joint or common right or interest in any property from which the returns are derived. There must be an unmistakable
intention to form partnership or joint venture.

G.R. L-68118 Obillos v. CIR

Facts:
In 1973, Jose Obillos completed payment on two lots located in Greenhills, San Juan. The
next day, he transferred his rights to his four children for them to build their own residences.
The Torrens title would show that they were co-owners of the two lots. However, the
petitioners resold them to Walled City Securities Corporation and Olga Cruz Canda for
P313k or P33k for each of them. They treated the profit as capital gains and paid an
income
tax
of
P16,792.00
The CIR requested the petitioners to pay the corporate income tax of their shares, as this
entire assessment is based on the alleged partnership under Article 1767 of the Civil Code;

simply because they contributed each to buy the lots, resold them and divided the profits
among
them.
But as testified by Obillos, they have no intention to form the partnership and that it was
merely incidental since they sold the said lots due to high demand of construction. Naturally,
when they sell them as co-partners, it will result to the share of profits. Further, their
intention
was
to
divide
the
lots
for
residential
purposes.
Issue:
Was there a partnership, hence, they are subject to corporate income taxes?
Court

Ruling:

Not necessarily. As Article 1769 (3) of the Civil Code provides: the sharing of gross returns
does not in itself establish a partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from which the returns are derived. There
must be an unmistakeable intention to form a partnership or joint venture.
In this case, the Commissioner should have investigated if the father paid donor's tax
to establish the fact that there was really no partnership.
Obillos v CIR
G.R. No. L-68118
October 29, 1985

FACTS:

1. On March1973 Jose Obillos, Sr. completed payment on two lots located at

Greenhills, San Juan, Rizal. The next day he transferred his rights to his four
children, the petitioners, to enable them to build their residences. The company sold
the two lots to petitioners for P178,708.12 on March 13

2. In 1974, the petitioners resold them to the Walled City Securities Corporation and
Olga Cruz Canda for the total sum of P313,050. They derived from the sale a total
profit of P134,341.88 or P33,584 for each of them. They treated the profit as a
capital gain and paid an income tax on one-half thereof or of P16,792.

3. In April 1980, the CIR required the four petitioners to pay corporate income
tax on the total profit of P134,336 in addition to individual income tax on their

shares thereof. The petitioners are being held liable for deficiency income taxes and
penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on
capital gains already paid by them.

4. The Commissioner acted on the theory that the four petitioners had formed an
unregistered partnership or joint venture within the meaning of sections 24(a) and
84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas Trans. Co., 102
Phil. 822).

ISSUE: Whether or not the petitioners had created an unregistered partnership.

HELD: NO.

To regard the petitioners as having formed a taxable unregistered partnership would

result in oppressive taxation and confirm the dictum that the power to tax involves
the power to destroy. That eventuality should be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners
pure and simple. To consider them as partners would obliterate the distinction
between a co-ownership and a partnership. The petitioners were not engaged in any
joint venture by reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later on they
found it not feasible to build their residences on the lots because of the high cost of
construction, then they had no choice but to resell the same to dissolve the coownership. The division of the profit was merely incidental to the dissolution of the
co-ownership which was in the nature of things a temporary state. It had to be
terminated sooner or later.

Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not
of itself establish a partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from which the returns are
derived". There must be an unmistakable intention to form a partnership or joint
venture.

In the instant case, what the Commissioner should have investigated was whether
the father donated the two lots to the petitioners and whether he paid the donor's
tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might have
already prescribed.
G.R. No. 195909

September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
x-----------------------x
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
CARPIO, J.:
The Case
These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court
assailing the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its
Resolution 2 of 1 March 2011 in CTA Case No. 6746. This Court resolves this case on a pure
question of law, which involves the interpretation of Section 27(B) vis--vis Section 30(E) and (G) of
the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.
The 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;
xxxx3
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to P76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax. The BIR reduced the amount
to P63,935,351.57 during trial in the First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the
NIRC. Thus, St. Luke's appealed to the CTA.
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.
According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the
exemption on non-profit hospitals that were previously categorized as non-stock, non-profit
corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which prevails
over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, nonprofit charitable institutions and civic organizations promoting social welfare. 6
The BIR claimed that St. Luke's was actually operating for profit in 1998 because 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. St. Luke's had total revenues
of P1,730,367,965 or approximately P1.73 billion from patient services in 1998. 7
St. Luke's 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 (i.e., total revenues less
operating expenses) of P334,642,615. 8 St. Luke's also claimed that its income does not inure to the
benefit of any individual.
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.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA
that Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether 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. The BIR
prays that St. Luke's be ordered to pay P57,659,981.19 as deficiency income and expanded
withholding tax for 1998 with surcharges and interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding
of a part of its income, 9 as well as the payment of surcharge and delinquency interest. There is no
ground for this Court to undertake such a factual review. Under the Constitution 10 and the Rules of

Court, 11 this Court's review power is generally limited to "cases in which only an error or question of
law is involved." 12 This Court cannot depart from this limitation if a party fails to invoke a recognized
exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision
dated 23 February 2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED.
Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the
amount of P110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby
ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable
year 1998 in the respective amounts of P5,496,963.54 and P778,406.84 or in the sum
of P6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the
total amount of P6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to
Section 249(C)(3) of the NIRC of 1997.
SO ORDERED. 13
The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose from the
failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came
from charitable activities. The CTA cancelled the remainder of the P63,113,952.79 deficiency
assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En
Banc held was not applicable to St. Luke's. 15
The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section
30(E) and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services
to its patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's
Medical Center, Inc. v. Commissioner of Internal Revenue, 16 which examined the primary purposes
of St. Luke's under its articles of incorporation and various documents 17 identifying St. Luke's as a
charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a
charitable institution does not lose its charitable character and its consequent exemption from
taxation merely because recipients of its benefits who are able to pay are required to do so, where
funds derived in this manner are devoted to the charitable purposes of the institution x x x." 19 The
generation of income from paying patients does not per se destroy the charitable nature of St.
Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which
ruled that the old NIRC (Commonwealth Act No. 466, as amended) 21 "positively exempts from
taxation those corporations or associations which, otherwise, would be subject thereto, because of
the existence of x x x net income." 22 The NIRC of 1997 substantially reproduces the provision on
charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very
responsible organization must be run 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." 23
The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA
explained that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit."
On the other hand, Congress specifically used the word "non-stock" to qualify a charitable
"corporation or association" in Section 30(E) of the NIRC. According to the CTA, this is unique in the
present tax code, indicating an intent to exempt this type of charitable organization from income tax.
Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is clear that nonstock, non-profit hospitals operated exclusively for charitable purpose are exempt from income tax
on income received by them as such, applying the provision of Section 30(E) of the NIRC of 1997,
as amended." 25
The Issue
The sole issue is whether St. Luke's 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.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the
petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall
raise only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of
Appeals 26 which permits factual review "when the Court of Appeals [in this case, the CTA] manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA
"disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the
nature of the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to consider
relevant evidence. The CTA obviously considered the evidence and concluded that it is self-serving.
The CTA declared that it has "gone through the records of this case and found no other evidence
aside from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25%
surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the
time prescribed for its payment in the notice of assessment[.]" 30 St. Luke's is also liable to pay 20%
delinquency interest under Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the
amount of P6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only
deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest. 32
The Main Issue
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--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. The BIR argues that
Congress intended to remove the exemption that non-profit hospitals previously enjoyed under

Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the
NIRC of 1997. 33 Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof
shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated
trade, business or other activity' means any trade, business or other activity, the conduct of which is
not substantially related to the exercise or performance by such educational institution or hospital of
its primary purpose or function. A 'proprietary educational institution' is any private school maintained
and administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be,
in accordance with existing laws and regulations. (Emphasis supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a
charitable institution and an organization promoting social welfare. The arguments of St. Luke's
focus on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable
institutions. 34 St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to
remove the exemption for "proprietary non-profit" hospitals. 35 The relevant provisions of Section 30
state:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, 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;
xxxx
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;
xxxx
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. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold 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 nonprofit educational institutions 36 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).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary nonprofit 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, 37 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. 38 The club was non-profit because of its purpose and there was no evidence that it was
engaged in a profit-making enterprise. 39
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 40 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." 41 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.
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. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. 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. The loss of
taxes by the government is compensated by its relief from doing public works which would have
been funded by appropriations from the Treasury. 42
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 power of Congress to tax implies the power
to exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that
"[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress." 43 The requirements for a tax exemption are strictly construed against the
taxpayer 44 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 45and Jesus Sacred Heart College 46 which says that receiving income from paying
patients does not destroy the charitable nature of a hospital.
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, whether out-patient, or confined
in the hospital, or receives subsidies from the government, 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. 47
For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that "[c]haritable institutions,
churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable,
or educational purposes shall be exempt from taxation." 48The 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.
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.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) 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" 49 and that any profit "obtain[ed] 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." 50 However, under Lung Center, any profit by a charitable institution
must not only be plowed back "whenever necessary or proper," but must be "devoted or used
altogether to the charitable object which it is intended to achieve." 51

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that
"no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person." The use of lands, buildings and improvements of the institution is but
a part of its operations.
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) 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. (Emphasis supplied)
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. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation
or association [must be] organized and operated exclusively for x x x charitable x x x purposes x x
x." It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.
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%.
In 1998, St. Luke's 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." 52 Indeed, St. Luke's admits that it derived
profits from its paying patients. St. Luke's declared P1,730,367,965 as "Revenues from Services to
Patients" in contrast to its "Free Services" expenditure of P218,187,498. In its Comment in G.R. No.
195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income
after expenses was allocated to free or charitable services" in 1998. 53
REVENUES FROM SERVICES TO PATIENTS

P1,730,367,965.00

OPERATING EXPENSES
Professional care of patients
Administrative
Household and Property

P1,016,608,394.00
287,319,334.00
91,797,622.00
P1,395,725,350.00

INCOME FROM OPERATIONS

P334,642,615.00

100%

Free Services

-218,187,498.00

-65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES

P116,455,117.00

34.80%

OTHER INCOME

EXCESS OF REVENUES OVER EXPENSES

17,482,304.00

P133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a
privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for the
words "used exclusively" without doing violence to the Constitution and the law. Solely is
synonymous with exclusively. 54
The Court cannot expand the meaning of the words "operated exclusively" without violating the
NIRC. 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. 55 The P1.73
billion total revenues from paying patients is not even incidental to St. Luke's charity expenditure
of P218,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying patients, then it cannot be said
that the income is "devoted or used altogether to the charitable object which it is intended to
achieve." 56 The income is plowed back to the corporation not entirely for charitable purposes, but for
profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that
income from activities for profit is taxable "regardless of the disposition made of such income."
Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase
"any activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus

Cuenco, who was a member of the Committee of Conference for the Senate, which introduced the
phrase "or from any activity conducted for profit."
P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree Vd. que es
una actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha
universidad?
xxxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero
considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de
buena posicin social econmica, lo que se paga por estos enfermos debe estar sujeto a 'income
tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any
activity conducted for profit.' 57
The question was whether having a hospital is essential to an educational institution like the College
of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid
rooms generally occupied by people of good economic standing, then it should be subject to income
tax. He said that this was one of the reasons Congress inserted the phrase "or any activity
conducted for profit."
The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is
applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on
the activities of charitable institutions. Activities for profit should not escape the reach of taxation.
Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its profitable activities from
being taxed.
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).
A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be limited to institutions beneficial to the public and those
which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to
the detriment of the government and other taxpayers.
1wphi1

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"59 and thus
exempt from income tax. 60 In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the
Court said that "good faith and honest belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the tax law, are sufficient justification to
delete the imposition of surcharges and interest." 62
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. 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(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. All other parts of the Decision and Resolution of the Court of Tax Appeals
are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1,
Rule 45 of the Rules of Court.

CIR vs. St. Luke's Medical Center, Inc.

Post under case digests, Political Law, Taxation at Thursday, January 28, 2016 Posted by Schizophrenic Mind

FACTS: St. Luke's is a non-stock non-profit hospital. 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 was 65% of
its operating income and that no part of its income inures to the benefit of any individual.

ISSUE: Does Section 27(B) have the effect of taking proprietary non-profit hospitals out of the income
tax exemption under Section 30 of the Tax Code and should instead be subject to a preferential rate of
10% on its entire income?

RULING: No. The enactment of Section 27(B) does not remove the possible income tax exemption of
proprietary non-profit hospitals. The only thing that Section 27(B) captures (at 10% tax) in the case of
qualified hospitals is in the instance where the income realized by the hospital falls under the last
paragraph of Section 30 such as when the entity conducts any activity for profit. The revenues derived by
St. Luke's from pay patients are clearly income from activities conducted for profit.

National Internal Revenue Code; income tax; exemption of charitable and social welfare
institutions. St. Lukes Medical Center, Inc. (the petitioner) claims income tax exemption under
Section 30 (E) and (G) of the National Internal Revenue Code (the Tax Code). The petitioner claims
that it is a charitable institution and an organization promoting social welfare. The petitioner claims

that the legislative intent of introducing Section 27 (B) was only to remove the exemption for
proprietary non-profit hospitals. The Court holds that Section 27 (B) of the Tax Code does not
remove the income tax exemption of proprietary non-profit hospitals under Section 30 (E) and (G).
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, which are 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). 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. 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 institutions purposes and all its
activities conducted not for profit. 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. The petitioner fails to meet the requirements under Section 30 (E) and (G)
of the Tax Code to be completely tax exempt from all its income. However, it remains a proprietary
non-profit hospital under Section 27 (B) as long as it does not distribute any of its profits to its
members and such profits are reinvested pursuant to its corporate purposes. The petitioner, as a
proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its
for-profit activities. Commissioner of Internal Revenue vs. St. Lukes Medical Center, Inc./St. Lukes
Medical Center, Inc. vs. Commissioner of Internal Revenue, G.R. No. 195909/G.R. No. 195960.
September 26, 2012.