Republic of the Philippines all the net income or asset devoted to the institution’s purposes and all its
stitution’s purposes and all its activities
SUPREME COURT
Manila
SECOND DIVISION
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.
Taxation; Tax Exemptions; The Supreme Court holds that Section 27(B) of the
National Internal Revenue Code (NIRC) does not remove the income tax exemption of
proprietary non-profit hospitals under Section 30(E) and (G).―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 non-profit
educational institutions and proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under Section 27(B)
instead of the ordinary 30% corporate rate under the last paragraph of Section 30
in relation to Section 27(A)(1).
Same; Preferential Tax Rate; Section 27(B) of the National Internal Revenue
Code (NIRC) imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions and (2) proprietary non-profit hospitals.―Section
27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit
hospitals. The only qualifications for hospitals are that they must be proprietary and
non-profit. “Proprietary” means private, following the definition of a “proprietary
educational institution” as “any private school maintained and administered
by private individuals or groups” with a government permit. “Non-profit” means
no net income or asset accrues to or benefits any member or specific person, with
conducted not for profit.
Same; “Non-profit” does not necessarily mean “charitable.”―“Non-profit” does
not necessarily mean “charitable.” In Collector of Internal Revenue v. Club Filipino
Inc. de Cebu, 5 SCRA 321 (1962), this Court considered as non-profit a sports club
organized for recreation and entertainment of its stockholders and members. The
club was primarily funded by membership fees and dues. If it had profits, they were
used for overhead expenses and improving its golf course. The club was non-profit
because of its purpose and there was no evidence that it was engaged in a profit-
making enterprise.
Same; Tax Exemptions; 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; The government forgoes taxes which should have
been spent to address public needs, because certain private entities already assume a
part of the burden.―To be a charitable institution, however, an organization must
meet the substantive test of charity in Lung Center of the Philippines vs. Quezon City,
433 SCRA 119 (2004). 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.
Same; Same; Charitable institutions are not ipso facto entitled to a tax
exemption. The requirements for a tax exemption are specified by the law granting
it.―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.” The requirements for a tax exemption are strictly
construed against the taxpayer because an exemption restricts the collection of
taxes necessary for the existence of the government.
Same; Same; Income Taxation; Real Estate Taxes; For real property taxes, the
incidental generation of income is permissible because the test of exemption is the use
of the property; 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.―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.” The 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.
Same; Same; The Constitution exempts charitable institutions only from real
property taxes. In the National Internal Revenue Code (NIRC), Congress decided to
extend the exemption to income taxes.―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.
Same; Same; Real Estate Taxes; Income Taxation; 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 National Internal Revenue Code
(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 National Internal Revenue Code (NIRC) requires that the institution be
“operated exclusively” for social welfare.―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.
Same; Same; 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.―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%.
Same; Income Taxation; Preferential Tax Rate; The Supreme 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; 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).―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).
Same; Tax Exemptions; 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.―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.
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-à-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 ₱76,063,116.06 for 1998, comprised of deficiency
income tax, value-added tax, withholding tax on compensation and expanded
withholding tax. The BIR reduced the amount to ₱63,935,351.57 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, non-profit 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 ₱1,730,367,965 or approximately ₱1.73
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 ₱218,187,498 or 65.20% of its 1998 operating
income (i.e., total revenues less operating expenses) of ₱334,642,615. 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 ₱57,659,981.19 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 ₱110,000.00 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 ₱5,496,963.54 and ₱778,406.84 or in the
sum of ₱6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%)
delinquency interest on the total amount of ₱6,275,370.38 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 ₱5,496,963.54, 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 ₱63,113,952.79 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 non-stock, 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
₱6,275,370.38 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-à-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 non-profit 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 non-profit educational institutions and (2) proprietary non-profit
hospitals. The only qualifications for hospitals are that they must be proprietary
and non-profit. "Proprietary" means private, following the definition of a
"proprietary educational institution" as "any private school maintained and
administered by private individuals or groups" with a government permit. "Non-
profit" means no net income or asset accrues to or benefits any member or specific
person, with all the net income or asset devoted to the institution's purposes and
all its activities conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In Collector of Internal
Revenue v. Club Filipino Inc. de Cebu, 37this 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." 41A 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 45 and 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." 48 The 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 ₱1,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately ₱1.73
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 ₱1,730,367,965 as "Revenues
from Services to Patients" in contrast to its "Free Services" expenditure of
₱218,187,498. 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 ₱1,730,367,965.00
OPERATING EXPENSES
Professional care of patients ₱1,016,608,394.00
Administrative 287,319,334.00
Household and Property 91,797,622.00
₱1,395,725,350.00
INCOME FROM OPERATIONS ₱334,642,615.00 100%

Free Services -218,187,498.00 -
65.20%
INCOME FROM OPERATIONS, Net of FREE ₱116,455,117.00 34.80%
SERVICES
OTHER INCOME 17,482,304.00
EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00
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 ₱1.73 billion total revenues from paying
patients is not even incidental to St. Luke's charity expenditure of ₱218,187,498
for non-paying patients.
St. Luke's claims that its charity expenditure of ₱218,187,498 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 Tomás 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 contestación seria
afirmativa; pero considerando que el hospital tiene cuartos de pago, y a los
mismos generalmente van enfermos de buena posición social económica, 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.1âwphi1

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.

SO ORDERED.

Leonardo-De Castro*, Brion, Perez, and Perlas-Bernabe, JJ., concur.


EN BANC
G.R. No. 144104 June 29, 2004
LUNG CENTER OF THE PHILIPPINES, petitioner,
vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of
Quezon City, respondents.
Taxation; Lung Center of the Philippines; Charitable Institutions; Test of
Charitable Character; Words and Phrases; To determine whether an enterprise is a
charitable institution/entity or not, the elements which should be considered include
the statute creating the enterprise, its corporate purpose, its constitution and by-laws,
the methods of administration, the nature of the actual work performed, the character
of the services rendered, the indefiniteness of the beneficiaries, and the use and
occupation of the properties; In the legal sense, a charity may be fully defined 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 otherwise lessening the
burden of government. The test whether an enterprise is charitable or not is whether
it exists to carry out a purpose recognized in law as charitable or whether it is
maintained for gain, profit, or private advantage.—On the first issue, we hold that
the petitioner is a charitable institution within the context of the 1973 and 1987
Constitutions. To determine whether an enterprise is a charitable institution/entity
or not, the elements which should be considered include the statute creating the
enterprise, its corporate purposes, its constitution and by-laws, the methods of
administration, the nature of the actual work performed, the character of the
services rendered, the indefiniteness of the beneficiaries, and the use and
occupation of the properties. In the legal sense, a charity may be fully defined 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
otherwise lessening the burden of government. It may be applied to almost anything
that tend to promote the well-doing and well-being of social man. It embraces the
improvement and promotion of the happiness of man. The word “charitable” is not
restricted to relief of the poor or sick. The test of a charity and a charitable
organization are in law the same. The test whether an enterprise is charitable or not
is whether it exists to carry out a purpose reorganized in law as charitable or
whether it is maintained for gain, profit, or private advantage.
Same; Same; Same; The Lung Center of the Philippines was organized for the
welfare and benefit of the Filipino people principally to help combat the high incidence
of lung and pulmonary diseases in the Philippines; Any person, the rich as well as the
poor, may fall sick or be injured or wounded and become a subject of charity.—Under
P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which,
subject to the provisions of the decree, is to be administered by the Office of the
President of the Philippines with the Ministry of Health and the Ministry of Human
Settlements. It was organized for the welfare and benefit of the Filipino people
principally to help combat the high incidence of lung and pulmonary diseases in the
Philippines. The raison d’etre for the creation of the petitioner is stated in the
decree, viz: x x x Hence, the medical services of the petitioner are to be rendered to
the public in general in any and all walks of life including those who are poor and
the needy without discrimination. After all, any person, the rich as well as the poor,
may fall sick or be injured or wounded and become a subject of charity.
Same; Same; Same; 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.—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. In Congregational
Sunday School, etc. v. Board of Review, the State Supreme Court of Illinois held, thus:
… [A]n institution does not lose its charitable character, and consequent exemption
from taxation, by reason of the fact that those recipients of its benefits who are able
to pay are required to do so, where no profit is made by the institution and the
amounts so received are applied in furthering its charitable purposes, and those
benefits are refused to none on account of inability to pay therefor. The fundamental
ground upon which all exemptions in favor of charitable institutions are based is
the benefit conferred upon the public by them, and a consequent relief, to some
extent, of the burden upon the state to care for and advance the interests of its
citizens.
Same; Same; Same; The Lung Center of the Philippines does not lose its
character as a charitable institution simply because the gift or donation is in the form
of subsidies granted by the government.—Under P.D. No. 1823, the petitioner is
entitled to receive donations. The petitioner does not lose its character as a
charitable institution simply because the gift or donation is in the form of subsidies
granted by the government. As held by the State Supreme Court of Utah in Yorgason
v. County Board of Equalization of Salt Lake County: Second, the … government
subsidy payments are provided to the project. Thus, those payments are like a gift
or donation of any other kind except they come from the government. In
both Intermountain Health Careand the present case, the crux is the presence or
absence of material reciprocity. It is entirely irrelevant to this analysis that the
government, rather than a private benefactor, chose to make up the deficit resulting
from the exchange between St. Mark’s Tower and the tenants by making a
contribution to the landlord, just as it would have been irrelevant in Intermountain
Health Care if the patients’ income supplements had come from private individuals
rather than the government. Therefore, the fact that subsidization of part of the cost
of furnishing such housing is by the government rather than private charitable
contributions does not dictate the denial of a charitable exemption if the facts
otherwise support such an exemption, as they do here.
Same; Same; Same; Those portions of Lung Center’s real property that are
leased to private entities are not exempt from real property taxes as these are not
actually, directly and exclusively used for charitable purposes.—Even as we find that
the petitioner is a charitable institution, we hold, anent the second issue, that those
portions of its real property that are leased to private entities are not exempt from
real property taxes as these are not actually, directly and exclusively used for
charitable purposes.
Same; Same; Same; Statutory Construction; Taxation is the rule and exemption
is the exception—the effect of an exemption is equivalent to an appropriation.—The
settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception. The effect of an
exemption is equivalent to an appropriation. Hence, a claim for exemption from tax
payments must be clearly shown and based on language in the law too plain to be
mistaken. As held in Salvation Army v. Hoehn: An intention on the part of the
legislature to grant an exemption from the taxing power of the state will never be
implied from language which will admit of any other reasonable construction. Such
an intention must be expressed in clear and unmistakable terms, or must appear by
necessary implication from the language used, for it is a well settled principle that,
when a special privilege or exemption is claimed under a statute, charter or act of
incorporation, it is to be construed strictly against the property owner and in favor
of the public. This principle applies with peculiar force to a claim of exemption from
taxation . …
Same; Same; Same; Same; It is plain as day that under P.D. 1823, the Lung
Center of the Philippines does not enjoy any property tax exemption privileges for its
real properties as well as the building constructed thereon.—It is plain as day that
under the decree (P.D. 1823), the petitioner does not enjoy any property tax
exemption privileges for its real properties as well as the building constructed thereon.
If the intentions were otherwise, the same should have been among the
enumeration of tax exempt privileges under Section 2: It is a settled rule of statutory
construction that the express mention of one person, thing, or consequence implies
the exclusion of all others. The rule is expressed in the familiar maxim, expressio
unius est exclusio alterius. The rule of expressio unius est exclusio alterius is
formulated in a number of ways. One variation of the rule is the principle that what
is expressed puts an end to that which is implied. Expressium facit cessare
tacitum. Thus, where a statute, by its terms, is expressly limited to certain matters,
it may not, by interpretation or construction, be extended to other matters. ... The
rule of expressio unius est exclusio alterius and its variations are canons of restrictive
interpretation. They are based on the rules of logic and the natural workings of the
human mind. They are predicated upon one’s own voluntary act and not upon that
of others. They proceed from the premise that the legislature would not have made
specified enumeration in a statute had the intention been not to restrict its meaning
and confine its terms to those expressly mentioned.
Same; Same; Same; Same; The exemption must not be so enlarged by
construction.—The exemption must not be so enlarged by construction since the
reasonable presumption is that the State has granted in express terms all it intended
to grant at all, and that unless the privilege is limited to the very terms of the statute
the favor would be intended beyond what was meant.
Same; Same; Same; Same; The tax exemption under Section 28 (3), Article VI of
the 1987 Constitution covers property taxes only.—Section 28(3), Article VI of the
1987 Philippine Constitution provides, thus: (3) Charitable institutions, churches
and parsonages 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. The
tax exemption under this constitutional provision covers property taxes only. As
Chief Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional
Commission, explained: “. . . what is exempted is not the institution itself . . .; those
exempted from real estate taxes are lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or educational purposes.”
Same; Same; Same; Same; Under the 1973 and the present Constitutions, for
“lands, buildings, and improvements” of the charitable institution to be considered
exempt, the same should not only be “exclusively” used for charitable purposes—it is
required that such property be used “actually” and “directly” for such purposes.—We
note that under the 1935 Constitution, “. . . all lands, buildings, and improvements
used ‘exclusively’ for . . . charitable . . . purposes shall be exempt from taxation.”
However, under the 1973 and the present Constitutions, for “lands, buildings, and
improvements” of the charitable institution to be considered exempt, the same
should not only be “exclusively” used for charitable purposes; it is required that
such property be used “actually” and “directly” for such purposes. In light of the
foregoing substantial changes in the Constitution, the petitioner cannot rely on our
ruling in Herrera v. Quezon City Board of Assessment Appeals which was
promulgated on September 30, 1961 before the 1973 and 1987 Constitutions took
effect.
Same; Same; Same; Same; Words and Phrases; If real property is used for one or
more commercial purposes, it is not exclusively used for the exempted purposes but is
subject to taxation—the words “dominant use” or “principal use” cannot be
substituted for the words “used exclusively” without doing violence to the
Constitutions and the law.—Under the 1973 and 1987 Constitutions and Rep. Act
No. 7160 in order to be entitled to the exemption, the petitioner is burdened to
prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b)
its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes. “Exclusive” 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.” If real property is used for
one or more commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation. The words “dominant use” or “principal use”
cannot be substituted for the words “used exclusively” without doing violence to the
Constitutions and the law. Solely is synonymous with exclusively. What is meant by
actual, direct and exclusive use of the property for charitable purposes is the direct
and immediate and actual application of the property itself to the purposes for
which the charitable institution is organized. It is not the use of the income from the
real property that is determinative of whether the property is used for tax-exempt
purposes.
Same; Same; Same; Portions of the land leased to private entities as well as those
parts of Lung Center leased to private individuals are not exempt from taxes but
portions of the land occupied by the hospital and portions of the hospital used for its
patients, whether paying or non-paying, are exempt from real property taxes.—We
hold that the portions of the land leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from such taxes. On the
other hand, the portions of the land occupied by the hospital and portions of the
hospital used for its patients, whether paying or non-paying, are exempt from real
property taxes.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, as
amended, of the Decision1 dated July 17, 2000 of the Court of Appeals in CA-G.R. SP
No. 57014 which affirmed the decision of the Central Board of Assessment Appeals
holding that the lot owned by the petitioner and its hospital building constructed
thereon are subject to assessment for purposes of real property tax.
The Antecedents
The petitioner Lung Center of the Philippines is a non-stock and non-profit entity
established on January 16, 1981 by virtue of Presidential Decree No. 1823. 2 It is
the registered owner of a parcel of land, particularly described as Lot No. RP-3-B-
3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner Elliptical Road,
Central District, Quezon City. The lot has an area of 121,463 square meters and is
covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of Deeds
of Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the
Lung Center of the Philippines. A big space at the ground floor is being leased to
private parties, for canteen and small store spaces, and to medical or professional
practitioners who use the same as their private clinics for their patients whom
they charge for their professional services. Almost one-half of the entire area on
the left side of the building along Quezon Avenue is vacant and idle, while a big
portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is
being leased for commercial purposes to a private enterprise known as the
Elliptical Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders medical
services to out-patients, both paying and non-paying. Aside from its income from
paying patients, the petitioner receives annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the petitioner were
assessed for real property taxes in the amount of ₱4,554,860 by the City Assessor
of Quezon City.3 Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C-
021-01231 (15-2518-A) were issued for the land and the hospital building,
respectively.4 On August 25, 1993, the petitioner filed a Claim for Exemption5 from
real property taxes with the City Assessor, predicated on its claim that it is a
charitable institution. The petitioner’s request was denied, and a petition was,
thereafter, filed before the Local Board of Assessment Appeals of Quezon City (QC-
LBAA, for brevity) for the reversal of the resolution of the City Assessor. The
petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the
property is exempt from real property taxes. It averred that a minimum of 60% of
its hospital beds are exclusively used for charity patients and that the major thrust
of its hospital operation is to serve charity patients. The petitioner contends that it
is a charitable institution and, as such, is exempt from real property taxes. The QC-
LBAA rendered judgment dismissing the petition and holding the petitioner liable
for real property taxes.6
The QC-LBAA’s decision was, likewise, affirmed on appeal by the Central Board of
Assessment Appeals of Quezon City (CBAA, for brevity) 7 which ruled that the
petitioner was not a charitable institution and that its real properties were not
actually, directly and exclusively used for charitable purposes; hence, it was not
entitled to real property tax exemption under the constitution and the law. The
petitioner sought relief from the Court of Appeals, which rendered judgment
affirming the decision of the CBAA.8
Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT
ENTITLED TO REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS
LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE
NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED FOR
CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX
EXEMPT UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY
NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the context of Section
28(3), Article VI of the 1987 Constitution. It asserts that its character as a
charitable institution is not altered by the fact that it admits paying patients and
renders medical services to them, leases portions of the land to private parties,
and rents out portions of the hospital to private medical practitioners from which
it derives income to be used for operational expenses. The petitioner points out
that for the years 1995 to 1999, 100% of its out-patients were charity patients and
of the hospital’s 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity
patients. It asserts that the fact that it receives subsidies from the government
attests to its character as a charitable institution. It contends that the "exclusivity"
required in the Constitution does not necessarily mean "solely." Hence, even if a
portion of its real estate is leased out to private individuals from whom it derives
income, it does not lose its character as a charitable institution, and its exemption
from the payment of real estate taxes on its real property. The petitioner cited our
ruling in Herrera v. QC-BAA9 to bolster its pose. The petitioner further contends
that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes,
it is not precluded from seeking tax exemption under the 1987 Constitution.
In their comment on the petition, the respondents aver that the petitioner is not a
charitable entity. The petitioner’s real property is not exempt from the payment of
real estate taxes under P.D. No. 1823 and even under the 1987 Constitution
because it failed to prove that it is a charitable institution and that the said
property is actually, directly and exclusively used for charitable purposes. The
respondents noted that in a newspaper report, it appears that graft charges were
filed with the Sandiganbayan against the director of the petitioner, its
administrative officer, and Zenaida Rivera, the proprietress of the Elliptical
Orchids and Garden Center, for entering into a lease contract over 7,663.13 square
meters of the property in 1990 for only ₱20,000 a month, when the monthly rental
should be ₱357,000 a month as determined by the Commission on Audit; and that
instead of complying with the directive of the COA for the cancellation of the
contract for being grossly prejudicial to the government, the petitioner renewed
the same on March 13, 1995 for a monthly rental of only ₱24,000. They assert that
the petitioner uses the subsidies granted by the government for charity patients
and uses the rest of its income from the property for the benefit of paying patients,
among other purposes. They aver that the petitioner failed to adduce substantial
evidence that 100% of its out-patients and 170 beds in the hospital are reserved
for indigent patients. The respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not speak well of its
record of service. That before a patient is admitted for treatment in the Center,
first impression is that it is pay-patient and required to pay a certain amount
as deposit. That even if a patient is living below the poverty line, he is charged
with high hospital bills. And, without these bills being first settled, the poor
patient cannot be allowed to leave the hospital or be discharged without first
paying the hospital bills or issue a promissory note guaranteed and indorsed
by an influential agency or person known only to the Center; that even the
remains of deceased poor patients suffered the same fate. Moreover, before a
patient is admitted for treatment as free or charity patient, one must undergo
a series of interviews and must submit all the requirements needed by the
Center, usually accompanied by endorsement by an influential agency or
person known only to the Center. These facts were heard and admitted by the
Petitioner LCP during the hearings before the Honorable QC-BAA and
Honorable CBAA. These are the reasons of indigent patients, instead of
seeking treatment with the Center, they prefer to be treated at the Quezon
Institute. Can such practice by the Center be called charitable?10
The Issues
The issues for resolution are the following: (a) whether the petitioner is a
charitable institution within the context of Presidential Decree No. 1823 and the
1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and (b)
whether the real properties of the petitioner are exempt from real property taxes.
The Court’s Ruling
The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable institution within the
context of the 1973 and 1987 Constitutions. To determine whether an enterprise
is a charitable institution/entity or not, the elements which should be considered
include the statute creating the enterprise, its corporate purposes, its constitution
and by-laws, the methods of administration, the nature of the actual work
performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.11
In the legal sense, a charity may be fully defined 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 otherwise lessening the burden of
government.12 It may be applied to almost anything that tend to promote the well-
doing and well-being of social man. It embraces the improvement and promotion
of the happiness of man.13 The word "charitable" is not restricted to relief of the
poor or sick.14 The test of a charity and a charitable organization are in law the
same. The test whether an enterprise is charitable or not is whether it exists to
carry out a purpose reorganized in law as charitable or whether it is maintained
for gain, profit, or private advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation
which, subject to the provisions of the decree, is to be administered by the Office of
the President of the Philippines with the Ministry of Health and the Ministry of
Human Settlements. It was organized for the welfare and benefit of the Filipino
people principally to help combat the high incidence of lung and pulmonary
diseases in the Philippines. The raison d’etre for the creation of the petitioner is
stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a priority concern,
having been the leading cause of illness and death in the Philippines,
comprising more than 45% of the total annual deaths from all causes, thus,
exacting a tremendous toll on human resources, which ailments are likely to
increase and degenerate into serious lung diseases on account of unabated
pollution, industrialization and unchecked cigarette smoking in the country;
Whereas, the more common lung diseases are, to a great extent, preventable,
and curable with early and adequate medical care, immunization and through
prompt and intensive prevention and health education programs;
Whereas, there is an urgent need to consolidate and reinforce existing
programs, strategies and efforts at preventing, treating and rehabilitating
people affected by lung diseases, and to undertake research and training on
the cure and prevention of lung diseases, through a Lung Center which will
house and nurture the above and related activities and provide tertiary-level
care for more difficult and problematical cases;
Whereas, to achieve this purpose, the Government intends to provide material
and financial support towards the establishment and maintenance of a Lung
Center for the welfare and benefit of the Filipino people. 15
The purposes for which the petitioner was created are spelled out in its Articles of
Incorporation, thus:
SECOND: That the purposes for which such corporation is formed are as follows:
1. To construct, establish, equip, maintain, administer and conduct an
integrated medical institution which shall specialize in the treatment, care,
rehabilitation and/or relief of lung and allied diseases in line with the concern
of the government to assist and provide material and financial support in the
establishment and maintenance of a lung center primarily to benefit the people
of the Philippines and in pursuance of the policy of the State to secure the well-
being of the people by providing them specialized health and medical services
and by minimizing the incidence of lung diseases in the country and elsewhere.
2. To promote the noble undertaking of scientific research related to the
prevention of lung or pulmonary ailments and the care of lung patients,
including the holding of a series of relevant congresses, conventions, seminars
and conferences;
3. To stimulate and, whenever possible, underwrite scientific researches on the
biological, demographic, social, economic, eugenic and physiological aspects of
lung or pulmonary diseases and their control; and to collect and publish the
findings of such research for public consumption;
4. To facilitate the dissemination of ideas and public acceptance of information
on lung consciousness or awareness, and the development of fact-finding,
information and reporting facilities for and in aid of the general purposes or
objects aforesaid, especially in human lung requirements, general health and
physical fitness, and other relevant or related fields;
5. To encourage the training of physicians, nurses, health officers, social
workers and medical and technical personnel in the practical and scientific
implementation of services to lung patients;
6. To assist universities and research institutions in their studies about lung
diseases, to encourage advanced training in matters of the lung and related
fields and to support educational programs of value to general health;
7. To encourage the formation of other organizations on the national, provincial
and/or city and local levels; and to coordinate their various efforts and
activities for the purpose of achieving a more effective programmatic approach
on the common problems relative to the objectives enumerated herein;
8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be
given to the organization;
9. To extend, whenever possible and expedient, medical services to the public
and, in general, to promote and protect the health of the masses of our people,
which has long been recognized as an economic asset and a social blessing;
10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and
maladies of the people in any and all walks of life, including those who are poor
and needy, all without regard to or discrimination, because of race, creed, color
or political belief of the persons helped; and to enable them to obtain treatment
when such disorders occur;
11. To participate, as circumstances may warrant, in any activity designed and
carried on to promote the general health of the community;
12. To acquire and/or borrow funds and to own all funds or equipment,
educational materials and supplies by purchase, donation, or otherwise and to
dispose of and distribute the same in such manner, and, on such basis as the
 Center shall, from time to time, deem proper and best, under the particular
circumstances, to serve its general and non-profit purposes and
objectives;lavvphil.net
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and
dispose of properties, whether real or personal, for purposes herein
mentioned; and
14. To do everything necessary, proper, advisable or convenient for the
accomplishment of any of the powers herein set forth and to do every other act
and thing incidental thereto or connected therewith.16
Hence, the medical services of the petitioner are to be rendered to the public in
general in any and all walks of life including those who are poor and the needy
without discrimination. After all, any person, the rich as well as the poor, may fall
sick or be injured or wounded and become a subject of charity.17
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.18 In Congregational Sunday School, etc. v. Board of Review,19 the State
Supreme Court of Illinois held, thus:
… [A]n institution does not lose its charitable character, and consequent
exemption from taxation, by reason of the fact that those recipients of its
benefits who are able to pay are required to do so, where no profit is
made by the institution and the amounts so received are applied in
furthering its charitable purposes, and those benefits are refused to none
on account of inability to pay therefor. The fundamental ground upon
which all exemptions in favor of charitable institutions are based is the
benefit conferred upon the public by them, and a consequent relief, to
some extent, of the burden upon the state to care for and advance the
interests of its citizens.20
As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital
Association of South Dakota v. Baker:21
… [T]he fact that paying patients are taken, the profits derived from
attendance upon these patients being exclusively devoted to the
maintenance of the charity, seems rather to enhance the usefulness of the
institution to the poor; for it is a matter of common observation amongst
those who have gone about at all amongst the suffering classes, that the
deserving poor can with difficulty be persuaded to enter an asylum of any
kind confined to the reception of objects of charity; and that their honest
pride is much less wounded by being placed in an institution in which
paying patients are also received. The fact of receiving money from some
of the patients does not, we think, at all impair the character of the
charity, so long as the money thus received is devoted altogether to the
charitable object which the institution is intended to further.22
The money received by the petitioner becomes a part of the trust fund and must be
devoted to public trust purposes and cannot be diverted to private profit or
benefit.23
Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner
does not lose its character as a charitable institution simply because the gift or
donation is in the form of subsidies granted by the government. As held by the
State Supreme Court of Utah in Yorgason v. County Board of Equalization of Salt
Lake County:24
Second, the … government subsidy payments are provided to the project.
Thus, those payments are like a gift or donation of any other kind except
they come from the government. In both Intermountain Health Careand
the present case, the crux is the presence or absence of material
reciprocity. It is entirely irrelevant to this analysis that the government,
rather than a private benefactor, chose to make up the deficit resulting
from the exchange between St. Mark’s Tower and the tenants by making a
contribution to the landlord, just as it would have been irrelevant
in Intermountain Health Care if the patients’ income supplements had
come from private individuals rather than the government.
Therefore, the fact that subsidization of part of the cost of furnishing such
housing is by the government rather than private charitable contributions
does not dictate the denial of a charitable exemption if the facts otherwise
support such an exemption, as they do here.25
In this case, the petitioner adduced substantial evidence that it spent its income,
including the subsidies from the government for 1991 and 1992 for its patients
and for the operation of the hospital. It even incurred a net loss in 1991 and 1992
from its operations.
Even as we find that the petitioner is a charitable institution, we hold, anent the
second issue, that those portions of its real property that are leased to private
entities are not exempt from real property taxes as these are not actually, directly
and exclusively used for charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception. The effect of an
exemption is equivalent to an appropriation. Hence, a claim for exemption from
tax payments must be clearly shown and based on language in the law too plain to
be mistaken.26 As held in Salvation Army v. Hoehn:27
An intention on the part of the legislature to grant an exemption from the
taxing power of the state will never be implied from language which will
admit of any other reasonable construction. Such an intention must be
expressed in clear and unmistakable terms, or must appear by necessary
implication from the language used, for it is a well settled principle that,
when a special privilege or exemption is claimed under a statute, charter
or act of incorporation, it is to be construed strictly against the property
owner and in favor of the public. This principle applies with peculiar force
to a claim of exemption from taxation . …28
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner,
specifically provides that the petitioner shall enjoy the tax exemptions and
privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock
corporation organized primarily to help combat the high incidence of lung
and pulmonary diseases in the Philippines, all donations, contributions,
endowments and equipment and supplies to be imported by authorized
entities or persons and by the Board of Trustees of the Lung Center of the
Philippines, Inc., for the actual use and benefit of the Lung Center, shall be
exempt from income and gift taxes, the same further deductible in full for
the purpose of determining the maximum deductible amount under
Section 30, paragraph (h), of the National Internal Revenue Code, as
amended.
The Lung Center of the Philippines shall be exempt from the payment of
taxes, charges and fees imposed by the Government or any political
subdivision or instrumentality thereof with respect to equipment
purchases made by, or for the Lung Center.29
It is plain as day that under the decree, the petitioner does not enjoy any property
tax exemption privileges for its real properties as well as the building constructed
thereon. If the intentions were otherwise, the same should have been among the
enumeration of tax exempt privileges under Section 2:
It is a settled rule of statutory construction that the express mention of
one person, thing, or consequence implies the exclusion of all others. The
rule is expressed in the familiar maxim, expressio unius est exclusio
alterius.
The rule of expressio unius est exclusio alterius is formulated in a number
of ways. One variation of the rule is the principle that what is expressed
puts an end to that which is implied. Expressium facit cessare tacitum.
Thus, where a statute, by its terms, is expressly limited to certain matters,
it may not, by interpretation or construction, be extended to other
matters.
...
The rule of expressio unius est exclusio alterius and its variations are
canons of restrictive interpretation. They are based on the rules of logic
and the natural workings of the human mind. They are predicated upon
one’s own voluntary act and not upon that of others. They proceed from
the premise that the legislature would not have made specified
enumeration in a statute had the intention been not to restrict its meaning
and confine its terms to those expressly mentioned.30
The exemption must not be so enlarged by construction since the reasonable
presumption is that the State has granted in express terms all it intended to grant
at all, and that unless the privilege is limited to the very terms of the statute the
favor would be intended beyond what was meant.31
Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
(3) Charitable institutions, churches and parsonages 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.32
The tax exemption under this constitutional provision covers property taxes
only.33 As Chief Justice Hilario G. Davide, Jr., then a member of the 1986
Constitutional Commission, explained: ". . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or
educational purposes."34
Consequently, the constitutional provision is implemented by Section 234(b) of
Republic Act No. 7160 (otherwise known as the Local Government Code of 1991)
as follows:
 SECTION 234. Exemptions from Real Property Tax. – The following are
exempted from payment of the real property tax:
...
(b) Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, non-profit or religious cemeteries
and all lands, buildings, and improvements actually, directly,
and exclusivelyused for religious, charitable or educational
purposes.35
We note that under the 1935 Constitution, "... all lands, buildings, and
improvements used ‘exclusively’ for … charitable … purposes shall be exempt from
taxation."36 However, under the 1973 and the present Constitutions, for "lands,
buildings, and improvements" of the charitable institution to be considered
exempt, the same should not only be "exclusively" used for charitable purposes; it
is required that such property be used "actually" and "directly" for such
purposes.37
In light of the foregoing substantial changes in the Constitution, the petitioner
cannot rely on our ruling in Herrera v. Quezon City Board of Assessment
Appeals which was promulgated on September 30, 1961 before the 1973 and 1987
Constitutions took effect.38 As this Court held in Province of Abra v. Hernando:39
… Under the 1935 Constitution: "Cemeteries, churches, and parsonages or
convents appurtenant thereto, and all lands, buildings, and improvements
used exclusively for religious, charitable, or educational purposes shall be
exempt from taxation." The present Constitution added "charitable
institutions, mosques, and non-profit cemeteries" and required that for
the exemption of "lands, buildings, and improvements," they should not
only be "exclusively" but also "actually" and "directly" used for religious
or charitable purposes. The Constitution is worded differently. The
change should not be ignored. It must be duly taken into consideration.
Reliance on past decisions would have sufficed were the words "actually"
as well as "directly" not added. There must be proof therefore of
the actual and direct use of the lands, buildings, and improvements for
religious or charitable purposes to be exempt from taxation. …
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be
entitled to the exemption, the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.
"Exclusive" 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." 40 If real property is used
for one or more commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation.41 The words "dominant use" or "principal use"
cannot be substituted for the words "used exclusively" without doing violence to
the Constitutions and the law.42 Solely is synonymous with exclusively.43
What is meant by actual, direct and exclusive use of the property for charitable
purposes is the direct and immediate and actual application of the property itself
to the purposes for which the charitable institution is organized. It is not the use of
the income from the real property that is determinative of whether the property is
used for tax-exempt purposes.44
The petitioner failed to discharge its burden to prove that the entirety of its real
property is actually, directly and exclusively used for charitable purposes. While
portions of the hospital are used for the treatment of patients and the dispensation
of medical services to them, whether paying or non-paying, other portions thereof
are being leased to private individuals for their clinics and a canteen. Further, a
portion of the land is being leased to a private individual for her business
enterprise under the business name "Elliptical Orchids and Garden Center."
Indeed, the petitioner’s evidence shows that it collected ₱1,136,483.45 as rentals
in 1991 and ₱1,679,999.28 for 1992 from the said lessees.
Accordingly, we hold that the portions of the land leased to private entities as well
as those parts of the hospital leased to private individuals are not exempt from
such taxes.45 On the other hand, the portions of the land occupied by the hospital
and portions of the hospital used for its patients, whether paying or non-paying,
are exempt from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The
respondent Quezon City Assessor is hereby DIRECTED to determine, after due
hearing, the precise portions of the land and the area thereof which are leased to
private persons, and to compute the real property taxes due thereon as provided
for by law.
SO ORDERED.
Davide, Jr., Puno, Vitug, Panganiban, Quisumbing, Ynares-Santiago, Sandoval-
Gutierrez, Carpio, Austria-Martinez, Corona, Carpio Morales, Azcuna, and Tinga,
JJ., concur.