Comm. Of Internal Revenue vs. St. Luke’s Medical Center, Inc.

(G.R. No. 195909-195960; Sept. 26, 2012)

Facts: St. Luke’s (respondent) is a hospital organized as a non-stock and non-profit

organization. Sometime in 2002, BIR assessed St. Luke’s deficiency taxes amounting to P76M
for 1998 which was subsequently reduced to P63M during trial in the CTA. St. Luke’s protested
and filed an administrative protest with BIR but was not acted by the latter within the 180 period
thus reaching to the CTA.

According to BIR, Section 27B of the NIRC imposing a 10% preferential tax rate applies
to St. Luke’s. Its reason is that it amends the exemption on non-profit hospitals and which
prevails over the exemption on income tax granted under Section 30 (E and G) for non-stock,
nonprofit charitable institution and civic organizations promoting social welfare. It further claimed
that St. Luke’s was actually operating for profit because only 13% came from charitable
purposes and that it had a total revenue of P1.73B from patient services in 1998.

Meanwhile, St. Luke’s contended that its operating income only totaled P334 M (less the
operating expenses) and out of that P218M (65%) made up its free services and further claimed
that its income does not inure to the benefit of anyone. Furthermore, it argued that it falls under
the exception provided under Sec. 30 (E) and (G) of NIRC and making of profit per se does not
destroy its tax exemption.

CTA En Banc ruled in favor of St. Luke’s exemption under Sec. 30 and reiterated its
earlier fiding in another case identifying St. Luke’s as a charitable institution. CTA adopted the
test in Hospital de San Juan de Dios, Inc. v. Pasay City, 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 . . . ." (The
generation of income from paying patients does not per se destroy the charitable nature of St.
Luke's.)

Issue: WON St. Luke’s is liable for deficiency income tax under Sec. 27 (B) of the NIRC which
imposes a 10% preferential rate.

Held: Petition partly granted. YES, St. Luke’s is liable under Sec. 27 (B) of the NIRC.

Under Sec. 30 (E) of the NIRC provides that a charitable institution must be: (1) non-stock
corporation or association; (2)ORGANIZED EXCLUSIVELY for charitable purposes; (3)
OPERATED EXCLUSIVELY for charitable purposes; (4) No part of its net income or asset shall
inure to the benefit of any member , officer or any person. Under the last paragraph of Sec. 30
of the NIRC 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. It simply means
that even if a charitable institution organized and operated exclusively for charitable purposes is
nevertheless allowed to engage in “activities conducted for profit” without losing its tax exempt
status for its no-for-profit activities. However, as a consequence "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." (Sec. 30, last
par.). Therefore, services rendered to paying patients are activities conducted for profit and
thus taxable under Sec. 27 (B) of the NIRC.

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.

Notes:

1. TEST OF CHARITY - 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." (In other words, charitable
institutions provide for free goods and services to the public which would
otherwise fall on the shoulders of government.)
2. Solely is synonymous with EXCLUSIVELY. (Lung center of the Phil.)
3. Proprietary- means private.
4. Non-profit- no net income accrues to the benefit of any person and with all its income
devoted to the institutions purpose and all its activities CONDUCTED NOT FOR
PROFIT.