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Tax Case 114

St. Luke's Medical Center (SLMC) was assessed deficiency taxes of over P76 million by the Bureau of Internal Revenue (BIR) for the year 1998. The BIR argued SLMC should pay the 10% preferential tax rate instead of being tax exempt because only 13% of its revenues were from charitable purposes. SLMC maintained it was a non-profit and non-stock institution organized for charitable purposes. The Supreme Court ruled SLMC was not entitled to tax exemption because, with total revenues of P1.73 billion, it could not be considered an institution "operated exclusively" for charitable purposes as required by law. The Court applied previous legal precedent in making its decision.

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31 views1 page

Tax Case 114

St. Luke's Medical Center (SLMC) was assessed deficiency taxes of over P76 million by the Bureau of Internal Revenue (BIR) for the year 1998. The BIR argued SLMC should pay the 10% preferential tax rate instead of being tax exempt because only 13% of its revenues were from charitable purposes. SLMC maintained it was a non-profit and non-stock institution organized for charitable purposes. The Supreme Court ruled SLMC was not entitled to tax exemption because, with total revenues of P1.73 billion, it could not be considered an institution "operated exclusively" for charitable purposes as required by law. The Court applied previous legal precedent in making its decision.

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© © All Rights Reserved
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Commissioner of Internal Revenue vs. St. Luke’s Medical Center, Inc.

(SLMC)
G.R. No 203514; February 13, 2017

Facts:

Luke’s Medical Center, Inc. is a hospital organized as a non-stock and non-profit


corporation.The BIR assessed St. Luke’s deficiency taxes amounting to P76,063,116.06
for 1998, comprised of deficiency income tax, VAT, withholding tax on compensation and
expanded withholding tax.Luke’s filed an administrative protest with the BIR against the
deficiency tax assessments.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary non-profit hospitals, should be applicable
to St. Luke’s. The BIR claimed that St. Luke’s was actually operating for profit in 1998
because only 13% of its revenues came from charitable purposes. Moreover, the hospital’s
board of trustees, officers and employees directly benefit from its profits and assets. St.
Luke’s had total revenues of P1,730,367,965 or approximately P1.73 billion from patient
services in 1998.

Luke’s contended that the BIR should not consider its total revenues, because its free
services to patients was P218,187,498 or 65.20% of its 1998 operating income of
P334,642,615. St. Luke’s also claimed that its income does not inure to the benefit of any
individual.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.

Issue:

Whether or not SLMC is entitled to tax exemption under Section 30 (E) and (G) of the
1997 NIRC and whether or not it is liable to pay compromise penalty pursuant to Section
248 (A) of the 1997 NIRC

Held:

The Supreme Court ruled that SLMC is not entitled to tax exemption under Section 30 (E)
and (G) of the 1997 NIRC and applied the doctrine of stare decisis - "absent any powerful
countervailing considerations, like cases ought to be decided alike."

Under Section 30 (E) and (G) of the 1997 NIRC, a charitable institution will be exempted
from tax if it has the following qualifications: a non-stock corporation or association;
organized exclusively for charitable purposes; operated exclusively for charitable
purposes; and 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.

Although there is no question that SLMC is organized as a non-stock, non-profit charitable


institution, it is not automatically exempted from paying taxes. To be exempted from
paying real property taxes, Section 28 (3) of the 1987 Constitution requires that a charitable
institution use the property ‘actually, directly and exclusively for charitable purposes.’ To
be exempted from income taxes, Section 30 (E) of the 1997 NIRC requires that a charitable
institution must be ‘organized and operated exclusively’ for charitable purposes. Likewise
to qualify as exempted in income tax, Section 30 (G) of the 1997 NIRC requires that the
institution be ‘operated exclusively’ for social welfare.

The Court defined ‘exclusive’ as ‘possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment. Given that SLMC has an income of P1.73
billion, it cannot be disputed that it is not an institution ’operated exclusively’ for charitable
purposes.

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