G.R. No. 203974 - Umali vs. Commission on Elections

On August 3, 2012, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. 35-2012, entitled “Clarifying the Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation, and Other Non-Profit Purposes,” to guide revenue officials on income tax and value-added tax (VAT) liability of such clubs.
Under its income tax component, RMC No. 35-2012 interpreted that recreational clubs lost their prior exemption (under Section 21(h) of the 1977 Tax Code) upon omission from the 1997 NIRC’s exemption list, thereby subjecting “income of recreational clubs from whatever source, including but not limited to membership fees, assessment dues, rental income, and service fees” to income tax. It likewise ruled that gross receipts of such clubs—including membership fees and dues—are subject to VAT per Section 105 of the 1997 NIRC.

On October 25, 2012, petitioner Association of Non-Profit Clubs, Inc. (ANPC) met with BIR officials and submitted a position paper (November 12, 2012) requesting that membership fees, assessment dues, and similar charges be excluded from income tax and VAT liability.
The BIR did not act on the position paper; AS a result, member clubs were assessed income tax and VAT on those fees.

On September 17, 2014, ANPC filed a petition for declaratory relief before the Regional Trial Court (RTC) of Makati City, Branch 134 (Special Civil Case No. 14-985), challenging RMC No. 35-2012 as invalid, oppressive, confiscatory, and beyond the BIR’s authority.
RTC Decision dated July 1, 2016 denied the petition, ruling no exhaustion violation (due to urgency) and upholding RMC No. 35-2012 as a valid interpretative rule. The RTC denied reconsideration on November 7, 2016.

Whether ANPC violated the doctrine of hierarchy of courts by directly invoking the Supreme Court instead of exhausting administrative remedies or appealing through proper fora.
Whether ANPC failed to exhaust available administrative remedies (i.e., review by the Secretary of Finance under Section 4, Title I of the 1997 NIRC) before seeking judicial relief.

Whether the RTC erred in upholding the validity of RMC No. 35-2012’s interpretations that (a) membership fees, assessment dues, and similar charges constitute taxable “income of recreational clubs from whatever source” subject to income tax; and (b) those same fees form part of the clubs’ VAT-able gross receipts.