G.R. No. 31305 - Hospital de San Juan de Dios, Inc. vs. Commissioner of Internal Revenue

In a letter dated January 15, 1959, the Commissioner of Internal Revenue assessed and demanded from Hospital De San Juan De Dios, Inc. a deficiency income tax of P51,462 for the years 1952 to 1955.
The petitioner protested against the assessment and requested its cancellation.
On November 8, 1960, after reevaluation, the Commissioner reduced the deficiency assessment to P16,852.41.
Despite this reduction, the petitioner, through its auditors, insisted on cancelling the revised assessment, but the request was denied.

On September 18, 1965, the petitioner sought a review of the assessment by the CTA.
In its decision dated August 29, 1969, the CTA upheld the Commissioner’s position.

It ruled that the expenses incurred by the petitioner in handling funds from its investments (interests and dividends) could not be deducted as business or administrative expenses.
The reasoning was that such expenses were not incurred in "carrying on any trade or business" as required by Section 30(a)(1) of the Revenue Code.

The operations of the hospital and the nursing school were exempt from income tax.
Its taxable or non-operating income derived from rentals, interests, and dividends from its properties and investments.

In the computation of its taxable income, the petitioner attempted to share all its income in the allocation of administrative expenses.
The Commissioner disallowed the allocation of administrative expenses to the income received as interests and dividends, on the ground that expenses related to investment management are not allowable unless incurred in the conduct of a trade or business.

The petitioner failed to establish by competent proof that its receipt of interests and dividends resulted from the carrying on of a trade or business.
No evidence was provided regarding:

The manner in which the petitioner handled its investments.
The buying, selling, and reinvestment strategy of its securities.
The decision-making process or consultation with brokers and investment services.
The extent of its active management or participation in the affairs of the corporations in which it invested.

The CTA highlighted that there was a total absence of any business-like management or operation concerning its investment activities.
Emphasis was placed on the fact that the interests and dividends were merely incidental income to the petitioner’s main activity—its operation of the hospital and nursing schools.
The petitioner’s Articles of Incorporation stated that it was established for benevolent, charitable, and religious purposes, and not for financial gain, reinforcing its non-commercial nature.

Whether the petitioner’s handling of its investment income (interests and dividends) met the criteria for "carrying on any trade or business" as required under Section 30(a)(1) of the Revenue Code.
Whether the expenses incurred for managing and administering the investment portfolio could be rightfully allocated as deductible business or administrative expenses.
Whether the incidental nature of the investment income, juxtaposed with the petitioner’s primary charitable activities, disqualifies such expenses from being allowed as deductions under the applicable law.