Case Summary (G.R. No. L-40399)
Key Dates
• August 3, 2012 – Issuance of Revenue Memorandum Circular No. 35-2012 (RMC 35-2012)
• September 17, 2014 – ANPC’s petition for declaratory relief filed in RTC
• July 1, 2016 – RTC decision denying petition and upholding RMC 35-2012
• November 7, 2016 – RTC order denying reconsideration
• June 26, 2019 – Supreme Court decision
Applicable Law
• 1987 Constitution (due process clause)
• National Internal Revenue Code of 1997 (NIRC), as amended by Republic Act No. 8424
• Presidential Decree No. 1158 (1977 Tax Code)
• Principles: doctrine of casus omissus pro omisso habendus est; distinction between capital and income; VAT imposition requirements
Factual Background
On August 3, 2012, the BIR issued RMC 35-2012 clarifying that clubs organized exclusively for pleasure, recreation, and other non-profit purposes are subject to income tax under the 1997 NIRC, on the ground that their exemption under the 1977 Tax Code was omitted. It likewise declared gross receipts—including membership fees, assessment dues, rental income, and service fees—subject to VAT under Section 105 of the 1997 NIRC. ANPC met with BIR officials, submitted a position paper seeking non-application of RMC 35-2012 to membership fees and dues, but received no response. Member clubs were assessed income tax and VAT, prompting ANPC to seek declaratory relief.
Procedural History
ANPC filed a petition for declaratory relief in the RTC of Makati, alleging RMC 35-2012 was invalid, oppressive, and beyond BIR rule-making authority, in violation of due process. The OSG moved to dismiss for failure to exhaust administrative remedies. On July 1, 2016, the RTC denied the petition, holding there was urgency to bypass administrative review, and that RMC 35-2012 was a valid interpretative rule. Reconsideration was denied on November 7, 2016. ANPC appealed by petition for review on certiorari directly to the Supreme Court, raising pure questions of law.
Issue
Whether the RTC erred in upholding the validity of RMC 35-2012’s interpretations that (a) all income of recreational clubs—specifically membership fees and assessment dues—is subject to income tax, and (b) gross receipts, including such fees, are subject to VAT.
Supreme Court Analysis – Procedural Issues
Hierarchy of Courts
• Petition for review on pure questions of law from an RTC decision is properly brought directly before the Supreme Court under Rule 45; no alternative concurrent remedy existed.
Exhaustion of Administrative Remedies
• RMC 35-2012 is an interpretative rule subject to review by the Secretary of Finance under Section 4, Title I of the 1997 NIRC.
• Exceptions to exhaustion apply where only pure questions of law are involved or urgency compels immediate judicial relief. Here, imminent tax assessments justified bypassing administrative review.
Supreme Court Analysis – Income Tax Interpretation
Doctrine of Casus Omissus
• Omission of recreational clubs from the 1977 Tax Code exemption list in the 1997 NIRC evidences congressional intent to tax their income.
Capital vs. Income
• Jurisprudence distinguishes capital (a fund) from income (a flow or realized gain).
• Membership fees, assessment dues, and similar charges constitute capital contributions held in trust for club maintenance, not realized gains.
• Taxation of capital violates the due process guarantee and amounts to unconstitutional confiscation.
Rule-Making Authority
• Administrative regulations must conform strictly to statutory language. RMC 35-2012’s sweeping inclusion of all membership fees and dues as taxable income exceeds the BIR’s interpretative authority.
Supreme Court Analys
Case Syllabus (G.R. No. L-40399)
Facts
- On August 3, 2012, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 35-2012, “Clarifying the Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation, and Other Non-Profit Purposes.”
- The Circular addressed income tax and Value Added Tax (VAT) liabilities of recreational clubs, stating that such clubs “are subject to income tax under the National Internal Revenue Code of 1997” and that their “gross receipts … are subject to VAT.”
- For income tax, the BIR invoked the doctrine of casus omissus pro omisso habendus est, noting that the 1997 Code omitted the previous exemption granted under the 1977 Tax Code to recreational clubs.
- For VAT, the BIR relied on Section 105, Chapter I, Title IV of the 1997 Code, which imposes VAT on any person, including nonstock, nonprofit organizations, rendering services “in the course of trade or business.”
- On October 25, 2012, ANPC and its member clubs met with Atty. Elenita Quimosing of the BIR to seek clarification on the Circular’s effects and were advised to submit a position paper.
- ANPC’s November 12, 2012 position paper requested non-application of RMC No. 35-2012 to membership fees, association dues, and similar charges used solely to defray club expenses; the BIR did not respond.
- Beginning in 2012, member clubs were assessed income tax and VAT on membership fees, assessment dues, and service fees, prompting ANPC to file a petition for declaratory relief on September 17, 2014 before the Regional Trial Court (RTC) of Makati City, Branch 134.
- ANPC characterized RMC No. 35-2012 as invalid, unjust, oppressive, confiscatory, and violative of due process, and contended the BIR exceeded its authority in interpreting membership fees and dues as taxable income and VAT-able services.
- The Office of the Solicitor General, representing the BIR, moved to dismiss for failure to exhaust administrative remedies a