Case Summary (G.R. No. 195909)
Petitioners and Respondents
- G.R. No. 195909: Commissioner of Internal Revenue (Petitioner) vs. St. Luke’s Medical Center, Inc. (Respondent)
- G.R. No. 195960: St. Luke’s Medical Center, Inc. (Petitioner) vs. Commissioner of Internal Revenue (Respondent)
Key Dates
- December 16, 2002: BIR assesses P76,063,116.06 in deficiencies against St. Luke’s for 1998
- January 14, 2003: St. Luke’s files administrative protest; BIR fails to act within 180 days
- February 23, 2009: CTA First Division Decision
- November 19, 2010: CTA En Banc Decision affirming partial grant of relief to St. Luke’s
- March 1, 2011: CTA En Banc Resolution denying motions for reconsideration
- September 26, 2012: Supreme Court Decision
Applicable Law
- 1987 Philippine Constitution, Art. VI, Sec. 28(3)–(4)
- National Internal Revenue Code of 1997 (NIRC):
• Sec. 27(A)(1) – Ordinary corporate rate
• Sec. 27(B) – 10% preferential rate on proprietary non-profit educational institutions and hospitals
• Sec. 30(E) – Income exemption for non-stock, non-profit charitable corporations
• Sec. 30(G) – Income exemption for civic organizations promoting social welfare
• Last paragraph of Sec. 30 – Taxability of income from “activities conducted for profit”
• Sec. 248(A)(3) – Surcharges on unpaid deficiencies
• Sec. 249(C)(3) – Delinquency interest on unpaid deficiencies
Factual Background
St. Luke’s is organized as a non-stock, non-profit corporation with charitable, benevolent and educational purposes. In December 2002 the BIR audited its 1998 operations and assessed deficiencies in income tax, VAT, withholding tax on compensation and expanded withholding tax, later reduced to P63,935,351.57. St. Luke’s protested administratively; the BIR’s inaction gave rise to a petition before the CTA. The BIR maintained that under Sec. 27(B) proprietary non-profit hospitals pay 10% on taxable income and are excluded from full exemption under Sec. 30. St. Luke’s argued its income is exempt under Sec. 30(E) and (G) because it operates exclusively for charitable and social welfare purposes and no part of its net income inures to private individuals.
CTA En Banc Ruling
The CTA First Division (23 February 2009) and En Banc (19 November 2010) held that:
- St. Luke’s qualifies as a non-stock, non-profit charitable institution under Sec. 30(E) and civic organization under Sec. 30(G), thus exempting its patient-service income, whether paying or non-paying.
- Section 27(B) does not apply, because Sec. 30(E) uses the specific term “non-stock.”
- St. Luke’s failed to prove that P17.48 million categorized as “Other Income-Net” derived exclusively from charitable activities; that portion remained taxable.
- Deficiency VAT was cancelled; deficiency income tax of P5,496,963.54 and expanded withholding tax of P778,406.84 were affirmed, plus 20% delinquency interest.
Legal Issue
Does Section 27(B) of the NIRC remove the income tax exemption granted by Section 30(E) and (G) to proprietary non-profit hospitals and subject all their taxable income to a 10% preferential rate?
Supreme Court Ruling
Scope of Review
- Petition G.R. 195960 (by St. Luke’s) is dismissed for raising factual issues; SC review under Rule 45 is limited to questions of law.
Interpretation of Sections 27 and 30
- Section 30(E)/(G) exempts from income tax the income “received by them as such” by charitable and social-welfare organizations, but expressly subjects “income … from any … activities conducted for profit” to tax.
- Section 27(B) imposes a 10% rate on the taxable income of proprietary non-profit educational institutions and hospitals, without requiring a “non-stock” corporate form.
- Both provisions operate harmoniously: Sec. 30 continues to exempt non-profit activities; Sec. 27(B) prescribes the rate for income from for-profit activities.
Application to St. Luke’s
- In 1998 St. Luke’s derived P1.73 billion from paying patients—activities conducted for profit—and allocated only P218 million to free services.
- The scale of paid services demonstrates that the hos
Case Syllabus (G.R. No. 195909)
Procedural Posture
- Two petitions (G.R. No. 195909 and G.R. No. 195960) were consolidated under Rule 45 of the Rules of Court.
- Both petitions assail the 19 November 2010 Decision and 1 March 2011 Resolution of the Court of Tax Appeals (CTA) En Banc in CTA Case No. 6746.
- The Supreme Court granted certiorari on a pure question of law concerning the interplay of Sections 27(B) and 30(E) & (G) of the 1997 National Internal Revenue Code (NIRC).
- SC review is limited to questions of law; factual issues raised by St. Luke’s (G.R. No. 195960) were denied for failure to comply with Rule 45, Section 1.
Facts
- St. Luke’s Medical Center, Inc. is a non-stock, non-profit corporation organized for charitable, benevolent, scientific and educational purposes under its articles of incorporation.
- In December 2002, the BIR assessed St. Luke’s with deficiency taxes for 1998 totalling ₱76,063,116.06, later reduced to ₱63,935,351.57 by the CTA First Division.
- St. Luke’s filed an administrative protest; the BIR’s inaction for 180 days led to an appeal to the CTA.
- The BIR argued Section 27(B) (10% preferential rate for proprietary non-profit hospitals) overrides the general exemption in Section 30(E) & (G).
- The BIR contended that St. Luke’s derived only 13% of its revenues from charitable purposes and that its trustees, officers and employees benefited from profits.
- St. Luke’s maintained its free services amounted to 65.20% of operating income and that no private individual benefitted from its net income.
- St. Luke’s argued the existence of profit does not destroy its tax-exempt status under Sections 30(E) & (G).
Issue
- Whether the enactment of Section 27(B) of the NIRC removes the income tax exemption of proprietary non-profit hospitals under Section 30(E) & (G) and subjects their taxable income to a 10% preferential rate.
CTA En Banc Ruling
- The CTA En Banc affirmed the First Division:
• Canceled the 1998 VAT deficiency assessment of ₱110,000.00.
• Ordered payme