G.R. No. 215383 - Jacinto-Henares vs. St. Paul College of Makati

Case Summary (G.R. No. 215383)

Petitioner

The petitioner sought review under Rule 45 of the 1997 Rules of Civil Procedure of the RTC’s decision and joint resolution that declared Revenue Memorandum Order (RMO) No. 20-2013 unconstitutional and made permanent a writ of preliminary injunction restraining its implementation.

Respondent

St. Paul College of Makati filed a civil action to declare RMO No. 20-2013 unconstitutional and prayed for a temporary restraining order and a writ of preliminary injunction. SPCM alleged that RMO No. 20-2013 imposed registration and approval prerequisites (including a Tax Exemption Ruling valid for three years and subject to renewal) and otherwise added requirements beyond Department of Finance Order No. 137-87; it further alleged that failure to file an annual information return under RMO No. 20-2013 would automatically deprive a non-stock, non-profit educational institution of its income tax-exempt status.

Key Dates

July 22, 2013: Issuance of RMO No. 20-2013.
October 29, 2013: RMO No. 28-2013 amended Section 10 of RMO No. 20-2013.
November 29, 2013: SPCM filed its civil action before the RTC.
December 27, 2013: RTC issued a temporary restraining order enjoining implementation of RMO No. 20-2013.
January 22, 2014: RTC granted a writ of preliminary injunction.
July 25, 2014: RTC Decision declared RMO No. 20-2013 unconstitutional and made the injunction permanent.
October 29, 2014: RTC denied respondent’s motion for reconsideration by Joint Resolution.
September 18, 2014: CIR issued RMO No. 34-2014, clarifying certain provisions of RMO No. 20-2013 as amended.
July 25, 2016: The then-CIR Caesar R. Dulay issued RMO No. 44-2016, excluding non-stock, non-profit educational institutions from the coverage of RMO No. 20-2013 (this date was judicially noticed by the Supreme Court).
March 8, 2017: Supreme Court resolution denying the petition on grounds of mootness.

Applicable Law

Article XIV, Section 4(3) of the 1987 Constitution (tax exemption of revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes).
Section 30(H) of the National Internal Revenue Code of 1997, as amended (reiterating tax exemption for non-stock, non-profit educational institutions).
Department of Finance Order No. 137-87 (Rules and Regulations Implementing Section 4(3), Article XIV, dated 16 December 1987).
Revenue Memorandum Orders: No. 20-2013 (prescribing policies and guidelines for issuance of Tax Exemption Rulings), No. 28-2013 (amending Section 10 of RMO No. 20-2013), No. 34-2014 (clarifications), and No. 44-2016 (excluding non-stock, non-profit educational institutions from RMO No. 20-2013 and setting guidance).

Facts

RMO No. 20-2013 set policies and guidelines for issuance of Tax Exemption Rulings (TERs) to qualified non-stock, non-profit corporations and associations under Section 30 of the 1997 Tax Code. Section 10 as originally promulgated and as amended provided for TERs valid for three years and subject to renewal; Section 11 provided that failure to file an annual information return by a corporation with a Tax Exemption Ruling would result in automatic loss of income tax-exempt status beginning the taxable year for which the return was not filed. SPCM challenged RMO No. 20-2013 as imposing prerequisites and conditions not sanctioned by the Constitution or by Department of Finance Order No. 137-87, and as diminishing the constitutional tax-exemption privilege.

Ruling of the Regional Trial Court

The RTC granted SPCM’s motions for injunctive relief and, in its Decision dated July 25, 2014, declared RMO No. 20-2013 unconstitutional for violating Article XIV, Section 4(3) of the Constitution. The RTC held that by imposing the registration/approval requirements and the three-year TER/renewal scheme, and by treating failure to file annual information returns as automatic revocation of tax-exempt status, RMO No. 20-2013 diminished the constitutional privilege—a diminution the RTC concluded the Commissioner could not effectuate. The RTC made permanent the writ of preliminary injunction against implementation of RMO No. 20-2013 and declared subsequent Revenue Memorandum Orders implementing RMO No. 20-2013 null and void. The RTC denied the CIR’s motion for reconsideration by joint resolution dated October 29, 2014.

Issues Raised by the Commissioner

The Commissioner presented, inter alia, whether the trial court correctly concluded that (1) RMO No. 20-2013 imposes a prerequisite before a non-stock, non-profit educational institution may avail of the tax exemption under Section 4(3), Article XIV of the Constitution; and (2) RMO No. 20-2013 adds to the requirement under Department of Finance Order No. 137-87.

Supreme Court Ruling and Rationale

The Supreme Court denied the petition on the ground of mootness. The Court took judicial notice of RMO No. 44-2016, issued July 25, 2016 by CIR Caesar R. Dulay, which expressly excluded non-stock, non-profit educational institutions from the coverage of RMO No. 20-2013. RMO No. 44-2016 reiterated the constitutional provision in Article XIV, Section 4(3) and Section 30(H) of the Tax Code, emphasized that the doctrinal requisites for the constitutional exemption are twofold—(1) the school must be non-stock and non-profit, and (2) the income is actually, directly and exclusively used for educational purposes—and stated that there are no other conditi

Case Syllabus (G.R. No. 215383)

Case Identification and Procedural Posture

Citation: 807 Phil. 133, Second Division, G.R. No. 215383, March 08, 2017.
Nature of case: Petition for review under Rule 45 of the 1997 Rules of Civil Procedure, assailing the Decision dated 25 July 2014 and Joint Resolution dated 29 October 2014 of the Regional Trial Court, Branch 143, Makati City (Civil Case No. 13-1405), which declared Revenue Memorandum Order (RMO) No. 20-2013 unconstitutional.
Panel and author: Resolution penned by Justice Carpio; Justices Peralta, Mendoza, Reyes, and Leonen concur. A designated fifth member per Special Order No. 2416-BB dated 4 January 2017 is noted.
Relief sought in petition: Review and annulment of the RTC’s Decision and Joint Resolution that declared RMO No. 20-2013 unconstitutional.

The Case (Statement)

The petition for review challenges the RTC rulings that declared RMO No. 20-2013 unconstitutional.
The RTC decision being assailed is dated 25 July 2014; the RTC’s Joint Resolution denying reconsideration is dated 29 October 2014.
The petition arises from Civil Case No. 13-1405 before RTC Branch 143, Makati City.

Facts

On 22 July 2013, Kim S. Jacinto-Henares, then Commissioner of Internal Revenue (CIR), issued RMO No. 20-2013 titled “Prescribing the Policies and Guidelines in the Issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-Profit Corporations and Associations under Section 30 of the National Internal Revenue Code of 1997, as Amended.”
On 29 November 2013, St. Paul College of Makati (SPCM), a non-stock, non-profit educational institution organized and existing under Philippine laws, filed a Civil Action to Declare Unconstitutional RMO No. 20-2013 with Prayer for Issuance of Temporary Restraining Order and Writ of Preliminary Injunction before the RTC.
SPCM’s allegations included:
- RMO No. 20-2013 imposes, as a prerequisite to enjoying the constitutional tax exemption under Section 4(3), Article XIV of the Constitution, a registration and approval requirement: submission of an application for tax exemption to the BIR subject to approval by the CIR in the form of a Tax-Exemption Ruling (TER) valid for a period of three years and subject to renewal.
- RMO No. 20-2013 adds prerequisites to the requirements under Department of Finance Order No. 137-87 (Rules and Regulations Implementing Section 4(3), Article XIV of the 1987 Constitution).
- RMO No. 20-2013 makes failure to file an annual information return a ground for automatic loss of income tax-exempt status (citing RMO No. 20-2013, Section 11).
Key provisions of RMO No. 20-2013 referenced by parties (as quoted in the source):
- Section 10 (as originally in RMO No. 20-2013 and as amended later by RMO No. 28-2013) provided that Tax Exemption Rulings may be renewed upon filing a subsequent Application for Tax Exemption/Revalidation; otherwise exemption shall be deemed revoked upon expiration, with new Rulings valid for three years unless sooner revoked or cancelled.
- Section 11 stated that if a corporation or association issued a Tax Exemption Ruling fails to file its annual information return, it shall automatically lose its income tax-exempt status beginning the taxable year for which it failed to file.
RTC proceedings before final judgment:
- 27 December 2013: RTC issued a temporary restraining order against implementation of RMO No. 20-2013, finding that non-compliance could result in loss of tax-exempt status and irreparable injury.
- 22 January 2014: RTC granted the writ of preliminary injunction, finding RMO No. 20-2013 appears to divest non-stock, non-profit educational institutions of their tax exemption privilege.
- The CIR’s motion for reconsideration before the RTC was denied.
- 29 April 2014: SPCM filed a Motion for Judgment on the Pleadings under Rule 34, Rules of Court.

Ruling of the Regional Trial Court (RTC)

Decision dated 25 July 2014 (Presiding Judge Maximo M. De Leon): The RTC ruled in favor of SPCM and declared RMO No. 20-2013 unconstitutional.
RTC’s substantive rationale: RMO No. 20-2013 imposes prerequisites which, if not complied with by non-stock, non-profit educational institutions, amount to diminution of the constitutional privilege of tax exemption protected by Article XIV, Section 4(3) — a privilege that even Congress cannot diminish by legislation, and thus cannot be diminished by the CIR who exercises merely quasi-legislative functions.
Dispositive portion of RTC Decision (as quoted):
- The Court declared BIR RMO No. 20-2013 UNCONSTITUTIONAL for being violative of Article XIV, Section 4, paragraph 3; all Revenue Memorandum Orders issued to implement RMO No. 20-2013 were declared null and void; the writ of preliminary injunction issued on 03 February 2014 was made permanent.
18 September 2014: CIR issued RMO No. 34-2014, which clarified certain provisions of RMO No. 20-2013, as amended by RMO No. 28-2013.
Joint Resolution dated 29 October 2014: The RTC denied the CIR’s motion for reconsideration for lack of merit and clarified that the phrase “Revenue Memorandum Order” in the Decision referred to issuance(s) tending to implement RMO No. 20-2013; the RTC stated that otherwise its decision would be useless and nugatory.

Issues Raised by the CIR Before the Supreme Court

Whether the trial court correctly concluded that RMO No. 20-2013 imposes a prerequisite before a non-stock, non-profit educational