Case Summary (G.R. No. 202792)
Petitioner
The Foundation is organized as a non-stock, non-profit educational institution with primary purposes set forth in its Amended Articles of Incorporation to operate educational programs, with explicit provisions that profits from enumerated activities shall not inure to members, trustees, or officers but shall be used exclusively for maintenance of the corporation.
Respondent
The Commissioner of Internal Revenue issued final assessment notices asserting deficiency income tax and deficiency value-added tax (VAT) against the Foundation and later argued that the Foundation had lost its tax-exempt status because of profit-oriented operations and thus was subject to taxation.
Key Dates
- BIR issued Assessment Notices: June 17, 2005 (deficiency income tax and deficiency VAT).
- Protest/Request for Reconsideration filed by petitioner: July 20, 2005.
- Petition for review filed with CTA Division (sent by registered mail): April 17, 2006 (last day of filing).
- Docket and legal fees paid: April 26, 2006 (nine days after filing).
- CTA Division Decision cancelling the income tax assessment: July 16, 2010.
- CTA En Banc Decision reversing the Division and dismissing petition for lack of jurisdiction: April 19, 2012.
- Petition for review before the Supreme Court and final disposition set aside the CTA En Banc decision (decision excerpt provided).
Applicable Law
Primary constitutional provision applied: 1987 Constitution, Article XIV, Section 4(3) — “All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties.” Related statutory reference: Section 30(H) of the National Internal Revenue Code (as amended), which recognizes the tax exemption of non-stock, non-profit educational institutions. Procedural rules regarding perfection of appeal to the Court of Tax Appeals (CTA) and the jurisdictional effect of paying docket and legal fees within the reglementary period are also central.
Factual Background
The BIR assessed the Foundation for deficiency income tax in the aggregate amount of P122,414,521.70 (inclusive of statutory increments) and a deficiency VAT assessment of P2,752,228.54 (inclusive of statutory increments). The assessments were premised on alleged disallowed deductions, unlocated/unsupported invoices and vouchers, income not subjected to tax, disallowed provisions for retirement and doubtful accounts, and revenue items classified by the BIR as taxable.
BIR’s Specific Findings and Allegations
The BIR characterized the Foundation as profit-oriented, citing (a) gross receipts of approximately P643 million from tuition and other fees, (b) substantial cash in bank (P775 million) suggestive of investing activity and insufficient charitable distributions, and (c) cash flow allocations showing significant portions of receipts used for operating, investing, and administrative purposes—facts that, in the BIR’s view, implied implied revocation of tax-exempt status or disqualification from the exemption.
Petitioner’s Position and Evidence
Petitioner disputed the BIR’s characterization. It maintained that the P643 million figure was gross receipts, not profit, and that total expenses for the fiscal year amounted to P582,903,965, yielding net receipts of P60,375,183 (roughly 9.38% of operating receipts). The Foundation maintained that all revenues and assets were actually, directly, and exclusively used for educational purposes and produced evidence including audited financial statements, the Amended Articles of Incorporation showing non-distribution of profits, and testimony (e.g., independent CPA) supporting the accounting treatment and the educational use of funds. The Foundation also relied on an earlier BIR Ruling (No. 176-88, August 23, 1988) classifying it as tax-exempt.
Procedural History before the CTA
After filing a protest with the BIR and receiving no decisive action, the Foundation filed a petition for review with the CTA Division within the prescribed filing period (registered mail dated April 17, 2006). The CTA computed docket and legal fees and the Foundation paid them nine days later (April 26, 2006). The CTA Division issued a decision on July 16, 2010 cancelling the deficiency income tax assessment, finding no evidence that the Foundation operated for profit or that income inured to members. The CIR filed a motion for reconsideration which the CTA Division denied. The CIR then sought review before the CTA En Banc.
CTA En Banc Ruling and Grounds
The CTA En Banc reversed the Division, dismissing the petition for lack of jurisdiction on the ground that payment of docket and other legal fees within thirty days is mandatory and jurisdictional. Because the Foundation paid the fees nine days late, the En Banc held the appeal was not perfected and the CTA Division had been divested of jurisdiction, rendering the assessment final and executory. The En Banc also suggested that, on the merits, the Foundation’s tax-exempt status had been impliedly revoked by profit-earning activities.
Issues Presented to the Supreme Court
The Supreme Court framed the pivotal issues as: (I) whether the petitioner Foundation lost its tax-exempt status under the 1987 Constitution; and (II) whether the CTA En Banc committed reversible error in reversing the CTA Division and dismissing the petition on jurisdictional grounds.
Supreme Court’s Legal Standard on Constitutional Tax Exemption
The Court reaffirmed that the 1987 Constitution expressly exempts all revenues and assets of non-stock, non-profit educational institutions from taxes and duties provided those revenues and assets are used actually, directly, and exclusively for educational purposes. The Court reiterated the two-element test derived from jurisprudence and tax rulings: (1) the entity must be a non-stock, non-profit educational institution; and (2) the income sought to be exempt must be used actually, directly, and exclusively for educational purposes.
Application of the Legal Standard to the Facts — Organizational Character
On the first element, the Court noted that both parties stipulated the Foundation’s non-stock, non-profit status; the Amended Articles of Incorporation expressly set primary educational purposes and provided that profits from enumerated activities shall not inure to members, trustees, or officers. The Board members did not receive compensation for performance of duties, the Foundation had no capital divided into shares, and there existed an existing BIR ruling recognizing its tax-exempt status. The Court found these facts sufficient to satisfy the first requirement.
Application of the Legal Standard to the Facts — Use of Income
On the second element, the Court examined the Foundation’s financial evidence. It accepted the Foundation’s presentation that the P643 million figure represented gross receipts and that total operating expenses of P582,903,965 reduced net receipts to P60,375,183 (9.38% of operating receipts). The Court observed that the Foundation’s cash and cash equivalents included funds held in trust for capital improvements, scholarships, faculty development, retirement, and other restricted uses. The Court emphasized that generating a surplus does not, by itself, demonstrate a profit-driven character sufficient to defeat tax exemption; responsible administration to avoid deficits and to generate surpluses to sustain operations is not inconsistent with the constitutional exemption. Because respondent offered no evidence that the Foundation’s income inured to private benefit or was used other than for educational purposes, the Court found the second requirement met.
Procedural Jurisdiction: Docket Fees and Equity Considerations
Although the general rule requires timely payment of docket and legal fees to perfect a petition and confer jurisdiction on the CTA, the C
...continue readingCase Syllabus (G.R. No. 202792)
Parties and Nature of the Case
- Petitioner: La Sallian Educational Innovators Foundation, Inc. (De La Salle University-College of St. Benilde Foundation), a non-stock, non-profit domestic corporation organized under Philippine law.
- Respondent: Commissioner of Internal Revenue, vested with authority to decide, cancel, and abate tax liabilities pursuant to Section 204(B) of the Tax Code, as amended.
- Nature: Petition for Review on Certiorari under Rule 16 of the Revised Rules of the Court of Tax Appeals in relation to Rule 45 of the Rules of Court, seeking to nullify the CTA En Banc Decision dated April 19, 2012 and Resolution promulgated on July 17, 2012.
Factual Antecedents — Overview
- On June 17, 2005, the Commissioner issued two Assessment Notices (both numbered 33-FY 05-31-02) for fiscal year ending May 31, 2002, demanding deficiency income tax and deficiency VAT against petitioner.
- Petitioner filed a Protest/Request for Reconsideration on July 20, 2005 to contest the deficiency assessments.
- In view of alleged inaction by the BIR, petitioner filed a Petition for Review with the CTA Division by registered mail on April 17, 2006 (last day for filing). Payment of docket and legal fees was made on April 26, 2006 (nine days after filing).
- Petitioner executed an Agreement Form with the BIR on April 21, 2006 and paid a portion of the assessed VAT (P601,487.70) on May 9, 2006.
- Respondent asserted that petitioner had lost its tax-exempt status due to profit-oriented operations and large cash balances.
Tax Assessments and Computations — Income Tax Assessment
- Alleged deficiency income tax (inclusive of interest): P122,414,521.70.
- Computation as presented in assessment:
- Gross Income per Return (educational): P618,449,079.00
- Less: Expenses per Return (educational): P459,848,867.00
- Net Income per Return: P158,600,212.00
- Add: Adjustments per Investigation:
- Interest expense — disallowed (Sec. 34 NIRC): P21,827,506.66
- Provision for retirement — not deductible (Sec. 34 NIRC): P27,059,453.34
- Provision for doubtful accounts — not deductible (Sec. 34 NIRC): P4,252,393.73
- Not subject to withholding tax — rental: P123,147.00
- Income not subjected to income tax — depository accounts (Sec. 32 NIRC): P575,702,650.00
- Unlocated/unsupported invoices & vouchers (Sec. 34 NIRC): P2,150,270.66
- Total adjustments: P631,170,895.82
- Adjusted taxable income: P789,771,107.82
- Tax due: P78,977,110.78
- Add: 25% surcharge (Sec. 248) and 20% interest (Sec. 249) and other increments to arrive at total amount due of P122,414,521.70.
Tax Assessments and Computations — VAT Assessment
- Alleged deficiency VAT (inclusive of interest): P2,752,228.54.
- Computation as presented in assessment:
- Taxable income subject to VAT comprised of various auxiliary and commercial activities totaling P32,610,546.68.
- VAT output tax due (Sec. 106/08 NIRC): P3,261,054.67.
- Less: Creditable/input taxes carried over and current input tax, adjustments for unsupported items, pro-ration between hotel & school, resulting in net VAT due of P2,372,648.88.
- Less: Payments made (P652,506.04) produced deficiency VAT P1,720,142.84.
- Add: 25% surcharge (Sec. 248) and 20% interest (Sec. 249) yielding total amount due & collectible P2,752,228.54.
- On the same date, a separate demand letter for a compromise penalty in deficiency VAT in the amount of P25,000.00 was also sent.
Procedural History — Chronology and Key Filings
- July 20, 2005: Petitioner filed Protest/Request for Reconsideration with the BIR.
- April 17, 2006: Petition for Review filed with CTA Division via registered mail (last day for filing).
- April 21, 2006: Petitioner executed Agreement Form with BIR.
- April 26, 2006: Payment of docket and other legal fees made (nine days after filing).
- May 9, 2006: Payment of P601,487.70 (VAT liability) to BIR.
- June 15, 2006: Respondent filed Answer before CTA Division.
- June 30, 2006: Petitioner filed Reply.
- July 16, 2010: CTA Division promulgated Decision cancelling Assessment Notice No. 33-FY 05-31-02 for fiscal year ending May 31, 2002 (income tax deficiency of P122,414,521.70).
- August 3, 2010: Respondent filed Motion for Reconsideration in CTA Division.
- November 18, 2010: CTA Division denied respondent’s Motion for Reconsideration by Resolution.
- December 21, 2010: Respondent filed petition for review with CTA En Banc.
- April 19, 2012: CTA En Banc promulgated Decision granting respondent’s petition for review and reversed CTA Division’s Decision and Resolution, dismissing petitioner’s petition on jurisdictional grounds.
- May 18, 2012: Petitioner filed Motion for Reconsideration with CTA En Banc; subsequently denied (Resolution dated July 17, 2012).
- G.R. No. 202792: Petition for Review on Certiorari filed with the Supreme Court; decision promulgated February 27, 2019.
Contentions of the Parties — Respondent
- Respondent alleged petitioner lost tax-exempt status due to profit-oriented operations and excessive profit-earning activities.
- BIR Discrepancy details alleged:
- Foundation, though non-stock, acted as a profit-oriented organization with revenue-operating activities producing approximately P643 million in receipts allegedly from expensive tuition fees.
- Cash in bank amounting to P775 million comprised investing activities and signified insufficient donations and diversion from charitable purposes.
- Cash flows showed substantial use for operating, interest/loan settlement, and investing activities, implying 70% of earnings allocated to administrative purposes and school improvements to increase enrollees and profits.
- BIR asserted previous BIR Ruling for exemption (1988) required reapplication after amendments (e.g., RA No. 8424) and thus exemption was effectively repealed absent a new ruling.
Contentions of the Parties — Petitioner
- Petitioner asserted continuing tax-exempt status as a non-stock, non-profit educational institution under Article XIV, Section 4(3) of the 1987 Constitution.
- Argued the P643,279,148.00 figure represented gross receipts for school year 2002, not profit.
- Presented audited financial statements showing total expenses of P582,903,965.00, yielding net receipts of P60,375,183.00 (9.38% of operating receipts).
- Claimed all income was actually, directly and exclusively used for educational purposes; no income inured to benefit of members, trustees, or officers.
- Pointed to BIR Ruling No. 176-88 (dated August 23, 1988) that declared petitioner a tax-exempt non-stock, non-profit educational institution.
- Emphasized governance and corporate provisions: no capital divided into shares; no distribution of income as dividends; Board of Trustees members not compensated for duties/attendance.
CTA Division Decision (July 16, 2010) — Findings and Disposition
- CTA Division granted the Petition for Review and cancelled Assessment Notice No. 33-FY 05-31-02 for fiscal year ending May 31, 2002, for deficiency inc