Title
Lung Center of the Philippines vs. Quezon City
Case
G.R. No. 144104
Decision Date
Jun 29, 2004
A non-profit hospital sought tax exemption, claiming charitable status. The Supreme Court ruled portions used for hospital operations are exempt, but leased areas for commercial use are taxable.
real property taxes
assessment
patients
A

Case Summary (G.R. No. 91114)

Key Dates and Procedural Posture

Assessment date: June 7, 1993 (real property taxes assessed by Quezon City Assessor).
Administrative remedies: Claim for exemption filed August 25, 1993; denial by City Assessor; appeals to Quezon City Local Board of Assessment Appeals (QC-LBAA) and Central Board of Assessment Appeals (CBAA) with adverse rulings.
Judicial appeals: Court of Appeals affirmed CBAA decision (CA-G.R. SP No. 57014, July 17, 2000). Petition for review on certiorari under Rule 45 filed with the Supreme Court (en banc decision authored by Justice Callejo, Sr., partial grant).

Applicable Law and Constitutional Basis

Constitutional provision applied: 1987 Philippine Constitution, Article VI, Section 28(3) — exempting “lands, buildings, and improvements actually, directly and exclusively used for religious, charitable or educational purposes.”
Implementing statute: Section 234(b), Republic Act No. 7160 (Local Government Code of 1991) — mirrors the constitutional phrase “actually, directly, and exclusively.”
Charter creating petitioner: Presidential Decree No. 1823 (PD 1823), including Section 2 which enumerates specified tax exemptions and privileges, and the petitioner’s Articles of Incorporation as provided in the decree.

Facts Relevant to Exemption Claim

  • The Lung Center is a non-stock, non-profit entity organized to provide specialized care for lung and allied diseases, research and training, and to assist needy persons without discrimination, as set forth in PD 1823 and its Articles of Incorporation.
  • The facility admits paying and non-paying patients; the petitioner claimed at least 60% of its 282-bed capacity (170 beds) are reserved for charity patients and that out-patients for 1995–1999 were 100% charity patients.
  • Portions of the hospital premises are leased to private practitioners (clinics), canteen and store spaces; a portion of the land is leased to Elliptical Orchids and Garden Center for commercial purposes. Rental income reported: P1,136,483.45 (1991) and P1,679,999.28 (1992).
  • The petitioner receives government subsidies and asserted it used income and subsidies to finance hospital operations and charity services.

Procedural and Evidentiary Contentions

Petitioner’s position: It qualifies as a charitable institution under Section 28(3) of the 1987 Constitution and remains entitled to property tax exemption despite receiving revenue from paying patients, leasing portions of its property, and obtaining government subsidies, provided the receipts are devoted to charitable objectives. Cites prior authority (Herrera) to support broad exemption.
Respondents’ position: Petitioner failed to prove that its properties are actually, directly and exclusively used for charitable purposes; leasing to private entities, procedural admission practices, and alleged underpriced leases and possible misuse of subsidies and income weaken the charitable character and preclude exemption for leased/commercial portions.

Issues Presented

  1. Whether the petitioner is a charitable institution within the meaning of PD 1823 and the 1973 and 1987 Constitutions and Section 234(b) of RA 7160.
  2. Whether the petitioner’s real properties (land, building, improvements) are exempt from real property tax under the constitutional and statutory standard requiring actual, direct and exclusive use for charitable purposes.

Legal Standard for Determining Charitable Institution Status

Elements to be considered (as applied by the Court): statutory creation of the enterprise, corporate purposes, constitution and by‑laws, methods of administration, nature of actual work performed, character of services rendered, indefiniteness of beneficiaries, and the use and occupation of properties.
Definition and reach of “charitable”: in law, charity is a gift or institution serving an indefinite number of persons to promote public well‑being (not strictly confined to relief of the poor or sick). The test is whether the enterprise exists to further purposes recognized as charitable rather than for private gain.
Principle on revenue and subsidies: A charitable institution does not lose its charitable character solely because it receives payments from beneficiaries or subsidies from the government, provided receipts are devoted to the charitable purposes and no private inurement results.

Application: Petitioner Found to Be a Charitable Institution

The Court concluded the petitioner qualifies as a charitable institution under the 1973 and 1987 Constitutions and PD 1823, based on: the express purposes in PD 1823 and the Articles of Incorporation (tertiary care, research, training, service to the needy without discrimination), the nature of services rendered, and evidence that income and subsidies were used for hospital operations and patients (including net losses reported in 1991–1992). The Court reiterated that government subsidies are analogous to donations and do not defeat charity status so long as funds are applied to charitable objectives.

Legal Standard for Property Tax Exemption: Actual, Direct and Exclusive Use

The 1987 Constitution and RA 7160 require that to qualify for property tax exemption, lands, buildings and improvements must be actually, directly and exclusively used for charitable purposes.

  • “Actually” and “directly” added to earlier constitutional formulations impose a stricter test than prior Constitutions; reliance on pre‑1973 authority (e.g., Herrera) is inappropriate where it predates these textual additions.
  • “Exclusively” means possession and enjoyment to the exclusion of others; dominant or principal use cannot substitute for exclusive use.
  • Determinative inquiry centers on the actual use of the property itself, not merely on whether income derived is applied to charitable purposes.

Application: Portions of Property Taxable, Other Portions Exempt

  • The Court found petitioner failed to prove that the entirety of its real property was actually, directly and exclusively used for charitable purposes. Evidence showed significant portions leased to private individuals and a large parcel leased for commercial enterprise (Elliptical Orchids and Garden Center), producing substantial rental income (specific amounts cited for 1991 and 1992).
  • Accordingly, leased portions of the land and areas of the hospital leased to private individuals are not exempt from real property tax because they are not actually, directly and exclusively devoted to charitable use.
  • Conversely, portions of the land occupied by the hospital and portions of the hospital actually used for patient treatment (whether paying or non‑paying) are exempt from real property taxes.

Statutory Construction and Limitations under PD 1823

PD 1823’s Section 2 enumerates specific tax exemptions

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