G.R. No. 195909 & G.R. No. 195960; September 26, 2012
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, vs. ST. LUKE’S MEDICAL CENTER, INC., RESPONDENT. (Consolidated Cases)

FACTS

St. Luke’s Medical Center, Inc. (St. Luke’s) is a non-stock, non-profit corporation. The Bureau of Internal Revenue (BIR) assessed it deficiency taxes for 1998, arguing that as a proprietary non-profit hospital, it was subject to the 10% preferential income tax rate under Section 27(B) of the National Internal Revenue Code (NIRC), not the full exemption under Section 30 for charitable institutions. The BIR contended that Section 27(B), introduced in 1997, was a specific provision that amended the prior general exemption, and that St. Luke’s operated for profit, citing that only a small percentage of its substantial revenues were used for charitable purposes. St. Luke’s protested, maintaining its exemption under Section 30(E) and (G) as a charitable and social welfare institution. It argued that the existence of revenue does not automatically destroy its exempt status if the income does not inure to private individuals.

ISSUE

The principal legal issue is whether a non-stock, non-profit proprietary hospital is subject to the 10% preferential tax rate under Section 27(B) of the NIRC, or if it remains fully exempt from income tax as a charitable institution under Section 30.

RULING

The Supreme Court ruled that St. Luke’s remains a tax-exempt charitable institution under Section 30 of the NIRC, and the 10% preferential rate under Section 27(B) does not apply. The Court clarified that Section 27(B) applies to proprietary educational hospitals, which are organized for profit. In contrast, St. Luke’s is a non-stock, non-profit corporation. The legal logic hinges on the distinction between the nature of the corporation and the use of its income. For an institution to be exempt under Section 30, it must be organized and operated exclusively for charitable purposes, and no part of its net income must inure to the benefit of any private individual. The Court, citing Lung Center of the Philippines v. Quezon City, held that the test of charity is the use of the property or income. An institution does not lose its charitable character merely because it derives income from paying patients, provided that the profits are devoted to fulfilling its charitable mission and not distributed as dividends. The Court found that St. Luke’s met this test. Therefore, Section 27(B), being a provision for proprietary entities, is inapplicable. Consequently, St. Luke’s is exempt from the 10% tax, but it remains liable for any deficiency tax on income proven to be unrelated to its charitable purposes, as determined by the Court of Tax Appeals. The BIR’s petition was denied, and the CTA’s decision was affirmed with modification regarding the specific tax liabilities.