Commission of Internal Revenue vs. Javier, Jr., 199 SCRA 824 , July 31, 1991
Taxation; Court persuaded that there is no fraud in the filing of the return and agrees fully with the Court of Tax Appeals’ interpretation of Javier’s notation on his income tax return filed on March 15, 1978.—We are persuaded considerably by the private respondent’s contention that there is no fraud in the filing of the return and agree fully with the Court of Tax Appeals’ interpretation of Javier’s notation on his income tax return filed on March 15, 1978 thus: “Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation;” that it was an “error or mistake of fact or law” not constituting fraud, that such notation was practically an invitation for investigation and that Javier had literally “laid his cards on the table.”
Same; Same; Fraud in relation to the filing of income tax return discussed in Aznar vs. Court of Appeals.—In Aznar v. Court of Appeals, fraud in relation to the filing of income tax return, was discussed in this manner: xxx The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue
committed mistakes in making entries in the returns and in the assessment, respectively, under the inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the respondent as made in good faith.
Same; Same; Same; Courts never sustain findings of fraud upon circumstances which create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion.—Fraud is never imputed and the courts never sustain find ings of fraud upon circumstances which, at most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion.
Same; Same; Same; Same; There was no actual and intentional fraud through willful and deliberate misleading of the Bureau of Internal Revenue, case at bar; Error or mistake of law is not fraud.—In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. Error or mistake of law is not fraud. The petitioner’s zealousness to collect taxes from the unearned windfall to Javier is highly commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified by the extant facts.
Obillos, Jr. vs. Commissioner of Internal Revenue, 139 SCRA 436 , October 29, 1985
Taxation; The dictum that the power to tax involves the power to destroy should be obviated.—To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated. Same; Partnership; Co-ownership; Where the father sold his rights over two parcels of land to his four children so they can build their residence, but the latter after one (1) year sold them and paid the capital gains, they should not be treated to have formed an unregistered partnership and taxed corporate income tax on the sale and dividend income tax on their shares of the profit's from the sale.—Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the coownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later.
Same; Same; Same; Mere sharing of gross income from an isolated transaction does not establish a partnership.—Article 1769(3) of' the Civil Code provides that ''the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a j oint or common right or interest in any property from which the returns are derived". There must be an unmistakable intention to form a partnership or joint venture.
Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., 682 SCRA 66 , September 26, 2012
Taxation; Tax Exemptions; The Supreme Court holds that Section 27(B) of the National Internal Revenue Code (NIRC) does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G).―The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption. The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-profit educational institutions and proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).
Same; Preferential Tax Rate; Section 27(B) of the National Internal Revenue Code (NIRC) imposes a 10% preferential tax rate on the income of (1) proprietary non- profit educational institutions and (2) proprietary non-profit hospitals.―Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. “Proprietary” means private, following the definition of a “proprietary educational institution” as “any private school maintained and administered by private individuals or groups” with a government permit. “Non- profit” means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution’s purposes and all its activities conducted not for profit.
Same; “Non-profit” does not necessarily mean “charitable.”―“Non-profit” does not necessarily mean “charitable.” In Collector of Internal Revenue v. Club Filipino Inc. de Cebu, 5 SCRA 321 (1962), this Court considered as non-profit a sports club organized for recreation and entertainment of its stockholders and members. The club was primarily funded by membership fees and dues. If it had profits, they were used for overhead expenses and improving its golf course. The club was non-profit because of its purpose and there was no evidence that it was engaged in a profit-making enterprise.
Same; Tax Exemptions; Charity is essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government; The government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden.―To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center of the Philippines vs. Quezon City, 433 SCRA 119 (2004). The issue in Lung Center concerns exemption from real property tax and not income tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated by its relief from doing public works which would have been funded by appropriations from the Treasury.
Same; Same; Charitable institutions are not ipso facto entitled to a tax exemption. The requirements for a tax exemption are specified by the law granting it.―Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax exemption are specified by the law granting it. The power of Congress to tax implies the power to exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that “[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of Congress.” The requirements for a tax exemption are strictly construed against the taxpayer because an exemption restricts the collection of taxes necessary for the existence of the government.
Same; Same; Income Taxation; Real Estate Taxes; For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of the property; The effect of failing to meet the use requirement is simply to remove from the tax exemption that portion of the property not devoted to charity.―For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of the property. The Constitution provides that “[c]haritable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.” The test of exemption is not strictly a requirement on the intrinsic nature or character of the institution. The test requires that the institution use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center of the Philippines did not lose its charitable character when it used a portion of its lot for commercial purposes. The effect of failing to meet the use requirement is simply to remove from the tax exemption that portion of the property not devoted to charity.
Same; Same; The Constitution exempts charitable institutions only from real property taxes. In the National Internal Revenue Code (NIRC), Congress decided to extend the exemption to income taxes.―The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that the institution “actually, directly and exclusively” use the property for a charitable purpose.
Same; Same; Real Estate Taxes; Income Taxation; To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the property “actually, directly and exclusively” for charitable purposes. To be exempt from income taxes, Section 30(E) of the National Internal Revenue Code (NIRC) requires that a charitable institution must be “organized and operated exclusively” for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the National Internal Revenue Code (NIRC) requires that the institution be “operated exclusively” for social welfare.―There is no dispute that St. Luke’s is organized as a non-stock and non- profit charitable institution. However, this does not automatically exempt St. Luke’s from paying taxes. This only refers to the organization of St. Luke’s. Even if St. Luke’s meets the test of charity, a charitable institution is not ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the property “actually, directly and exclusively” for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be “organized and operated exclusively” for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be “operated exclusively” for social welfare.
Same; Same; Even if the charitable institution must be “organized and operated exclusively” for charitable purposes, it is nevertheless allowed to engage in “activities conducted for profit” without losing its tax exempt status for its not-for- profit activities.―Even if the charitable institution must be “organized and operated exclusively” for charitable purposes, it is nevertheless allowed to engage in “activities conducted for profit” without losing its tax exempt status for its not- for-profit activities. The only consequence is that the “income of whatever kind and character” of a charitable institution “from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax.” Prior to the introduction of Section 27(B), the tax rate on such income from for- profit activities was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.
Same; Income Taxation; Preferential Tax Rate; The Supreme Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social welfare purposes insofar as its revenues from paying patients are concerned; Such income from for-profit activities, under the last paragraph of Section 30, is
merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).―The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated exclusively” for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).
Same; Tax Exemptions; A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing in the expenses of government and yet benefits from them.―A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for charitable institutions should therefore be limited to institutions beneficial to the public and those which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to the detriment of the government and other taxpayers.