CTA Case No. 5213 (Decision)

./ �. ',.:. ;�' REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ALABANG COUNTRY CLUB. INC�� Petitioner, - versus - C.T.A. CASE NO. 5213 COitltiSSIONER OF INTERNAL REVENUE. Respondent. X- - - - D E C I S I Cl N This is an assessment case involving Petitioner's alleged-deficiency income taxes for the years 1988, 1989 and 1990 in the total amount of P15,233,233.85. � Records of the case reveal that Petitioner is a non- I stock and non-profit corporation organized "to promote the social, recreational and athletic activities on a non-profit basis among its stockholders��� "<see Amended Articles of Incorporation>. On April 29, 1992, Petitioner received a notice of assessment from the Respondent involving its alleged deficiency income taxes for the years 1988, 1989 and 1990 amounting to P15,233,233.85 computed as follows: ...-:__ ... '

DECISION - C.T.A. CASE NO. 5213 -2- 1988 1989 19!10 P3,298,672.23 Basic taxes P2,501,696.73 P2, 975, 332. 60 Surcharge 824,668.06 Interest 625,424.18 743,833.15 824,668.06 Coaproaise penalty 25,000.00 1, 876, 272. 54 . 1,487,666.30 Pf. 973. 008. 35 Total'-t 25,000.00 25.000.00 ~- 393. 45 1'5. 23!. 832.05 The above assessment was duly protested by the Petitioner on May 25, 1992 with a supplemental �,protest filed on July 6, 1992. On February 27, 1995, Petitioner received a copy o� Respondent's letter dated October 7, 1994 denying its protest, "for lack of legal basis", thus: The qnly issue to be reso~ved here is whe'ther or not the above taxpayer's earnings from its operation of restaurant within the club premises � where foods and beverages were sold to its members and their guests were taxable income. You contended that the said income derived from the sale of ~ood and beverages to the club members and their guests are not taxable pursuant to Section 26 o� the Tax Code which provides as follows: �sec. 26 - Exemption from tax on corporations The fo~~owing organizations shall be taxed under this Title in respect to income received by them as such - " <h) Club organized and cre.ated exclusively for pleasure, recreation and other non-profitable purposes, no part of the net income of which inures to the benefit of any private stockholder or member."

.' DECISION - C.T.A. CASE NO. 5213 -3- However, the above provisions o:f the Tax Code, as amended, has been :further amended by Presidential Decree No. 1959 dated October 15, 1984, particu1ar1y Section 15<3> thereo:f, which provides as :fol1ows: "Section 15(3) On proprietors or operators o:f restaurants, re:freshment par1ors, bars, ca:fes and other eating places which are maintjined within the premises or compound o:f a cockpit, cabaret, night or day c1ub, Jai-A1ai, race track by means o:f a connecting door or passage, twe1ve <12Y.) per centum in the case o:f night or day club, and twenty :five <25Y.) per centum in the case o:f Jai-Alai and race track, o:f their gross receipts. "Where the estab1ishments enumerated above are operated and maintained by c1ubs o:f any kind or nature (irrespective. o:f the disposition o:f their net income and whether or not they cater exc1usively t~ members or their guests>, the ~ keepers o:f the estab1ishment sha11 pay the corresponding tax at the rates fixed above." As the above deficiency tax assessments cover the taxable years 1988 to 1990, the same 'fa11 within the above provision of the 1 1aw. In view of the foregoing, your protest is hereby denied for lack of 1ega1 basis. During the hearing of this case on June 29, 1995, the parties agreed that the on1y issue to be resolved is whether or not the earnings derived by the Petitioner from its operation of a restaurant within the c1ub premises where foods and beverages are so1d to it~ members and guests are taxab1e. 1b48

�l ;, DECISION - C.T.A. CASE NO. 5213 -4- While Petitioner maintained that said earnings are not taxable since it was incorporated �or the sole purpose of "promoting the social, recreational and athletic activities" on a non-profit basis among its stockholders, and hence, exempted ifrom taxation under Section 26<h> of the Tax Code, Respondent opined that said provision of the Tax Code has already been amended by Presidential Decree No. 1959 dated October 15, 1984, particularly Section 15<3> thereof. We do not _agree with the Respondent. The Presidential Decree No. 1959�re�erred to by the Respondent did not in any way amend, Section 26 o� the Tax Code as the former refers to caterer's tax under the Title he,ding� "Other Percentage Taxes" while the latter refers to "Income Taxes". In fine, they are poles apart and do not mean the same thing. The applicable law is indubitably clear, thus: "Sec. 26 - Exemption �rom tax on corporations The �allowing organizations shall be taxed under this Title in respect to income received by them as such - "< h > Club organized and created exclusively �or pleasure, recreation and other non-profitable purposes, no part of the net income of which inures to the benefit of any private stockholder or member." lt55()

DECISION - C.T.A. CASE NO. 5213 -5- for which it should be applied as it is categorically written. This law was never and has never been amended by any law and therefore, still subsist. Hence, We find no compelling reason to adopt the contention of the Respondent a~ such was devoid of any merit. In fact, Petitioner's argument was also supported by existing jurisprudence on the matter for which Jose Ara6as, an acknowledged expert in Taxation tackling on the same issue, opined thus: "The Valley Golf Club which is rented for the purpose of promoting and �'" fostering the game of golf and its operation depends upon funds derived from membership due, green fees, recreational facilities and no profit will inure to any of the members, is not engaged in 'business' and, therefore, not subject to income tax. xxx A golf club which maintains a golf course and operates upon funds derived from membership dues, green fees, proceeds from recreation facilities and receipts from bar and restaurants exclusive to its members, their families, and that no profits will be utilized in the improvement of its facilities is not engaged in business and therefore, not subject to any business tax, and income tax, pursuant to Section 27<h> of the Tax Code." <BIR Ruling No. 372, 4 September 1961>. <Araftas, Updated National Internal Revenue Code <with Notations and Appendices), 1988 Ed., p. 109) ��.

i' DECISION - C.T.A. CASE NO. 5213 -6- Furthermore, in a similar case, involving also parking fees and rental income this Court ruled that for �as long as no profit inures to the benefit of any private individual or entity and that it is in pursuant ... to the benevolent objectives of the organizations then it remains not taxable.� <Young Ken's Christian Association of the Phi.lippinea. Inc. va. CIR. . CTA Case No. 4347, August 11, 1993). He elaborated, thus: In a similar case involving Petitioner's predecessor, Young Ken's Christian Association of Kani.la va. The Co.l.lector of Interna.l Revenue <No. 7988, January 19, 1916), the Supreme Court held that "YMCA is exempt from taxation on the ground that it is a combination of religious, charitable and educational institution and not� founded and conducted for profit". Against the argument that YMCA runs a business because it keeps lodging and boarding houses, the Supreme Co~t states, as follows: "These facts, however, are far from constituting a business in the ordinary acceptance of the word. In the first place, no profit, is realized by the association in any sense. In the second place, it is undoubted as it is undisputed that the purpose of the association is not primarily to obtain money which comes from the lodgers and boarders. The real purpose is to keep the membership continually within the sphere of influence of the institution, and thereby prevent as far as possible the opportunities which vice presents to young men in foreign countries who lack home or other similar influences. We regard this feature of the institutiori not as a business or means of making money, but, rather, as a very .,

DECISION - C.T~A. CASE NO. 5213 -7- e��icient means o� maintaining the influence o� the institution over its members, as we held in the case o� Columbia Club, religious and moral teachings do not always stop with the spoken word; but to be e��ective, the highest degree they must �ollow the young through as many moments o� his li�e as possible. To this end, the feature o� the Young Merf' s Christian Association to which objection is made lends itsel� with great e��ectJ and we are accordingly �creed to regard this activity o� the institution not as business but as a method by which the institution maintain its influence and conserves the bene�its which its organization was designated to con�er." <Underscoring supplied> In the case o� Jesus Sacred Heart Co11ege vs. Co11ector of Internal Revenue <No. L-6807, May 24, 1954, 95 Phil 16) .which invol vee the interpretation o� Section 27<e> the taxpayer maintains that it is exempt �rom taxation under the first part o� the said paragraph< e > which th~ Collector asserts that the income in question <net income �rom tuition and other �ees> was derived �rom an "activity conducted �or profit" and accordingly it is taxable under the proviso o� the same paragraph. The Supreme Court states, as follows: 1. Section 27<e> o� the National Internal Revenue Code, as amended by Republic Act No. 82 <section 5>, exempts �rom taxation the "net income" o� corporations "organized and operated exclusively �or * * * educational purposes * * * no part o� the net income o� which inures to the benefit o� any private stockholder or individual," and it is conceded that plainti�� corporation belongs to this class. To hold that an educational institution is subject to income tax whenever it is so administered as to reasonable assure that it will not incur in de�icit, is

.:. DECISION - C.T.A. CASE NO. 5213 -8- to nullify and de:feat the aforementioned exemption. Indeed, the e��ect, in general, o:f the interpretation advocated by appellant would be to deny the exemption whenever there is a net income, contrary to the tenor o� said section 27<e> which positively exempts :from taxation those corporations or associations which, otherwise, would be subject thereto, because o:f the existence o� said net income. Needless to say, every resoonsible organization must be so run as to, at least insure its existence, by operating within the limits o� its own resources, especially its reaular income. In other words, it should always strive, whenever possible, to have a surplus. Upon the other hand, appellant's pretense would limit the bene:fits o:f the exemption, under said section 27(e), to institutions which do not hope, or propose, to have such surplus. Under this view, the - exemption would apply only to schools which are on the verge o� bankruptcy, �or-unlike the United States, where a substantial number of institutions of learning are dependent upon voluntary contributions and still enjoy economic stability, such as Harvard, the trust fund o� which has been steadily increasing with the years- there are, and there have always been, very �ew educational enterprises in the Philippines which are supported by donations, and these organizations usually have a very precarious existence. The :final result o� appellant's contention, if adopted, would be to discourage the establishment of colleges in the Philippines, which is precisely the opposite of the objective consistently sought by our law. :...� .. �: IL

_-. DECISION - C.T.-A. CASE NO. 5213 -9 In other words, the making of pro�it does not destroy tax exemption o� charitable, benevolent or educational institution. This decision was reiterated in several other decisions o� the Supreme Court, to wit: "The mere charging o� medical and hospital �ees �or those who can a��ord to pay, did not make the institution established �or pro�it or gain. It had to meet expenses �or operation and maintenance, in order to carry its lo�ty purposes to serve humanity". ( UST Hospital E�ployees v. Santo To�as Hospital, G.R. No. L- 6988, October 29, 1955; Collector o� Internal Revenue vs. St. Paul Hospital in Iloilo, L-12127, May 25, 1958; University of San Agustin vs. CIR, et al., No. L-12222. May 28, 1958). Other decisions on the matter are well recited in the Petition �or Review and memorandum o� the Petitioner. Analyzing the particular income involved in ..,the instant case, namely, rental income and parking �ees, the question would be whether or not the net income �or said activities would be subject to income tax considering that they are derived from operation of real property. Following the aforementioned decisions o� the �Supreme Court, as long as no pro�it inures to tQe benefit of any private individual or entity and that it is in pursuant to the benevolent objectives of the organization, then it remains not taxable. However, this court wish to go further and distinguish, for otherwise the absolute application of the above jurisprudence would render nugatory and effect the proviso under Section 27 of the NIRC. I� we may borrow from U.S. authorities on the use o� property, the jurisprudence is as follows: "The exemption in �avor o� property used exclusively �or charitable or educational purposes is not limited to property actually indispensable therefore <Cooley on 1{.

DECISION - C.T.A. CASE NO. 5213 - 10 - Taxation, Vol. 2, p. 1430) but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes, such as in the case of hospitala, 'a school for training nurses, a nurses' home, property used to provide housing �acilities �or interns, resident ._ doctors, superintendents and other members o� the hospital staff, and recreation facilities for student nurses, interns and residents' <84 C.J.S. 621) such as "athletic �ield's including 'a farm used �or the inmates of the institution" <Cooley on Taxation, Vol. 2, p. 1430> J cited �,,. in the case of Jose V. Herrera et al. vs. The Quezon City Board o� Assess�ent Appea1s <L-15270 September 30, 1961). Under the above guidelines, the leasing o�. Petitioner's facilities to small shop owners,� to restaurant and canteen operators and the operation of the parking lot are reasonably incidental to and reasonably necessary �or the accomplishment of the objectives o� the P~titioners. The above decision of this Court dismissing the assessments of alleged deficiency income t~x was a��irmed in toto just very recently by the Court o� Appeals in a Resolution with the former fourth division, CA-GR-Sp. 32007 dated September 28, 1995, the dispositive portion of which is hereby quoted, thus: "WHEREFORE, the motion for reconsideration is GRANTED: the respondent CTA's de.cision is AFFIRMED in toto." \ ' lb:JC .rl.

DECISION - C.T.A. CASE NO. 5213 - 11 - WHEREFORE. in all the foregoing, We hereby RESOLVE to hold the Petitioner HOT LIABLE for the payment of any deficiency income tax. ACCORDINGLY. Respondent is hereby ORDERED to CANCEL the assessment dated April 14, 1992 against Petitioner for lack of merit~ SO ORDERED. GRUBA Judge WE CONCUR: ~ D. ACOSTA Pr siding Judge -~w:! RAIIOH 0. ~w~l A Associate Ju e CERTIFICATION I hereby certify that this decision was reached after consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. Q.~-'Wi '(), ~ ERHESTO D. ACOSTA Presiding Judge Court of Tax Appeals :..� ..