COMMISSIONER OF INTERNAL REVENUE v. ST. LUKES MEDICAL CENTER, INC.

REPUBLIC OF THE PHILIPPINES Court of Tax Appeals QUEZON CITY ENBANC COMMISSIONER OF INTERNAL CTA EB NO. 823 REVENUE, (CTA Case No. 7857) Petitione r, Present: -ve rsus - Acosta, P.J. Castaneda, Jr. Bautista, Uy, Casanova, Palanca-Enriquez, Fabon-Victorino, Mindaro-Grulla, and Cotangco-Manalastas, JJ . ST. LUKE'S MEDICAL CENTER, Promulgate d : ~ INC., DEC03 201I2 3 .., u,r:-""'"' Responde nt. x ------------------------------------------------ --- --------------------------x DECISION COTANGCO-MANALASTAS, J.: On a ppeal be fore th e Court En Bane by way of a Petition for Review l fil ed on S e pte mbe r 2 0 , 2 011 by pe tition e r Commission e r of th e Burea u o f Intern a l Reve nue (SIR), pursua nt to Sec tion 18 of Re publi c Ac t No . 11 25, as a m e nd ed by Re publi c Act No . 9282 a nd J,- I Ro llo, p p. 7 -2 1.

DECISION Page 2 of 28 CTA EB No. 823 (CTA Case No . 7857) Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. Republic Act No . 9503, 2 are the August 23, 2011 Resolution3 and June 3, 2011 Decision4 enunciated by the Second Division of this Court in CTA Case No . 7857 entitled "St. Luke's Medical Center, Inc., us. Commissioner of Internal Revenue". Quoted hereunder are the dispositive portions of the assailed Resolution and Decision: Resolution dated August 23, 2011: "WHEREFORE, premises considered, respondent's "Motion for Reconsideration " is hereby DENIED for lack of merit. SO ORDERED ." Decision dated June 3, 2011: "WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly, Assessment Notice No. INC-07-000224, assessing petitioner for alleged deficiency income taxes for the taxable year 2007 is hereby CANCELLED and SET ASIDE. SO ORDERED ." Petitioner prays of this Court to reverse and set aside the August 23, 2011 Resolution and June 3, 2011 Decision and to issue a new ruling ordering respondent St. Luke's Medical Center, Inc. (SLMCI) to pay the amount of P93,074,387.18 as deficiency mcome lax for taxab le year 2007, plus 25% surcharge and 20% annual/-- 2 Otherwise known as "An 1\ct Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level of a Collegiate Court with Special Jurisdiction and Enlarging its Membership, /\mending for the Purpose Certain Sections of Republic Act No. 1125, as amended, Otherwise Known as the Law Creating the Court of Tax Appeals, and for Other Purposes." 3 Rollo, pp. 45-48. 4 Hollo, pp. 23 -44.

DECISION Page 3 of 28 CTA EB No. 823 (CTA Case No. 7857) Commissioner oflnternall?evenue us. St. Luke 's Medical Cente r, Inc. interest for late payme nt from 29 August 2008 (due d a te indicated in the Formal Lette r of De mand) until fully paid pursuant to Sections 248 an d 249 of the Na tion a l Inte rn a l Reve nue Cod e (NIRC) of 1997 , as a mended . THE FACTS The facts of the case, as na rrated by the Second Division of this Courl, a re reproduced h e re und e r: "Petitioner is a non-stock, non-profit corporation duly organized and existing und er a nd by virtu e of the laws of the Republic of the Philippines, with principal office a ddress at St. Luke's Hospita l, E. Rodri guez Blvd., Quezon City. Respondent is the duly a ppointed Commissioner of the Bureau of Inte rnal Revenue (SIR) vested with a uthority to exe rc1se the fun ctions of said office, includin g, inte r al ia, th e power to a b a te or cancel a lax li a bility when the tax or any portion thereof appears to be unjustly or excessive ly assessed . Res ponde nt holds office at th e SIR National Office Building, Diliman, Quezon City. Petitioner received from respondent's Large Taxpayer's Service a Forma l Letter of Demand dated ,July 21, 2008, together with Details of Discrepancies and Audit Result/ Assessment Notice No . INC -07 -000224 d ated August 7, 2 008 , for alleged d e fici e ncy income tax for the taxable year 2007 amounting to P89,627,083.92. On September 19, 2 008 , petitione r filed a n ad ministra tive protest against the a bove- mentioned deficiency tax assessm e nt, praying for its cancellation . O n Nove mbe r 28, 2 008 , pe tition e r received res pond e nt's Final Decision on Disputed Assessment da ted October 22, 2 008 . The Final Decision modifi ed the Formal Lette r of Demand, Detai ls of Discre pancies a nd V Audit

DECISION Page 4 of 28 CTA EB No. 823 (CTA Case No. 7857) Co mmissione r of Inte rnal Revenue us. St. Luke's Medical Center, Inc. Result/ Assessment Notice by increasing the alleged deficiency income tax for the year 2007 to P93 ,074,387. 18. Respondent's main reason for assessing petitioner for deficiency income tax was based on the finding that petitioner is allegedly a non-profit hospital that is liable to pay ten percent (I 0 % ) tax on its net income pursuant to Section 27 (B) of the National Internal Revenue Code (NIRC) of 1997. Hence, petitioner filed the instant Petition for Review on December 23, 2008. Respondent filed her Answer on February 6, 2009, as follows: "5. Petitioner is subject to 10% income tax. Section 27 (B) of th e NIRC of 1997 specifically provides that: 'SECTION 27. Rates of Income Tax on Domestic Corporations. - (B) Proprietary Education Institutions and Hospitals . Proprietary educational institutions and hospitals which are nonprofit shall pay a lax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institu lion or hospital of its pnmary purpose or function. A 'proprietary educational institution ' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the ~

DECISION Page 5 of 28 CTA EB No. 8 23 (CTA Case No. 78 57 ) Commissione r of Int e rna l Re ve nue us. S t. Luke 's Medical Cen ter, Inc. Commission on Hi gh e r Educa tion (CHED) , or th e Tec hnicaJ Education and Skills Deve lopme nt Authority (TESDA) , a s the case m ay be, in a ccordance with existin g la ws a nd regul a tions .' Cry sta l clear from t h e fore goin g provision of la w is t h e fac t th a t non - profit hos pita ls are now li a bl e to p ay te n pe rcen t (10 %) on th e ir tax a ble income exce pt those cove red by Section (D) of th e s am e Cod e . This is a n ew provision introduce d by th e legisl a ture unmistaka bly inte nd ed to ame nd th e exe mption on non -profit hospitals th a t we re previously categorized a s non- stock , non -profit corpora tions und e r Se ction 26 of the NJRC of 1977 , a s amended . Th e aforequote d provision should be distin guish e d fro m S ection 30( E) of th e NIR C of 1997 whi c h provid e s : 'S ECTION 30. Exemptions from Tax on Corpora tions . - Th e followin g organi zation s sh aJI not be taxed und e r thi s T ill e in res pect to in com e received by them a s su ch : XXX XXX XX X (E) Nonstock corporation or associa tion organi zed a nd ope ra ted e xclusive ly for religious , ch a rita ble, s c ie ntifi c , a thl e ti c, or c ultural purposes, or for th e reh a bilita tion of veterans, no pa rt of its net income or a sse t sh a ll be lon g to or inure to the be n e fit of an y m e mbe r , organi ze r , office r or any specific pe rson ; XXX XXX xxx' Th e ba si c diffe re n ce be tween Sec tion 27 (8 ) a nd S ec tion 3 0( E) is th a t th e form e r parti c ul ar ly m e ntions non - profit hospita ls , whil e th e Ia Uer ge n e rally e num e ra te s non -stock corpora tions organized and ope ra te d exclusive ly, amon g oth e r thin gs , for c h a rita ble purpose s . Ba si c a nd ax iom a ti c is th e rul e on sta tutory constru c tion th a t th e specifi c provision should aJ w ay s prevai l ove r th e ge n e raJ provision . Moreove r , Section 27 (8) docs not provide any prohibition m t h e a llocation of its n e t income a s distin guish ed from ~

DECISION Page 6 of 28 CTA EB No . 823 (CTA Case No. 7857) Commissioner of Int ernal Revenue us. S t. Luke's Medical Cen te r, Inc. Section 30(E) which requires that 'no part of its net income or asset shaJI belong to or inure to the benefit of any m ember, organizer, offi ce r or any specific pe rson .' Although th e re is no explicit require m ent for non -profit hospitals to aJlot a certa in percentage of its n et income for charitable purposes, Section 27(8) considers non -profit hospitals as ordinary corporations but subject to a pre fe re nti a l rate of 10% . Pe tition er' s reliance on the alleged le tte r of exemption issu ed to it on 9 Jun e 1990 stating among others that it faJls within the purview of a co rporation for pure ly c harita ble and social welfare purposes, and accordingly, it is exempt from the pay m e nt of income tax on in com e receive d by it as such organization is utte rly misplaced . In li ght of the e nactme nt of the NIRC of 1997 which took e ffect on 1 January 1998, the 1990 ruling being invoked by petitioner is deem ed repealed by Section 27(8) . Thus, petition er , as non -profit hospital is now subject to t h e 10% tax on its taxa bl e in com e. 6. Th e payment of surcharge is mandatory . It has been explained by the Supreme Court'.. . th at it is mandatory to co ll ect pe nalty and inte rest a t th e stated rate in case of d e linqu e ncy . Th e inte ntion of the la w is to discourage d e lay in the paym ent of taxes du e the Government and, in this sense, th e penalty and interest are not pe nal but co mpensatory for the concomita nt use of the funds by the taxpayer beyond the date when he is supposed to have pajd them to the Government. .. .' (Philippine Re finin g Company vs. Court of Appeals, e t al., G.R. No . 118794 , 8 May 1996) . Although petition er fil ed Annual Income Tax Re turns for taxabl e year 2 007 , the said return was evide nlly d e fi cie nt and faJse as it did not contain the income tax du e for the said taxable year. Section 248 (B) categorically provides th at 'in case of willful n eglect to file th e return within the pe riod prescribed by this Code or by rules and regula tions , or in case a false or fr a udulent return is wil lfull y m a d e, the pe nalty to be imposed shall be fifty perce nt (50%) of the tax or of the~

DECISION Page 7 of 28 CTA EB No. 823 (CTJ\ Case No. 7857) Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud: 7. All presumptions are in favor of the correctness of tax assessments. The good faith of lax assessors and the validity of their actions are presumed . They will be presumed to have taken into consideration all the facts to which their attention was called (CIR vs. Construction Resources of Asia, Inc. 145 SCRA 671). It is incumbent upon the taxpayer to prove the contrary (Mindanao Bus Company vs. CIR, 1 SCRA 538; CIR vs. Tuazon, Inc., 173 SCRA 397) and failure to do so shall vest legality on respondent's actions and assessments. 8. Failure to present proof of error in the assessment will justify judicial affirmation of said assessment (Della Motors Co. vs. Commissioner, C.T.A. Case No. 3782, 21 May 1986; Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. Nos. 104151 and 105563, 10 March 1995)." During trial, petitioner and respondent presented documentary and testimonial evidence in support of their respective claims and contentions. On July 23, 2010, considering petitioner's Memorandum filed on July 21, 2010 and respondent's Memorandum filed on ,July 16, 2010, the case was deemed submitted for decision. The issues are as follows: " 1. Whether Petitioner is a non-stock, non-profit corporation organized for charitable and social welfare purposes under section 30 (E) and (G) of the NIRC; 2 . Whether Petitioner is subject to 10% income tax under Section 27(8) of the NIRC; 3. Whether Petitioner SLMC is liable for the surcharge and interest imposed by Respondent CIR; and 4. Whether Petitioner SLMC is liable for compromise penalties for alleged non-compliance with Section 248(A) of the NIRC as amended."~

DECISION Page 8 of 28 CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us. St. Luke's Medical Center, Inc. The foregoing issues can be summarized as- "Whether petitioner is a non-stock, non-profit corporation organized for charitable and social welfare purposes under Section 30(E) and (G) of the NIRC or whether petitioner is subject to 10% income tax under Section 27(8) of the NIRC ."' In its Decisions promulgated on ,June 3, 2011, the Court in Division found merit in SLMCI's contentions and, thus, granted its petition for review. Accordingly, the Court in Division ordered the cancellation and selling aside of Assessment Notice No. INC-07- 000224, assessing the petitioner therein, SLMCI (respondent herein), for alleged deficiency income taxes for the taxable year 2007. The Court in Division denied in its Resolution6 dated August 23, 201 1 the Motion for Reconsideration filed by the respondent therein, Commissioner of the BIR (petitioner herein), for lack of merit. Hence, the filing of the instant Petitionfor Review7. On October 4, 2011, the Court En Bane required respondent SLMCI to file its comment on the subject petition within ten (10) days from notice. Respondent SLMCI failed to file its comment within the period granted, thus, considering the issues and arguments proffered by the petitioner, this Court resolved to give due course to the Petition V and ordered the parties to submit their respective mcmoranda 8 . Supra, Note 4. 6 Supra, Note 3. 7 Supra, Note 1. B Rollo, pp. 57 -58 .

DECISION Page 9 of 28 CTA EB No. 823 (CTA Case No. 7857) Commissioner of Inte rnal Revenue vs. St. Luke's Me dical Ce nter, Inc. On December 2, 2011, petitioner filed a Manifestation9 stating that she is adopti n g the subject Petition for Review filed on September 20, 2011 as her Memorandum in this case. Respondent SLMCI timely filed its Memorandum lO on December 29, 2011. Considering the Manifestation of petitioner and the Memorandum of responde nt, the instant Petition for Review was submitted for decision on January 18, 2012. THE ISSUE/S Petitioner interposed the following sole issue: "WHETHER OR NOT THE SECOND DIVISION OF THE HONORABLE COURT ERRED IN RULING THAT RESPONDENT IS NOT SUBJECT TO TEN PERCENT (10%) INCOME TAX UNDER SECTION 27 (B) OF THE NATIONAL INTERNAL REVENUE CODE OF 1997 (NIRC OF 1997)." Arguments of Petitionerll Petitioner emp h asizes that Section 27 (B) of the NIRC of 1997 imposes on non -profit hospitals a tax of 10% on their taxable income; this new prov1s1on was unmistakably intended to amend the exemption on non - profit hospitals that were previously categorized as~ 9 Rollo, pp. 59 -61 . 10 Rollo, pp. 64 -79 . 11 Rollo, pp. 13- 18.

DECISION Page 10 of 28 CTA EB No . 8 23 (CTA Ca se No. 78 57) Commissione r of Inte rnal R e ve nue vs. St. Luke 's Medical Cente r, Inc. non-stock, non-profit corporations under Section 26 of the NIRC of 1977, as a m ended. Furthe r, pe tition er argues th a t th e above- m e ntioned proviSIOn should b e distin guish ed from Sec tion 3 0 (E) of th e NIRC of 1997 ; the ba si c diffe re nce b e twee n S ection 27 (B) and S ection 30 (E) is tha t th e former pa rti cula rly m e ntions "proprieta ry hospita ls whic h a re non - profi t", whil e th e !a lte r ge n e ra lly e nume ra te s non -stoc k c orpora tion s o rganized a nd ope ra ted exclusive ly , a mon g othe r things , for c h a rita bl e purpose s; it doe s not n ecessa rily follow that wh e n a hosp ita l is non - stoc k, non - profit a nd ope rated exclusive ly for c h a rita bl e purpose, it fa lls within th e purvi e w of S ec tion 3 0 (E) of th e NIRC of 19 97; wh e re th e re is a p a rti c ul a r or spec ia l provision a nd a ge n e ra l provision in t h e sam e sta tute a nd th e la tte r in its most compre h e nsive s e nse would ove rrul e th e form e r , th e pa r tic ul a r or spec ia l provision mus t b e ope ra tive a nd th e ge n e ra l provision must b e ta k e n to a ffec t only th e o t h e r pa rts of th e sta tute to whi c h it m a y prope rly a pply . Also , petitioner ma inta ins tha t: respondent is not opera ting pure ly for c h a rita bl e a nd soc ia l we lfa re purpose s ; re spond e nt 's o pe ra tions indi cate th a t it is es ta blish ed for profit a nd not sole ly for c h a r itabl e or s oc ia l we lfa re purpose s a s only 13% of its ope ra tion s fo r 19 98 we re a lloca ted to c h a rita bl e purpose s; re spond e nt's witn e ss Atty . Alfonso Ancheta categorica lly a nswe red on c ross-exa mination th a t only 10% of th e ope ra tions of th e hospita l is a llocated for c h a rita ble V purpose s .

DECISION Page 11 of 28 CTA EB No. 823 (CTA Case No. 7857) Commissioner oflntemal Revenue us. St. Luke's Medical Cente r, Inc. Lastly , pe tition e r submits that a ll pre sumptions are in favor of the co rrectn ess of tax assessments; a nd fai lure lo prese nt proof of e rror in the assess m e nt will justify judici a l a ffirmation of said assess m ent. Arguments of Respondentl2 Res pond e nt SLMCI opposes pe tition e r's a llegations a nd posits that petitioner erroneously concluded that respondent is a proprietary non-profit ho s pi tal which is taxable und e r Section 27 (B) of the NIRC of 1997. Res pond e n l m a in lai ns that: Section 27 (B) of the Nl RC of 1997 imposes a 10% income lax on non -profit hospita ls lhal are proprietary, but said provision does nol stale that the 10% income tax is imposed on non -stock, non -profit hospita ls; non-stock, non -profit hospitals organized an d operated as c h a ritab le a nd social we lfa re institutions are still exe mpt from in com e tax pursua nt to Section 3 0 (E) a nd (G) of the NIRC o f 1997; t h e legisl ative inte nt was to re m ove the tax exemp tion only of proprietary non - profit hospita ls is evid ent from a comparison of Section 26 (e) of the 1977 NIRC a nd Section 30 (E) of the NIRC of 1997; Section 26 (c) of th e 1977 NIRC speaks of "co rporation or association" in gene ra l terms inte nd ed to a pply lo both stoc k a nd non -stock co rporations or assoc iations that a re non - profi t; when said section was re -e n acted as Sec lion 30 (E) of the Nl RC of 1997, the exe mption from lax was no lon ge r exte nd ed lo a ny non - V profit co rporation or assoc iatio n , the exe mption from inco m e tax 12 Ro llo, pp. 68 - 7 7.

DECISION Page 12 of 28 CTA EB No. 823 (CTA Case No. 7857) Co mmissioner of Inte rnal Revenue us. St. Luke's Me dical Cente r, Inc. under Section 30 (E) of the NIRC of 1997 is now limite d to non -s tock co rpora Lions Lhat are non - profit; a nd LhaL pe LiLione rs insiste nce that res pond e nt is Laxab le und e r Sec tion 27 (B) of th e NIRC of 1997 would therefore expand the coverage of th e provision beyond what the law c learly a nd ex pressly slates, i.e. , that only proprietary, non - profit hospita ls a re subject to the 10% income Lax. Furth e r, re spondent avers that this Court has already ruled in cases involvin g Lh e s a m e issu e Lh al res pond e nl is not a proprietary, non - profit hospila l Laxabl e und e r Sec tion 27 (B) of the NlRC of 1997 , but is a non -sloc k, non - profiL corporation organized for c h a ritable a nd social welfare purposes that is exe mpl from incom e Lax und e r Section 30 (E) a nd (G) of the NIRC of 1997 . F'or its fina l point, res pond e nt argues Lhal it has shown by ove rwh e lmin g pre pond e ra n ce of ev id e nce thal iL is a charitable a nd social welfare institution , a nd thal no pa rt of its income or assets be long or inure Lo a ny membe r , organ ize r, officer, Lrustee or a ny specific person . Res ponde nl co nte nds that the transcript of slenographic nole s of the testimony of Alty. An c h eta will readily show that what h e ac tually said was that "al least" 10% of res pondent's operations a re a lloca led to charitable purposes; that the Lestimony of Alty . An c h e la was not given in the insla nt case but in a noth e r case docketed as CTA Ca s e No . 6993 invo lving the same pa rti es but of a V diffe re nt taxa ble year.

DECISION Page 13 of 28 CT/\ EB No . 823 (CTA Case No. 7857 ) Commissione r of Int e rnal Revenue vs . S t. Luke's Medical Cente r, Inc. THE RULING OF THE COURT EN BANC In this case, pe titione r conte nds that re spond e nt SLMCI , a s a proprietary non - profit hospita l, is lia bl e to pay th e income tax ra te of 10% on its taxable in co m e und e r S ection 27 (B) of th e NIRC of 1997 ; a nd a rgu e s th at this new provision was unmista ka bly inte nded to a m end th e exe mption th at non-profit hospita ls previously e njoyed as non -s toc k, non -profit corpora tion s und e r Section 26 of th e NIRC of 1977, a s a m e nd ed . S ec tion 27 (B) of th e NIRC of 19 97 sla tes th a t : "SEC . 27 . Ra tes of In com e Tax on Dom esti c Corpora tion s .- XXX XXX XXX "(B) Proprietary Ed u cational Ins titutions and Hospitals . - Propri e tary educa tional institutions and hospitals which are non -profit shall pa y a tax of ten pe rcent (10%) on th eir taxable in com e exce pt those cove red by Subsection (D) h e reof: Provided , That if th e gross income from unrela ted tra de, busine s s or oth e r a ctivity exceeds fifty pe rce nt (50% ) of th e total gross income de rived by su ch edu cational institutions or hospita ls from all source s , th e l ax pre s c ribed in Subsection (A) h e re of sh a ll be imposed on th e e ntire taxable in com e. Fo r purposes of thi s Subsection , th e te rm 'unrelated trade , business or other activity' m eans any tra de, bu s iness or oth e r ac ti vity, th e condu c t of whi c h is not substan tially re la ted to the exercise or performance by su ch educational institution or hospital of its prima ry purpose or function . A 'proprietary educational institution' is any privat e s c hool m aintain e d and a dmini s te red by pri vate individu als or groups with an issu ed pe rmit to ope ra te from th e Departme nt of Education , Culture an d Sports (D EC S) , or th e Commission on High e r Edu cation (C H E D) , o r th e Techni cal Edu cation and Skills Deve lopme nt Authority (TE SDA) , a s th e cas e m ay be, in a ccordance with existin g la ws a nd regula tions ." (Und e rscorin g suppli e d) Re spond e nt, on th e oth e r h a nd , cla ims th a t it is a non -s toc k , non - profit co rpo ration orga ni zed for c h a rita bl e a nd s oc ia l we lfa re purpose s th a t is exe mpt from in come lax und e r Sec tion 3 0 (E) a nd (G) ~

DECISION Page 14 of 28 CTJ\ El3 No . 823 (CTA Ca se No. 7857) Commissione r of Int e rnal Revenue us. S t. Luke 's Medical Cente r, Inc. o f th e NIRC of 1997; and conte nts that S ection 27 (B) of the NIRC of 19 97 impose s a 10% in come tax on non - profit hospita ls th a t a re proprie tary, bul said provision doe s not sta le th a t th e 10% income tax is imposed on non -stock, non -profit hospita ls like SLMCI. Pe rtin e nt portions of S ec tion 30 (E) a nd (G) of th e NIRC of 1997 provid e: "SEC. 30. Exemptions from Tax on Corporations. - The following organiza tions shall nol be taxed under this Title in r e spect to income rece ive d by th e m as such : Xxx "(E) Nonstock corpora tion or a ssoci a tion organized and operated exclusively for reli gious , charitable , s c ie ntifi c, athl e ti c, or cultural purpose s , or for the reh a bilita tion of vetera ns, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person; XXX "(G) Civic leagu e or organi zation no t organi zed for profit but ope ra te d exclusi ve ly for th e promotion of soc ia l we lfare; XXX "Notwithstanding the prov1s1ons in th e preceding paragraphs , the income of whatever kind and character of the foregoing organizations from a ny of their properties , real or personal , or from any of their activities conducted for profit regardless of the disposition made of such income , shall be subject to tax imposed under this Code." (Emphasis suppli e d) Afte r du e consid e ra tion o f th e a rg um e nts of both p a rti e s, th e laws a nd rece nt jurisprud e n ce re leva n t lo th e ca s e a l ba r , We a re inclin ed to pa rti a lly g rant lh e Pe tition for Revie w of th e Commission e r V of BIR.

DECISION Page 15 of 28 CTA EB No. 823 (CTA Ca se No. 7857) Co mmissione r of Int e rnal Re ve nue us . St. Luke's Medical Cente r, Inc. In the disposi tion of this prese nt controversy, a pa rt from the ex press provisions of S ection 27 (B) a nd S ec tion 3 0 (E) a nd (G) of th e NIRC of 1997, a s a m e nded , th e Court En Bane ta kes its bearing from th e rece nt pronoun ce m e nt of th e Supre m e Court in t h e ca s e of Co mmiss ione r of Inte rnal Re ve nue us. S t. Luke's Medical Ce nte r, Inc., 13 -- co ns id e rin g t h a t "JtJh c Supre m e Court by tra dition a nd in our sys te m of judic ia l a dministra tion , h a s the la st word on wh a t th e la w is ; it is t h e fin a l a rbi te r o f a ny just ifi a bl e co ntrove rsy"1 4 . In th e said cas e, th e Hi g h Court c la rifi ed th e lin ge rin g issu e s / qu e stions , z. e ., 1ss u es as to t h e imposition of t h e in come tax ra te o f 10% on t h e taxa ble in co m e of propri e ta ry non -profit hospita ls und e r Sec tion 27 (B) ; th e in come ta x ex e mp t ions of propri eta ry non - profit ho s pi tals und e r S ection 3 0 (E) a nd (G) of th e NIRC of 1997 , a s a m e nd ed ; a nd t h e qu es ti o ns a s to wh e n a propri e ta ry non - profit h o spi tal subj ect to t h e in com e tax ra te of 10% on its taxa ble in come? ; a nd wh e n is it considered exempt from income tax? Firs t, th e Supre m e Court d e s c ribed th e rate o f tax imposed und e r S ectio n 2 7 (B), th e qua lifi cations of h o spita ls in ord e r fo r th e s a id ra te to a pply, t h e e ffec t of th e introduction of th e a fore s a id section , a nd likewise ex pl a in ed th a t S ec tion 27 (B) a nd S ec ti o n 3 0 (E) a nd (G) of th e NIRC o f 1997 can be constru ed toge th e r withou t t h e re m ova l of s u c h tax exe mption und e r th e la tte r provi s ion, z. e ., a /r proprie ta ry n o n - profi t h os pita l w hose in come from activities 13 G. !~. No. 19590 9 a nd 195960 , Se pte mber 26, 2 01 2. 14 Commissione r of Inte rna l Revenue (CIR) us. Miche l J Lhuille r, G. R. No. 150 947, J u ly 15, 200 3.

DECISION Page 16 of 28 CTA EB No. 8 23 (CTA Ca se No. 78 57) Commissione r of Int e rnal Re ve nue us . St. Luke's Me dical Cente r, Inc. conducted for profit is subjected to the 10% tax ra te unde r Section 2 7 (B) may still re ta in its lax exe mpt sta tus und e r S e ction 30 (E) a nd (G) for its not-for-profit activities , thus: "Th e Court parlly gr a nts the pe tition of th e SIR but on a different ground . We hold that Section 27(8) of the NIRC does not remove the income lax exemption of proprietary non-profit hospitals und e r Section 30(E) and (G). S ection 2 7(8) on one hand , a nd S ection 30(E) and (G) on the oth e r hand, can be construed together without the removal of such tax exemption. Th e e ffect of th e introdu c tion of S ection 27(8) is to subj ect th e taxable income of two specifi c institutions, name ly, proprie tary non-profit educa tional institutions a nd proprietary non-profit hospita ls, among the institutions covered by Section 30 , to the 10% pre fe rential ra te und e r S ection 2 7(8) instead of th e ordin a ry 30% corpora te ra te unde r the la st paragra ph of S ection 3 0 in re la tion to S ection 27(A) ( 1). "S ection 2 7(8) of th e NIRC impose s a 10% pre fe re ntial tax r a te on the in com e of ( 1) propri e tary non - profit edu cation al institu Lions and (2 ) proprie tary non -profit hospitals . The only qualifi cations for hospital s are th a t th ey must be proprietary an d non - profit. "Proprie tary" m eans pri vate , following th e d e fini tion of a "proprie ta ry e du cational institution " a s "any private school m a inta ined and a dministered by private individu a ls or groups" with a government pe rmit. "Non -profit" m eans no net income or a sse t a ccru es to or benefits any m embe r or specific person , with all the n e t in com e or a s se t d evote d to th e institution 's purpose s and all its ac tiviti e s ." (Unde r scorin g s uppli ed) S econd, th e Hig h Court disc ussed S ection 3 0 (E) a nd (G) of the NIRC of 1997, a s a m e nd ed , (the provision unde r which the responde nt SLMCI is claiming income tax exemption) by e nume ra ting the esse ntia l requisite s in ord e r for th e in com e rece ived by a c h a rita bl e corpora ti o n o r a ssoc ia ti o n lo be conside red exe mpt from in come tax. Th e discussion hi ghlights th e Hi g h Court's pronounce m e nt th a t "[tjo be exempt from income taxes, Section 30(�) of the NIRC requires that a charitable institution must be "organized and operated exclusively"~

DECISION Page 17 of 28 CTA EB No. 823 (CTA Case No. 7857) Commissioner of Internal Revenue us. St. Luke 's Medical Center, Inc. for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NJRC requires that the institution be operated exclusively" for social welfare." viz: "Section 30(E) of the NIRC provides lhal a charitab le institution must be: (l) A non -stock corporation or association; (2) Organized exclusively for charitab le purposes; (3) Operated exclusively for charitab le purposes; and (4) No part of its net income or asset shall belong to or inure to lhe benefit of any member, organizer, officer or any specific person. "Thus, both the organization and operations of the charitab le institution must be devoted "exclusively" for charitable purposes. The organization of the institution refers lo its corporate form, as shown by its articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC specifical ly requires that the corporation or association be non-stock, which is defined by the Corporation Code as "one where no part of its income is distributable as dividends lo its members, trustees, or officers" and that any profit "obtain ledl as an incident lo its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized." However, under Lung Center, any profit by a charitab le institution must nol only be plowed back "whenever necessary or proper," but must be "devoted or used altogether lo the charitable object which it is intended to achieve." "The operations of the c h aritable institution general ly refer lo ils regular activities. Section 30(E) of the NlRC requires that these operations be exclusive lo charily. There is also a specific requirement lhal "no part of llhel nel income or asset shall belong lo or inure lo the benefit of any member, organizer, officer or any specific person." The use of lands, buildings and improvements of the institution is but a part of its operations. "There is no dispute lhal Sl. Luke's is organized as a non -stock and non - profit charitab le 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 charily, a charitable institution is not ioso [acto tax exempt. To be exempt from real property taxes, Section 28(3) , Article VI of the Constitution requires that a ~

DECISION Page 18 of 28 CTA EB No. 8 23 (CTA Ca se No. 78 57) Commissione r oflnte mal Re ve nue us . St. Luke's Me dical Cente r, Inc. charita ble institution use the prope rty "actually, dire ctly and exclusive ly" for charita ble purposes . To be exe mpt from income taxes , Section 30(E) of th e NIRC require s that a c harita bl e institution must be "organized and operated exclusively" for c h a rita bl e purposes . Likewise, to be exe mpt from in come taxes, Section 30(G) of th e NIRC requires tha t the institution be ope ra te d exclusi vely" for soc ia l we lfare ." Following th e foregoing disc ussion, the Supre m e Court kee nly s tee red th e disc ussion to th e la st pa ra gra ph of S ec tion 3 0 of th e NIRC a nd stre ssed its poin t th at this la st pa ragra ph qu a lifie s th e words "o rgani zed a nd ope rated exclusive ly" by providin g th a t "income of whateve r kind and characte r of the foregoing organizations xxx xxx from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code ." Simply put, eve n if th e c h a rita bl e institution mu st be "organized and operated exclusively" for c h a rita bl e purpose s , it is still a llowe d to e n gage in "activities conducted for profit" wi th o ut los in g its l ax exe mpt sta tus for its not-for-profit activities . Th e only consequen ce is tha t the "income of whatever kind and character" o f a c h a rita bl e institution "from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax. ", viz: "Howeve r , th e la st pa ragra ph of Section 3 0 of th e NIR C qualifie s the words "organized and opera ted exclusive ly" Qy providing th a t: No twithsta ndin g th e provisions in th e prece din g paragra phs , th e incom e of wh a teve r kind and chara cte r of the foregoin g organi zations from any of th e ir prope rti e s , real or personal , or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. "In short, th e la st pa ra gra ph of Section 3 0 provide s th a t if a lax exe mpt ch arita b le institution condu c ts "any" a ctivity for profit, such activity is not lax exempt eve n a s its not-for- ~

DECISION Page 19 of 28 CTA EB No . 823 (CTA Case No. 7857) Commissione r of Int e rnal Revenue us. St. Luke's Medical Cente r, Inc. profit activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the "Inion-stock corporation or a ssociation !must bel organized and operated exclusively for x x x charitable x x x purposes x x x." It likewise qualifies the requirement in Section 30(G) that the civic organization must be "ope rated exclusively" for th e promotion of social welfare. "Thus, eve n if the charitable institution must be "organi zed and operated exclusively" for charitable purposes, it is n eve rth e less allowed to e ngage in "activiti es co nducted 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 charitab le 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 (8) , the tax ra te on such income from for-profit activities was the ordinary corpora te rate under Section 27(A). With the introduction of Section 27 (8) , th e lax ra te is now 10%." (Und e rscorin g supplied) Finally, consiste nt with the a bove-discussion, the Supreme Court rul e d th a t St. Luke's is a corporation that is not "operated exclusively" for charitable or social w e lfare purposes insofar as its revenues from paying patie nts a re co n cerned. The Supre m e Court d eclared that the Pl. 73 billion from paying patie nts are mcome rece ive d from "activities conducted for profit". Th e Supre m e Court expla ined, thus: "In 1998, St. Luke's h ad total revenu es of PI ,730 ,367,965 from services to paying patients. It cannot be disputed that a hospita l which receive s approximately P1 .73 billion from paying patients is not an institution "operated exclusive ly" for charitable purposes. Clearly, revenu es from paying patients are income received from "activities conducted for profit." xxx. XXX XXX XXX "In Lung Center, this Court declared : "le lxc lusive" is defined as possessed and en joyed to the exclusion of others; debarred from participation or enjoy m e nt ; and "exclusi ve ly" is d e fin ed, "in a manner to exc lud e; as en joyin g a privilege exc lusi ve ly." x x x ~

DECISION Page 20 of 28 CTA E B No. 8 2 3 (CTA Ca s e No . 7 857) Co mmiss ione r of Int e rnal Re ve nue us. St. Luke's Medical Cente r, Inc. The words "domina nt use" or "princ ipa l use" cannot be substituted for th e words "used e xclusi ve ly" with out doing viole n ce to th e Co nstitution a nd the la w . Solely is synonymous with exclusively. "The Court cannot expand th e mea ning of th e words "ope r a ted exclusive ly" without violating th e NIRC . Services to paying patients are activities conducted for profit. They cannot be considered any other way. There is a "purpose to make profit over and above the cost" of services. The Pl.73 bi llion total reve nu es from paying pa tients is not eve n incid e ntal to St. Luke's c harity expenditure of P2 18 , 187,498 for non-paying patients. "St. Luke's claims th a t its c harity expe nditure of P2 18 , 187 ,498 is 65.20% of its opera ting income in 1998. However , if a part of the remaining 34.80% of the opera ting income is reinvested in prope rty, e quipm e nt or fac iliti es used for service s to paying and non-paying patients, the n it cannot be s a id tha t the incom e is "d evoted or use d altogether to th e charitable objec t whi c h it is inte nd ed to a chieve. " Th e in come is p lowed back to th e corpora tion not e ntire ly for c h arita ble purposes , but for profit a s w e ll. In any ca s e, th e last paragraph of Section 30 of the NIRC expre ssly qualifie s that income from activities for profit is taxa ble "regardless of the disposition made of such income ." XXX XXX XXX "The qu e stion wa s wh e th e r h a ving a hospital is e sse ntia l to a n e du cational institution like th e Coll ege of Me dicin e of th e University of Sa nto Tom a s. Se n a tor Cu e nca answe re d tha t if th e hospital h a s pa id rooms ge nera lly occ upied by pe ople of good economi c standing, the n it should be subj ect to income lax. He said tha t this wa s one of th e reasons Congress inserted th e phra s e "or a n y a ctivity condu c ted for profit. " "Th e qu e stion in ,Jesu s Sa cred H eart College in volve s a n e du cational institution. Howeve r , it is app lic abl e to charita ble institutions because S e n a tor Cuen co 's re sponse shows an inte nt to focus on th e ac tiviti e s of ch a ritabl e institution s. Ac ti viti e s for profit should not e sca pe th e re a c h of taxa tion . Being a non-stock and non-profit corporation does not, by this reason a lon e, compl e te ly exe mpt an institution from tax . An institution cannot use its corpora te form to prevent its profita ble activities from being taxed . "Th e Court finds th a t St. Luke 's is a corpora tion th a t is not "ope ra ted e xclusi vely" for c haritab le or social welfare purpose s insofar a s its revenu es from paying patie nts are conce rned . This ruling is ba s ed not on ly on a stri c t inte rpre ta tion of a provision gra nting lax e xe mption, but a lso on th e cl e ar and pl a in tex t of Section 30(E) a nd (G) . S e ction 30(E) and (G) of the ~

DECISION Page 21 of 28 CTA EB No. 823 (CTA Case No. 7857) Commissione r of Inte rnal Revenue us. St. Luke's Medical Cente r, Inc. NIRC re quire s th a t an institution be "operated exclusively" for charitable or social welfare purposes to be completely exempt from income tax. An institution under S ection 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 para gra ph of Section 30, is m e re ly sub ject to income tax, previously at the ordinary corporate rate but now at the prefe re ntial 10% ra te pursu a nt to Section 27 (8) . XXX XXX XXX "St. Luke's fa ils to m eet the require m e nts under Section 30(E) and (G) of th e NIRC to be completely tax exempt from a ll its income . However, it re m a ins a proprie tary non - profit hospita l under Section 27(8) of the NIRC as long as it does not distribute a ny of its profits to its members a nd such profits are reinvested pursu a nt to its corporate purposes. St. Luke's, as a. propri e ta ry non - profit hospital , is e ntitl e d to th e pre fe re ntial tax rate of 10% on its n e t income from its for-profit activities." (Underscoring supplied) Conspicuously, the prese nt case fits pe rfectly into th e mold of the a bove-quoted case e n titled Commissioner of Internal Revenue vs. St. Luke 's Medical Cente r, Inc., G .R. No. 195909 a nd 195960, September 26, 2 01 2. Th e facts in the insta nt case, t h e issu e, a nd laws a ppli cabl e, a nd eve n the pa rti es involved a re substantially similar to those of G.R. No. 195909. Thus, applying the forego ing principles la id down by the Supreme Court in G.R . No. 1959 09 to t h e insta nt case, the in escapa bl e conclusion is th at res pond e nt SLMCI is li ab le for defi cie n cy in co m e tax in 2 007 und e r Section 2 7 (B) of the NIRC of 1997, as a m e nd ed . As cited , be fore a co rporation or association m ay be exempt from incom e tax und e r Section 30 (E) and (G) of the NIRC of 1997, as a mended, followin g requisites must be satisfied: ( 1) V A non -s toc k corpora tion or a ssoci a tion ;

DECISION Page 22 of 28 CTA EB No. 823 (CTA Case No. 7857) Commissione r of Int e rnal Revenue vs. St. Luke 's Medical Cente r, Inc. (2 ) Organized exclusively for charitable purposes; (3) Operated exclusively for charitable purposes; and (4) No part of its net income or asset shaJI be long to or inure lo the be nefit of any member, organizer, office r or any specific person . As regards the first, seco nd , a nd fourth requisite, this Court agrees with the Court in Division in finding that responde nt SLMCI sufficiently satis fi ed these requisites. SLMCI is a non-stock, non - profit c orporat ion organized for c haritable and soc ial we lfare purposes as indicated in its Ame nd ed Articles of Incorporation; and on the basis of a judici a l a ffid a vit, wh ich was not con tested by the petitioner, a ttesting that no part of SLMCI's income or net asset inures to the benefit of any trustee , respondent SLMCI is deemed to ha ve satisfied the fourth requisite. It is the third requisite which res pondent SLMC I ulle rly fa iled to satisfy. In lin e with the a bove-me ntion ed jurisprude ntia l prece pts e nun c ia ted in G.R. No. 1959 091 5, and based on th e ex plicit provisions of Sec tion 30 (E) and (G) of th e NIRC of 1997 , as a m e nd ed , and a lso on the strict inte rpretation of a provtston granting tax exe mption , the Court holds that res pond e nt SLMCI is not "operated exclusive ly" for c h a rita ble or social welfare purposes insofar as its reve nu es from paying patie nts are concerned. The Supreme Court expressed that '"Se rvice s to paying pa ti e nts are act ivities conducted for profit. Th ey~ 1" Com missioner of Int e rnal Revenue vs. St. Luke's Medical Cen te r, Inc., G.R. No . 195909 and 19 5960, September 26, 20 12.

DECISION Page 23 of 28 CTA EB No . 823 (CTA Case No. 7857) Commissioner of Inte rnal Revenue vs. St. Luke's Medical Cente r, Inc. cannot be considered any other way. There is a "purpose to make profit ove r and above the cost" of services."' Reco rds show th at res pondent SLMCI d eclared the amount of P4,680, 298,23 1 as "Reve nu e from S e rvices to Patie nts", the expenditure of P511 ,843,073 as "Free Services", a nd the a mount of P753 , 166,477 as "Excess of Reve nu e Ove r Expenses". The contrasting diffe re n ce betwee n the sizeable a mount of revenu e s rece ived by SLMCI from pay in g pa tients of approximately P4.6 billion a nd the a mount a llotted by SLMCI to "Free Service s" which is roughly PS . 1 million , furthe r buttress the findin g that respondent SLMCI is not a n institution "operated excl usive ly" for charitable purposes. Th e Supreme Court stressed in G .R. No. 19590916 t h at th e operations of the c h a ritabl e institution ge n e ra lly refe r to its regul a r ac tiviti es a nd Section 30 (E) re quires th a t th ese operations be exclusive to c h a ri ty. In the case of Lung Center of the Philippines us. Quezon City 17, the Supreme Court expounded on the meaning of exclusive: "[elxclusive" is d efined as possessed and e njoyed to the exclusion of othe rs; d ebarred from participa tion or e njoym ent; and "exclusive ly" is d e fined, "in a manner to exclud e; as enjoying a privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for th e words "used exclusively" without doing viole nce to the Constitution and the law. Solely is synonymous with exclusively. He n ce, if a pa rt of the remaining P7.5 million ("Excess of fr. Reve nu e Ove r Expenses") '" is re inve sted in prope rty, equipm e nt, or 16 S upra, Note 15 . 17 G . l~ . No . 144104, June 29 , 2004 .

DECISION Page 24 of 28 CTA EB No. 823 (CTA Case No . 7 857) Commissione r of Int e rnal Re ve nue vs. St. Luke's Me dical Center, Inc. facilities used for services to paying and non-paying patients, then it cannot be said that the income is "devoted or used altogether to the charitable obj ec t which it is intended to achieve". The .mcome .IS plowed back to the corporation not e ntirely for charitable purposes, but for profit as weii."'I 8 In support of the above finding, We reite rate th e ratiocination of the Supreme Court in G .R. No. 19590919: "In 1998, St. Luke 's h ad total revenues of Pl,730,367,965 from se rvices to paying patients. It cannot be disputed that a hospital which receives approximate ly Pl. 73 billion from paying patients is not an institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are income received from "activities conducted for profit." xxx . XXX XXX XXX "In Lung Center, this Court declared : :J.elxclusivc" is defined as possessed and enjoyed to the exclusion of others; de barred from pa rticipation or e njoy ment ; and "exclusively" is defined , "in a m a nn e r to exclude; a s e njoying a privilege exclusive ly. " x x x The words "dominant use" or "principal use" cannot be substituted for th e words "used excl usive ly" without doing violence to the Constitution and the law. Solely is synonymous with exclusively. "The Court cannot expand the meaning of the words "operated exclusively" without violating the NJRC. Services to paying patients are activities conducted for profit. They cannot be considered any other way. There is a "purpose to make profit over and above the cost" of services. The P1.73 billion tolaJ revenues from paying patients is not even incid e nlaJ to St. Luke's charity expenditure of P218 , 187 ,498 for non -paying patients. "S l. Luke's c laims th a t its charily expenditure of P2 18 , 187,498 is 65.20% of its operating income in 1998. However, if a part of V th e re maining 34.80% of the ope rating income is reinves ted in prope rty, equipment or facilities used for services to paying 18 Commissione r of Inte rnal Revenue vs. St. Luke's Medical Cente r, Inc., G.R. No . 195909 a nd 195960, September 26, 20 12 citing Lung Cente r of the Philippines vs. Quezon City, G.R. No. 144104, June 29, 2 004 . 19 Supra, Note 15.

DECISION Page 25 of 28 CTA EB No . 823 (CT/\ Case No. 7857) Commissioner of Inte rnal Revenue vs. St. Luke's Medical Cente r, Inc. and non-paying patients, then it cannot be said that the income is "devoted or used altogether to the charitable object which it is intended to achieve." The income is plowed back to th e corporation not entirely for charitable purposes, but for profit a s we ll . In any case, the last paragraph of Section 30 of the NIRC expressly qualifi e s that income from activities for profit is taxable "regardless of the disposition made of such income." XXX XXX xxx'' Neve rth e less , eve n if this Court rul es thal res pond e nt is a n institution "operated exclusively" for charitable purpose, re sponde nt may still be held liab le for d e fici e ncy incom e tax und e r of the last pa ragraph of Sec tion 30 of the NIRC of 1997, a s a m e nd ed. Th e last pa rag ra ph of Section 3 0 provides lhal if an institution, considered a s tax exe mpt under S ec tion 30 (E) and (G), conducts "any" activity for profit, lhe income from such activity is not lax exe mpt rega rdl e ss of the disposition m a d e of such income and eve n as its not-for-profit activ iti es re m a in tax exe mpt. It bears to stress, howeve r , th at "[a ]n institution und e r S ec tion 3 0(E) or (G) do es nol lose ils tax exe mption if il earns income from its for- profit activities. Such in co m e from for- profit activiti es, under the lasl p a ragraph of S ection 30, is m e re ly s ubject lo income lax, previously a t the ordina ry corpora te ra le but now a l the pre fe re nti a l 10% ra le pursuant lo Section 27(8)."20 As h e ld by lh e Supre m e Court, "revenues from paying pa ti e nts a rc m come rece ived from "activities conducted for profit."2L Thus , in (r, this case, a lbe it we consider respond e nt SLMCI an institution 2o Supra, Note 15. 21 Supra.

DECISION Page 26 of 28 CTA EB No. 823 (CTA Case No. 7857) Co mmissione r of inte rnal Revenue vs. St. Lu k e's Medical Center, Inc. "operated exclusive ly" for charitable purpose s, its reve nu es rece ived from pay in g pati e nts a re regarded as income from "activities conducted for profit" a nd therefore subj ect to tax unde r the Tax Code regardless of th e disposition mad e of such income. "Prior lo the introduction of Section 27(8), the tax rate on such income from for- profit ac tiviti es was the ordinary co rporate ra te und e r Section 27(A). Wi th the introduction of Section 27 (8), the lax ra te is now 10 %."22 Res pond e nt fa iled to m eet a ll the requirements und e r Section 30 (E) a nd (G) of the NIRC of 1997, as a m e nd e d, to be completely tax exe mpt from a ll its in co m e. Non eth e less, co nsid e rin g th at it re m a ins a proprie ta ry non - profit hospita l und e r S ection 27 (B) of the NIRC of 1997 as lon g as it docs not distribute a ny of its profits lo its m e mbe rs a nd such profits a re re inve sted pursu a nt lo its co rpora te purposes, res pond e nt SLMC I is e ntitl ed lo the pre fe re nti a l tax rate of 10% on its net incom e from its "activities co ndu cted for profit". 23 Finally, as regards the interest a nd surcharges, the Court finds that res pond e nt SLMC I h as a d equate reasons to re ly on the letter dated June 6, 1990 by th e BlR, which d eclared that res ponde nt is "a co rpora tion for pure ly c h a ritabl e a nd social we lfa re purposes". He n ce, the re is sufficient justification lo delete the imposition of surcharges and inte rest. This is in kee pin g with the rulin g of the Supreme Court in G. R. No. 1959 0924 , viz: ~ 22 Supra, Note 15 . 23 Supra. 24 Supra.

DECISION Page 27 of 28 CTA EB No. 823 (CTA Case No. 7857) Co mmissione r of Inte rnal Revenue us. St. Luke 's Medical Center, Inc. "St. Luke's is th e re fore li a ble for d eficiency income tax in 1998 under Section 27(8) of the NIRC . However, St. Luke's has good reasons to rely on the letter da ted 6 June l 990 by the SIR, which opined that St. Luke 's is "a corporation for purely charitable and sociaJ welfare purposes" and thus exempt from income lax . In Michae l J Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that "good faith and honest b e li e f that one is not subject lo tax on the bas is of previous interpretation of government age ncies tasked to imple m e nt the lax law, are sufficient justifica tion to delete the imposition of surcharges and interest." WHEREFORE, pre m1ses considered, the Petition for Review is hereby PARTIALLY GRANTED. The Decision of the Second Division of this Court d ated clune 3, 2011 a nd its Resolution d ated Au gust 23, 2 011 in CTA Case No. 7857 a re MODIFIED . Rcs pond en t St. Luke's Medica l Ce nte r, Inc . is ORDERED TO PAY the d e fici e n cy income tax in 2 007 ba s ed on th e 10% prefe re nti a l in co m e tax rate und e r Section 27 (8) of th e NIRC of 1997, as a m e nd ed. Howeve r, it is not li ab le for surcharges a nd inte rest on such d efic ie n cy in co m e tax und e r Sections 248 a nd 249 of th e NIRC of 1997, as a m e nd ed . SO ORDERED. ~~-/-~~ AMELIA R. COTANGCO-MANALASTAS Associate Justice WE CONCUR: ~~ It � \J....,A..-- ERNESTO D. ACOSTA Presiding Justice Q~1' c. Q:t--~ .0. JUANITO c. CASTANED.( JR. L Associate Justice

DECISION Page 28 of 28 CTA EB No . 82 3 (CTA Ca se No . 7 8 5 7) Commissione r of Inte rnal Re venue us. S t. Luke's Medical Cente r, In c. t ~ E~P.UY CAESAR A. CASANOVA Associate Justice (On Leave) ESPE OLGA PALANCA-ENRIQUEZ Associate ,Justice W,lzt N. M~~ C~ CIELITO N. MINDARO-GRULLA Associa te Justice CERTIFICATION Pursua n t to S ection 13 , Artic le VIII of th e Constitution , it is h e re by ce rtifi ed tha t th e conclusions in th e a bove Dec ision we re reach ed in consultation with the me mbe rs of the Court En Bane before the ca se wa s a ssigned to the writer of the opinion of the Court. ~/iJ;.. 0 -.J\-- ERNESTO D. ACOSTA Presiding Justice