D.

IMPROPERLY ACCUMULATED EARNINGS TAX

Meaning:

Improperly accumulated earnings tax is imposed for each taxable year on the
improperly accumulated taxable income by closely-held domestic corporations.

CODAL PROVISION

SECTION 29. Imposition of Improperly Accumulated Earnings Tax. -

"(A) In General. - In addition to other taxes imposed by this Title, there is hereby
imposed for each taxable year on the improperly accumulated taxable income of
each corporation described in Subsection B hereof, an improperly accumulated
earnings tax equal to ten percent (10%) of the improperly accumulated taxable
income.

"(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. -

"(1) In General. - The improperly accumulated earnings tax imposed in the

preceding Section shall apply to every corporation formed or availed for the
purpose of avoiding the income tax with respect to its shareholders or the
shareholders of any other corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed.

"(2) Exceptions. - The improperly accumulated earnings tax as provided for under
this Section shall not apply to:

"(a) Publicly-held corporations;

"(b) Banks and other nonbank financial intermediaries; and

"(c) Insurance companies.

"(C) Evidence of Purpose to Avoid Income Tax. -

"(1) Prima Facie Evidence. - The fact that any corporation is a mere holding
company or investment company shall be prima facie evidence of a purpose to
avoid the tax upon its shareholders or members.

"(2) Evidence Determinative of Purpose. - The fact that the earnings or

profits of a corporation are permitted to accumulate beyond the reasonable needs
of the business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by the clear preponderance of
evidence, shall prove to the contrary.

"(D) Improperly Accumulated Taxable Income. - For purposes of this Section, the
term 'improperly accumulated taxable income' means taxable income adjusted by:

"(1) Income exempt from tax;

"(2) Income excluded from gross income;

"(3) Income subject to final tax; and

 "(4) The amount of net operating loss carry-over deducted;

"And reduced by the sum of:

"(1) Dividends actually or constructively paid; and

"(2) Income tax paid for the taxable year.

"Provided, however, That for corporations using the calendar year basis, the
accumulated earnings tax shall not apply on improperly accumulated income as of
December 31, 1997. In the case of corporations adopting the fiscal year
accounting period, the improperly accumulated income not subject to this tax,
shall be reckoned, as of the end of the month comprising the twelve (12)-month
period of fiscal year 1997-1998.

"(E) Reasonable Needs of the Business. - For purposes of this Section, the term
'reasonable needs of the business' includes the reasonably anticipated needs of
the business.

i. CONCEPT

In addition to other taxes imposed by this Title, there is hereby imposed for each taxable
year on the improperly accumulated taxable income of each corporation described in
Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of
the improperly accumulated taxable income of corporations formed or availed of for the
purpose of avoiding the income tax with respect to its shareholders of any other
corporation, by permitting the earnings and profits of the corporation to accumulate instead
of dividing them among or distributing them to the shareholders.

Rationale:

If the earnings and profits were distributed, the shareholders would then be liable to
income tax thereon, whereas if the distribution were not made to them, they would
incur no tax in respect to the undistributed earnings and profits of the corporation.

A tax is being imposed in the nature of a penalty to the corporation for the improper
accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon
shareholders who are supposed to pay dividends tax on the earnings distributed to them by
the corporation.

DETERMINATION OF IMPROPERLY ACCUMULATED TAXABLE INCOME FOR A

PARTICULAR YEAR

Determined by adding to that year’s taxable income the following:

a) Income exempt from tax;

b) Income excluded from gross income;
c) Income subject to final tax;
d) The amount of the net operating loss carry-over (NOLCO) deducted

IT SHALL BE REDUCED BY THE SUM OF:

 a) Income tax paid/payable for the taxable year;
b) Dividends actually or constructively paid/issued from the applicable year’s taxable
income;
c) Amount reserved for the reasonable needs of the business emanating from the
covered year’s taxable income.

ii. APPLICATION

SECTION 29 B(1)

"(1) In General. - The improperly accumulated earnings tax imposed in the preceding
Section shall apply to every corporation formed or availed for the purpose of avoiding the
income tax with respect to its shareholders or the shareholders of any other corporation, by
permitting earnings and profits to accumulate instead of being divided or distributed.

It shall not apply to the following corporations:

a) Banks and other nonbank financial intermediaries;

b) Insurance companies;
c) Publicly-held corporations;
d) Taxable partnerships;
e) General professional partnerships;
f) Non-taxable joint ventures; and
g) Enterprises duly registered with PEZA, and enterprises registered pursuant to the
Bases Conversion and Development Act of 1992, as well as other enterprises duly
registered under special economic zones declared by law

iii. CLOSELY-HELD CORPORATIONS

Those corporations at least 50 % of the total combined voting power of all classes of
stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals.
Domestic corporations not falling under the aforesaid definition are, therefore publicly-held
corporations

iv. REASONABLE NEEDS OF BUSINESS

 IMMEDIACY TEST

The immediate needs of the business which includes reasonably anticipated needs.
In either case, the corporation should be able to prove an immediate need for the
accumulation of the earnings and profits, or the direct correlation of anticipated needs to
such accumulation of profits. Otherwise, such accumulation would be deemed to be not for
the reasonable needs of the business, and the penalty tax would apply.

v. PRIMA FACIE EVIDENCE

The fact that any corporation is a mere holding company or investment company
shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or
members.

 Holding company
  Investment company

CASES

1. COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ANTONIO

TUASON, INC. and THE COURT OF TAX APPEALS, respondents.

SYLLABUS

1. TAXATION; SURTAX UNDER SECTION 25 OF THE TAX CODE OF 1977; PRESUMPTION

THAT THE CORPORATION WAS A MERE HOLDING OR INVESTMENT COMPANY. — The Court
of Tax Appeals conceded that the Revenue Commissioner's determination that Antonio
Tuason, Inc. was a mere holding or investment company, was "presumptively correct" (p. 7,
Annex A), for the corporation did not involve itself in the development of subdivisions but
merely subdivided its own lots and sold them for bigger profits. It derived its income mostly
from interest, dividends and rental realized from the sale of realty. Another circumstance
supporting that presumption is that 99.99% in value of the outstanding stock of Antonio
Tuason, Inc., is owned by Antonio Tuason himself. The Commissioner "conclusively
presumed" that when the corporation accumulated (instead of distributing to the
shareholders) a surplus of over P3 million from its earnings in 1975 to 1978, the purpose
was to avoid the imposition of the progressive income tax on its shareholders. Since the
company as of the time of the assessment in 1981, had invested in its business operations
only P773,720 out of its accumulated surplus profits of P3,263,305.88 for 1975-1978, its
remaining accumulated surplus profits of P2,489,585.88 are subject to the 25% surtax.
2. ID.; ASSESSMENTS OF THE BIR OFFICE PRESUMPTION OF CORRECTNESS THEREOF. —
All presumptions are in favor of the correctness of petitioner's assessment against the
private respondent. It is incumbent upon the taxpayer to prove the contrary (Mindanao Bus
Company vs. Commissioner of Internal Revenue, 1 SCRA 538). Unfortunately, the private
respondent failed to overcome the presumption of correctness of the Commissioner's
assessment.
3. ID.; FAILURE TO DISTRIBUTE DIVIDENDS TO THE STOCKHOLDERS FOR REASONS
OTHER THAN THE REASONABLE NEEDS OF THE BUSINESS: WITHIN THE INTERDICTION OF
THE TAX CODE OF 1977. — "The touchstone of liability is the purpose behind the
accumulation of the income and not the consequences of the accumulation. Thus, if the
failure to pay dividends were for the purpose of using the undistributed earnings and profits
for the reasonable needs of the business, that purpose would not fall within the interdiction
of the statute" (Mertens Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 45 cited in
Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, 127 SCRA 483, 493). It
is plain to see that the company's failure to distribute dividends to its stockholders in 1975-
1978 was for reasons other than the reasonable needs of the business, thereby falling
within the interdiction of Section 25 of the Tax Code of 1977.
Facts:
Under date of February 27, 1981, the petitioner, Commissioner of Internal Revenue,
assessed Antonio Tuason, Inc.:
(a) Deficiency income tax for the
years 1975,1976 and 1978 P37,491.83.
(b) Deficiency corporate quarterly
 income tax for the first quarter of
1975 161.49.
(c) 25% surtax on unreasonable
accumulation of surplus for
the years 1975-1978 1,151,146.98.
The private respondent protested the assessment on he ground that the
accumulation of surplus profits during the years was solely for the purpose of
expanding its business operations as real estate broker.
The request for reinvestigation was granted on condition that a waiver of the statute of
limitations should be filed by the private respondent. The latter replied that there was no
need of a waiver of the statute of limitations because the right of the Government to assess
said tax does not prescribe.
No investigation was conducted nor a decision rendered on Antonio Tuason Inc.'s protest.
Meantime, the Revenue Commissioner issued warrants of distraint and levy to enforce
collection of the total amount originally assessed including the amounts already paid.
The private respondent filed a petition for review in the Court of Tax Appeals with a request
that pending determination of the case on the merits, an order be issued restraining the
Commissioner and/or his representatives from enforcing the warrants of distraint and levy.
Since the right asserted by the Commissioner to collect the taxes involved herein by the
summary methods of distraint and levy was not clear, and it was shown that portions of the
tax liabilities involved in the assessment had already been paid, a writ of injunction was
issued by the Tax Court on November 26, 1984, ordering the Commissioner to refrain from
enforcing said warrants of distraint and levy.

Issue/s:
1. Whether or not private respondent Antonio Tuason, Inc. is a holding company and/or
investment company;
2. Whether or not Antonio Tuason, Inc. accumulated surplus for the years 1975 to 1978;
and
3. Whether or not Antonio Tuason, Inc. is liable for the 25% surtax on undue accumulation
of surplus for the years 1975 to 1978.

Ruling:
Section 25 of the Tax Code at the time the surtax was assessed, provided:
"SEC. 25. Additional tax on corporation improperly accumulating
profits or surplus. —
"(a) Imposition of tax. — If any corporation, except banks, insurance
companies, or personal holding companies, whether domestic or foreign, is
formed or availed of for the purpose of preventing the imposition of the tax
upon its shareholders or members or the shareholders or members of
another corporation, through the medium of permitting its gains and profits
to accumulate instead of being divided or distributed, there is levied and
 assessed against such corporation, for each taxable year, a tax equal to
twenty-five per centum of the undistributed portion of its accumulated
profits or surplus which shall be in addition to the tax imposed by section
twenty-four, and shall be computed, collected and paid in the same manner
and subject to the same provisions of law, including penalties, as that tax.
"(b) Prima facie evidence. — The fact that any corporation is a mere holding
company shall be prima facie evidence of a purpose to avoid the tax upon
its shareholders or members. Similar presumption will lie in the case of an
investment company where at any time during the taxable year more than
fifty per centum in value of its outstanding stock is owned, directly or
indirectly, by one person.
"(c) Evidence determinative of purpose. — The fact that the earnings or
profits of a corporation are permitted to accumulate beyond the reasonable
needs of the business shall be determinative of the purpose to avoid the tax
upon its shareholders or members unless the corporation, by clear
preponderance of evidence, shall prove the contrary."

The petition is meritorious

First Issue: Antonio Tuason, Inc. is a holding or investment company.
The Court of Tax Appeals conceded that the Revenue Commissioner's determination that
Antonio Tuason, Inc. was a mere holding or investment company, was "presumptively
correct", for the corporation did not involve itself in the development of subdivisions but
merely subdivided its own lots and sold them for bigger profits. It derived its income mostly
from interest, dividends and rental realized from the sale of realty.
Another circumstance supporting that presumption is that 99.99% in value of the
outstanding stock of Antonio Tuason, Inc., is owned by Antonio Tuason himself. The
Commissioner "conclusively presumed" that when the corporation accumulated a surplus
from its earnings in 1975 to 1978, the purpose was to avoid the imposition of the
progressive income tax on its shareholders.
Second Issue: Antonio Tuason, Inc. accumulated surplus profits for the years 1975 up to
1978.
That Antonio Tuason, Inc. accumulated surplus profits amounting to P3,263,305.88 for 1975
up to 1978 is not disputed. However, the private respondent vehemently denies that its
purpose was to evade payment of the progressive income tax on such dividends by its
stockholders. According to the private respondent, surplus profits were set aside by the
company to build up sufficient capital for its expansion program which included the
construction in 1979-1981 of an apartment building, and the purchase in 1980 of a
condominium unit which was intended for resale or lease.
Third Issue: Antonio Tuason, Inc. is liable for the 25% surtax on undue accumulation of
surplus for the years 1975 to 1978.
Since the company as of the time of the assessment in 1981, had invested in its business
operations only P773,720 out of its accumulated surplus profits of P3,263,305.88 for 1975-
1978, its remaining accumulated surplus profits of P2,489,585.88 are subject to the 25%
surtax.
 All presumptions are in favor of the correctness of petitioner's assessment against the
private respondent. It is incumbent upon the taxpayer to prove the contrary. Unfortunately,
the private respondent failed to overcome the presumption of correctness of the
Commissioner's assessment.
"The touchstone of liability is the purpose behind the accumulation of the income and not
the consequences of the accumulation. Thus, if the failure to pay dividends were for the
purpose of using the undistributed earnings and profits for the reasonable needs of the
business, that purpose would not fall within the interdiction of the statute.”
The company's failure to distribute dividends to its stockholders in 1975-1978 was for
reasons other than the reasonable needs of the business, thereby falling within the
interdiction of Section 25 of the Tax Code of 1977.
2. THE MANILA WINE MERCHANTS, INC., petitioner, vs. THE COMMISSIONER OF
INTERNAL REVENUE, respondent.

SYLLABUS

1. TAXATION; NATIONAL INTERNAL REVENUE CODE; CORPORATE INCOME TAX;

ADDITIONAL TAX ON ACCUMULATED EARNINGS; EXEMPTION THEREFROM. — A
prerequisite to the imposition of the tax has been that the corporation be formed or availed
of for the purpose of avoiding the income tax (or surtax) on its shareholders, or on
the shareholders of any other corporation by permitting the earnings and profits
of the corporation to accumulate instead of dividing them among or distributing
them to the shareholders. If the earnings and profits were distributed, the shareholders
would be required to pay an income tax thereon whereas, if the distribution were not made
to them, they would incur no tax in respect to the undistributed earnings and profits of the
corporation (Mertens, Law on Federal Income Taxation, Vol. 7, Chapter 39, p. 44). The
touchstone of liability is the purpose behind the accumulation of the income and
not the consequences of the accumulation (Ibid., p. 47). Thus, if the failure to pay
dividends is due to some other cause, such as the use of undistributed earnings and profits
for the reasonable needs of the business, such purpose does not fall within the interdiction
of the statute (Ibid., p. 45).
2. ID.; ID.; ID.; ID.; ID.; WHEN ACCUMULATION CONSIDERED UNREASONABLE. — An
accumulation of earnings or profits (including undistributed earnings or profits of prior
years) is unreasonable if it is not required for the purpose of the business, considering all
the circumstances of the case (Sec. 21, Revenue Regulations No. 2).
3. ID.; ID.; ID.; ID.; ID.; "REASONABLE NEEDS OF THE BUSINESS," CONSTRUED. — To
determine the "reasonable needs" of the business in order to justify an accumulation of
earnings, the Courts of the United States have invented the so-called "Immediacy Test"
which construed the words "reasonable needs of the business" to mean the immediate
needs of the business, and it was generally held that if the corporation did not prove an
immediate need for the accumulation of the earnings and profits, the accumulation was not
for the reasonable needs of the business, and the penalty tax would apply. American cases
likewise hold that investment of the earnings and profits of the corporation in stock or
securities of an unrelated business usually indicates an accumulation beyond the reasonable
needs of the business. (Helvering vs. Chicago Stockyards Co., 318 US 693; Helvering vs.
National Grocery Co., 304 US 282).
4. TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX OF CORPORATIONS;
ADDITIONAL TAX ON ACCUMULATED EARNINGS; EXCEPTION THEREFROM; ACCUMULATION
OF EARNINGS, MUST BE USED FOR REASONABLE NEEDS OF BUSINESS WITHIN A
REASONABLE TIME. — The records further reveal that from May 1951 when petitioner
purchased the U.S.A. Treasury shares, until 1962 when it finally liquidated the same, it
(petitioner) never had the occasion to use the said shares in aiding or financing its
importation. This militates against the purpose enunciated earlier by petitioner that the
shares were purchased to finance its importation business. To justify an accumulation of
earnings and profits for the reasonably anticipated future needs, such accumulation must be
used within a reasonable time after the close of the taxable year (Mertens, Ibid., p. 104).
5. ID.; ID.; ID.; ID.; ID.; ID.; INTENTION AT THE TIME OF ACCUMULATION, BASIS OF THE
TAX; ACCUMULATION OF PROFITS IN CASE AT BAR, UNREASONABLE. — In order to
determine whether profits are accumulated for the reasonable needs of the business as to
avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is
manifested at the time of accumulation not subsequently declared intentions which are
merely the product of afterthought (Basilan Estates, Inc. vs. Comm. of Internal Revenue, 21
SCRA 17 citing Jacob Mertens, Jr., The law of Federal Income Taxation, Vol. 7, Cumulative
Supplement, p. 213; Smoot and San & Gravel Corp. vs. Comm., 241 F 2d 197). A
speculative and indefinite purpose will not suffice. The mere recognition of a future problem
and the discussion of possible and alternative solutions is not sufficient. Definiteness of plan
coupled with action taken towards its consummation are essential (Fuel Carriers, Inc. vs. US
202 F supp. 497; Smoot Sand & Gravel Corp. vs. Comm.,supra). Viewed on the foregoing
analysis and tested under the "immediacy doctrine," We are convinced that the Court of Tax
Appeals is correct in finding that the investment made by petitioner in the U.S.A. Treasury
shares in 1951 was an accumulation of profits in excess of the reasonable needs of
petitioner's business.
7. ID.; ID.; ID.; ID.; ACCUMULATIONS OF PRIOR YEARS TAKEN INTO ACCOUNT IN
DETERMINATION OF LIABILITY THEREFOR. — The rule is now settled in Our jurisprudence
that undistributed earnings or profits of prior years are taken into consideration in
determining unreasonable accumulation for purposes of the 25% surtax. The case of Basilan
Estates, Inc. vs. Commissioner of Internal Revenue further strengthen this rule in
determining unreasonable accumulation for the year concerned. 'In determining whether
accumulations of earnings or profits in a particular year are within the reasonable needs of a
corporation, it is necessary to take into account prior accumulations, since accumulations
prior to the year involved may have been sufficient to cover the business needs and
additional accumulations during the year involved would not reasonably be necessary.
FACTS:

 Manila Wine Merchants Inc. is a domestic corporation principally engaged in the

importation and sale of whisky, wines, liquors and distilled spirits.

 In 1957 the CIR caused the examination of petitioner’s book of accounts and found
the latter having unreasonably accumulated surplus of P428,934.32 for the calendar
year 1947 to 1957, in excess of the reasonable needs of the business subject to the
25% surtax imposed by Section 25 of the Tax Code.

 The total amount due as of February 26, 1963 amounted to P 126,536.12

representing the surtax and interest thereon.

 Respondent contends that petitioner has accumulated earnings beyond the

reasonable needs of its business because the average ratio of the cash dividends
declared and paid by petitioner from 1947 to 1957 was 40.33% of the total surplus
available for distribution at the end of each calendar year.
 On the other hand, petitioner contends that in 1957, it distributed 100% of its net
earnings after income tax and part of the surplus for prior years. Respondent further
submits that the accumulated earnings tax should be based on 25% of the total
surplus available at the end of each calendar year while petitioner maintains that the
25% surtax is imposed on the total surplus or net income for the year after
deducting therefrom the income tax due.

 Another basis of respondent in assessing petitioner for accumulated earnings tax is

its substantial investment of surplus or profits in unrelated business. These
investments are itemized as follows:

Particulars Amount

1 Acme Commercial Co. Inc. P27,501.00

2 Union Insurance Society of Canton 1,145.76

3 U.S.A. Treasury Bond 347,217.50

4 Wack Wack Golf & Country Club 1.00

TOTAL P 375,865.26

 Respondent found that the accumulated surplus in question were invested to

‘unrelated business’ which were not considered in the ‘immediate needs’ of the
Company such that the 25% surtax be imposed therefrom.

 On appeal to the Court of Tax Appeals, it found that:

o The petitioner was not formed for the purpose of preventing the imposition of
income tax upon its shareholders since it has distributed an average of
85.77% of its total surplus available for distribution at the end of each
calendar year for 11 years and not 40.33%.

o The investments 1, 2, & 4 were harmless accumulation of surplus and

therefore not subject to surtax.

o As to the U.S.A. Treasury Bonds amounting to P347,217.50, the Court of Tax

Appeals ruled that its purchase was in no way related to petitioner’s business
of importing and selling wines, whisky, liquors and distilled spirits.

o That it was one for the purpose of preventing the imposition of surtax upon
petitioner’s shareholders by permitting its earnings and profits to accumulate
beyond the reasonable needs of the business. Hence, it modified the
respondent’s decision by imposing 25% surtax only on the USA Treasury
Bond in the amount of P86,804.38.

 Defenses of petitioner on the USA Treasury Bond:

o That the investment made in 1951 would be used in meeting immediate

urgent orders of its local customers.

o That they decided sometime in 1957 to hold the bills for a few more years in
view of their plan to buy a lot and construct their own building.
 o Since they were not yet 60% Filipino owned, they waited until the ownership
would reach that much before making definite plans.

o That in 1959 they were already more than 60% Filipino owned and thus in
1961, they bought a lot.

ISSUE/S:

(1) Whether the purchase of the U.S.A. Treasury bonds by petitioner in 1951 can be
considered as an improper accumulation of earnings, and

(2) If so, whether the penalty tax of twenty-five percent (25%) can be imposed on such
improper accumulation in 1957 despite the fact that the accumulation occurred in
1951.

RULING:

(1) Yes the purchase of the U.S.A. Treasury bonds by petitioner in 1951 can be
considered as improper accumulation of earnings. It was an investment to an
unrelated business and was made for the purpose of preventing the imposition of the
surtax upon petitioner’s shareholders by permitting its earnings and profits to
accumulate beyond the reasonable needs of the business.

A prerequisite to the imposition of the tax has been that the (1) corporation be
formed or availed of for the purpose of avoiding the income tax (or surtax) on its
shareholders, or on the shareholders of any other corporation (2) by permitting the
earnings and profits of the corporation to accumulate instead of dividing them among or
distributing them to the shareholders. If the earnings and profits were distributed, the
shareholders would be required to pay an income tax thereon whereas, if the distribution
were not made to them, they would incur no tax in respect to the undistributed earnings
and profits of the corporation. The touchstone of liability is the purpose behind the
accumulation of the income and not the consequences of the accumulation. Thus, if the
failure to pay dividends is due to some other cause, such as the use of undistributed
earnings and profits for the reasonable needs of the business, such purpose does not fall
within the interdiction of the statute.

An accumulation of earnings or profits (including undistributed earnings or profits of

prior years) is unreasonable if it is not required for the purpose of the business, considering
all the circumstances of the case.

To avoid the twenty-five percent (25%) surtax, petitioner has to prove that the
purchase of the U.S.A. Treasury Bonds in 1951 with a face value of $175,000.00 was an
investment within the reasonable needs of the Corporation. This, the petitioner failed to
prove.

To determine the "reasonable needs" of the business in order to justify an

accumulation of earnings, the Courts of the United States have invented the so-called
"Immediacy Test" which construed the words "reasonable needs of the business" to mean
the immediate needs of the business, and it was generally held that if the corporation did
not prove an immediate need for the accumulation of the earnings and profits, the
accumulation was not for the reasonable needs of the business, and the penalty tax would
apply. American cases likewise hold that investment of the earnings and profits of the
corporation in stock or securities of an unrelated business usually indicates an accumulation
beyond the reasonable needs of the business.
 The records reveal that from May 1951 when petitioner purchased the U.S.A.
Treasury shares, until 1962 when it finally liquidated the same, it (petitioner) never had the
occasion to use the said shares in aiding or financing its importation. This militates against
the purpose enunciated earlier by petitioner that the shares were purchased to finance its
importation business. To justify an accumulation of earnings and profits for the reasonably
anticipated future needs, such accumulation must be used within a reasonable time after
the close of the taxable year.

The arguments of petitioner indicate that it considers the U.S.A. Treasury shares not
only for the purpose of aiding or financing its importation but likewise for the purpose of
buying a lot and constructing a building thereon in the near future, but conditioned upon the
completion of the 60% citizenship requirement of stock ownership of the Company in order
to qualify it to purchase and own a lot. The time when the company would be able to
establish itself to meet the said requirement and the decision to pursue the same are
dependent upon various future contingencies.

In order to determine whether profits are accumulated for the reasonable needs of
the business as to avoid the surtax upon shareholders, the controlling intention of the
taxpayer is that which is manifested at the time of accumulation not subsequently declared
intentions which are merely the product of afterthought. A speculative and indefinite
purpose will not suffice. The mere recognition of a future problem and the discussion of
possible and alternative solutions is not sufficient. Definiteness of plan coupled with action
taken towards its consummation are essential.

Profits may only be accumulated for the reasonable needs of the business, and
implicit in this is further requirement of a reasonable time.

(2) The petition was wrong in its contention that the 25% surtax should be based on the
surplus accumulated in 1951 and not in 1957.

The rule is now settled in Our jurisprudence that undistributed earnings or profits of
prior years are taken into consideration in determining unreasonable accumulation for
purposes of the 25% surtax. The case of Basilan Estates, Inc. v. Commissioner of Internal
Revenue further strengthen this rule in determining unreasonable accumulation for the year
concerned. ’In determining whether accumulations of earnings or profits in a particular year
are within the reasonable needs of a corporation, it is necessary to take into account prior
accumulations, since accumulations prior to the year involved may have been sufficient to
cover the business needs and additional accumulations during the year involved would not
reasonably be necessary.

3. BASILAN ESTATES, INC., petitioner, vs. THE COMMISSIONER OF

INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

1. ID.; SURTAX ON UNREASONABLY ACCUMULATED PROFITS; TEST TO DETERMINE

REASONABLENESS ACCUMULATION OF PROFITS. — Persuasive jurisprudence on the matter
such as those in the United States from where our tax law was deprived (Collector of
Internal Revenue vs. Binalbagan Estate, Inc., L-12752, Jan. 30, 1965), has it that: "In order
to determine whether profits were accumulated for the reasonable needs of the business or
to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which
is manifested at the time of the accumulation, not subsequently declared intentions which
are merely the products of afterthought (Jacob Mertens, Jr., The Law of Federal Income
Taxation, Vol. 7, Cumulative Supplement, p. 213). In determining whether accumulations of
earnings or profits in a particular year are within the reasonable needs of a corporation, it is
necessary to take unto account prior accumulations, since accumulations prior to the year
involved may have been sufficient to cover the business needs and additional accumulations
during the year involved would not reasonably be necessary.

FACTS:

1. Basilan filed it’s income tax return 1953 and paid P8K

2. CIR: assessed deficiency income tax of P3K and P86K as 25% surtax on
unreasonably accumulated profits as of 1953.

a. It disallowed certain expenses and over-claimed depreciation

b. It added 25% surtax on P347k for unreasonably accumulated profits.

3. For non payment a warrant of distraint was issued but Basilan successfully moved
that it be put on hold and maintain constructive embargo instead.

4. CTA: Affirmed deficiency income tax and surtax.

ISSUE: w/n there was unreasonably accumulated profits.

HELD: YES there were unreasonably accumulated profits. Basilan failed to explain
the accumulation.

1. On prescription: There is a presumption of regularity that the tax assessment was

made/delivered within the 5year prescriptive period. Even if notice had been
received late, §331 requiring five years within which to assess deficiency taxes, the
assessment is deemed made when notice is released and mailed. It is not required
that the notice is actually received within the time period.

On assessment – the disallowed tax deductions were proper.

2. Depreciation: Basilan decided to deduct the value of depreciation computed on a

reappraised acquisition value instead of the original cost of the equipment.
Depreciation is for the cost of wear and tear, and allowance for deduction is to see
that at the end of the term the investment remains as It was in the beginning. The
income tax law does not authorize the depreciation of an asset BEYOND its
acquisition cost. Recovery (deduction) of an amount more that the invested capital
will transgress the underlying purpose of depreciation allowance. To allow what
Basilan did, would be to allow the not only the cost but ADDITIONAL PROFIT.

3. There were unreasonably accumulated profits.

a. §25 of the Tax Code provides for additional tax on corporations improperly
accumulating profits and surplus.

b. The CIR found that: Basilan had a strong financial position (assests > than
liab). It had considerable capital to meet it’s needs. The 250K reserved profits
were reverted to surplus, without intent to spend it on any future project.
Withdrawal by shareholders of large sums of money alleged to be used for the
business, but the unspent balance was retained by the said shareholders.
Investment in asses having no proximate connection with it’s business
 (hospital when it’s a coconut co.) Capital stock was increased when there was
no need to raise funds.

c. Explanations: 250K reversion to surplus, for building factory, but explanation

was made after the fact. INSUFFICIENT In order to determine whether profits
were accumulated for the reasonable needs of the business or to avoid the
surtax upon shareholders, the controlling intention of the taxpayer is that
which is manifested at the time of the accumulation, not subsequently
declared intentions which are merely the products of after-thought.1

d. Explanation:Surplus, needed for paying expenses during the year which is

greater than surplus. INSUFFICIENT There is no need to retain such a large
amount (P347K in 1953!) because during the year current assets will be
converted to cash + extra profits (ie sell stock = more money to pay for
expenses). It is erroneous to say that the taxpayer is entitled to retain
enough liquid net assets in amounts approximately equal to current operating
needs for the year to cover "cost of goods sold and operating expenses" for
"it excludes proper consideration of funds generated by the collection of notes
receivable as trade accounts during the course of the year 2

e. Explanation:Withdrawals by shareholders, advances in furtherance of

business INSUFFICIENT when in fact the unspent balance was retained by the
shareholders.

4. Alleged exemption from the 25% surtax by RA1823 approved June 1957. Not
allowed, the exemption effective 1957 wll not cover assessments for 1953, more
than three years before. Tax laws are prospective in nature unless expressly made
otherwise.

4. CYANAMID PHILIPPINES, INC., petitioner, vs. THE COURT OF APPEALS, THE

COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE
SYLLABUS
TAX ON IMPROPER ACCUMULATION OF SURPLUS AS A PENALTY. When
corporations do not declare dividends, income taxes are not paid on the undeclared
dividends received by the shareholders. The tax on improper accumulation of surplus is
essentially a penalty tax designed to compel corporations to distribute earnings so that the
said earnings by shareholders could, in turn, be taxed.

RULE ON ENUMERATION: THE EXPRESS MENTION OF ONE PERSON, THING,

ACT, OR CONSEQUENCE IS CONSTRUED TO EXCLUDE ALL OTHERS. Exemptions from
tax are construed strictissimi juris against the taxpayer. Taxation is the rule and exemption
is the exception. The burden of proof rests upon the party claiming exemption to prove that
it is in fact covered by the exemption so claimed.

WORKING CAPITAL NEEDS; CURRENT RATIO. The working capital needs of a

business depend upon the nature of the business, its credit policies, the amount of
inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the
availability of credit to the business, and similar factors. Aside from the Bardahl Formula,
other formulas are also used, e.g. the ratio of current assets to current liabilities and the

1
Jacob Mertens, Jr., The Law of Federal Income Taxation, Vol. 7, Cumulative Supplement,
p. 213
2
ibid
adoption of the industry standard. The ratio of current assets to current liabilities is used to
determine the sufficiency of working capital. Ideally, the working capital should equal the
current liabilities and there must be 2 units of current assets for every unit of current
liability, hence the so-called "2 to 1" rule.

BURDEN OF PROOF. If the CIR determined that the corporation avoided the tax on
shareholders by permitting earnings or profits to accumulate, and the taxpayer contested
such determination, the burden of proving the determination wrong, together with the
corresponding burden of first going forward with evidence, is on the taxpayer. This applies
even if the corporation is not a mere holding or investment company and does not have an
unreasonable accumulation of earnings or profits.

RELEVANT PROVISIONS OF LAW:

1. SEC. 43 PAR. 2 OF THE CORPORATION CODE OF THE PHILIPPINES
Stock corporations are prohibited from retaining surplus profits in excess
of one hundred (100%) percent of their paid-in capital stock, except: (1) when
justified by definite corporate expansion projects or programs approved by the
board of directors; or (2) when the corporation is prohibited under any loan
agreement with any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation, such as when there is
need for special reserve for probable contingencies.

2. SECTION 25 OF THE OLD NATIONAL INTERNAL REVENUE CODE OF 1977

Sec. 25. Additional tax on corporation improperly accumulating profits or
surplus -
"(a) Imposition of tax. -- If any corporation is formed or availed of for the
purpose of preventing the imposition of the tax upon its shareholders or
members or the shareholders or members of another corporation, through the
medium of permitting its gains and profits to accumulate instead of being divided
or distributed, there is levied and assessed against such corporation, for each
taxable year, a tax equal to twenty-five per-centum of the undistributed portion
of its accumulated profits or surplus which shall be in addition to the tax imposed
by section twenty-four, and shall be computed, collected and paid in the same
manner and subject to the same provisions of law, including penalties, as that
tax.

"(b) Prima facie evidence. -- The fact that any corporation is mere holding
company shall be prima facie evidence of a purpose to avoid the tax upon its
shareholders or members. Similar presumption will lie in the case of an
investment company where at any time during the taxable year more than fifty
per centum in value of its outstanding stock is owned, directly or indirectly, by
one person.

"(c) Evidence determinative of purpose. -- The fact that the earnings or

profits of a corporation are permitted to accumulate beyond the reasonable needs
of the business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear preponderance of
evidence, shall prove the contrary.

"(d) Exception -- The provisions of this sections shall not apply to banks,
non-bank financial intermediaries, corporation organized primarily, and
 authorized by the Central Bank of the Philippines to hold shares of stock of
banks, insurance companies, whether domestic or foreign.

BARDAHL FORMULA. The Bardahl formula was first adopted in Bardahl

Manufacturing Corp. to allow the taxpayer to accumulate earnings and profits to provide a
working capital reserve sufficient to meet ordinary operating expenses incurred during one
complete operating cycle. The corporation’s operating cycle was described as “the period of
time required to convert cash into raw materials, raw materials into inventory of marketable
products, the inventory into sales and accounts receivable, and the period of time required
to collected its outstanding accounts.”

FACTS:
 Cyanamid Philippines Inc. is a corporation organized under Philippine laws, is a
wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is
engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler
of imported finished goods, and an importer/indentor.
 Petitioner was found liable for P3,774,867.50 as 25% surtax on improper
accumulation of profits for 1981, plus 10% surcharge and 20% annual interest from
January 30, 1985 to January 30, 1987, under Sec. 25 of the National Internal
Revenue Code.
 Petitioner claimed that CIR’s assessment representing the 25% surtax on its
accumulated earnings for the year 1981 had no legal basis for the following reasons:
(a) That the accumulation of earnings and profits was for reasonable business
requirements to meet working capital needs and retirement of indebtedness;
(b) That petitioner is a wholly owned subsidiary of American Cyanamid Company, a
corporation organized under the laws of the State of Maine, in the United States
of America, whose shares of stock are listed and traded in New York Stock
Exchange. This being the case, no individual shareholder of petitioner could have
evaded or prevented the imposition of individual income taxes by petitioner’s
accumulation of earnings and profits, instead of distribution of the same.
 The Court of Tax Appeals made the following pronouncements:
o Petitioner’s purpose for accumulating its earnings does not fall within the
ambit of any of the specified purposes under Section 43, paragraph 2 of the
Corporation Code of the Philippines.
o That there was no need for petitioner to set aside a portion of its retained
earnings as working capital reserve as it claims since it had considerable
liquid funds. A thorough review of petitioner’s financial statement reveals that
the corporation had considerable liquid funds consisting of cash accounts
receivable, inventory and even its sales for the period is adequate to meet the
normal needs of the business. The current ratio of the company was
computed to be 2.21:1. The ratio serves as a primary test of a company’s
solvency to meet current obligations from current assets as a going concern
or a measure of adequacy of working capital.

ISSUE/S:
Whether the petitioner was liable for accumulated earnings tax for the year 1981.

RULING:
The court concluded that the petitioner was liable for accumulated earnings tax for
the year 1981.
 Section 25 of the Old NIRC of 1977 discouraged tax avoidance through corporate
surplus accumulation. When corporations do not declare dividends, income taxes are not
paid on the undeclared dividends received by the shareholders. The tax on improper
accumulation of surplus is essentially a penalty tax designed to compel corporations to
distribute earnings so that the said earnings by shareholders could, in turn, be taxed.

Petitioner’s assertion that it is exempt from the tax for being a wholly owned
subsidiary of a public owned company is without merit. The amendatory provision of Section
25 of the 1977 NIRC, which was PD 1739, enumerated the corporations exempt from the
imposition of improperly accumulated tax: (a) banks; (b) non-bank financial intermediaries;
(c) insurance companies; and (d) corporations organized primarily and authorized by the
Central Bank of the Philippines to hold shares of stocks of banks. Petitioner does not fall
among those exempt classes. Besides, the rule on enumeration is that the express mention
of one person, thing, act, or consequence is construed to exclude all others. Laws granting
exemption from tax are construed strictissimi juris against the taxpayer and liberally in
favor of the taxing power. Taxation is the rule and exemption is the exception. The burden
of proof rests upon the party claiming exemption to prove that it is, in fact, covered by the
exemption so claimed, a burden which petitioner here has failed to discharge.

Another point raised by the petitioner in objecting to the assessment, is that increase
of working capital by a corporation justifies accumulating income. Petitioner relies on the
so-called "Bardahl" formula, which allowed retention, as working capital reserve, sufficient
amounts of liquid assets to carry the company through one operating cycle. The "Bardahl"
formula was developed to measure corporate liquidity.

However, the court noted that the companies where the "Bardahl" formula was
applied, had operating cycles much shorter than that of petitioner. Cynamid’s operating
cycle was 288.35 days, or 78.55% of a year, reflecting that petitioner will need sufficient
liquid funds, of at least three quarters of the year, to cover the operating costs of the
business. In times when there is no recurrence of a business cycle (as in the case of
Cyanamid), the working capital needs cannot be predicted with accuracy. As stressed by
American authorities, although the "Bardahl" formula is well-established and routinely
applied by the courts, it is not a precise rule. It is used only for administrative convenience.
Petitioner’s application of the "Bardahl" formula merely creates a false illusion of exactitude.

Other formulas are also used, e.g. the ratio of current assets to current liabilities and
the adoption of the industry standard. The ratio of current assets to current liabilities is used
to determine the sufficiency of working capital. Ideally, the working capital should equal the
current liabilities and there must be 2 units of current assets for every unit of current
liability, hence the so-called "2 to 1" rule.

As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice
its current liabilities. That current ratio of Cyanamid, therefore, projects adequacy in
working capital. Said working capital was expected to increase further when more funds
were generated from the succeeding year’s sales.

The court has held in Basilan Estates, Inc. vs. Commissioner of Internal Revenue
that:
"...[T]here is no need to have such a large amount at the beginning of the
following year because during the year, current assets are converted into cash and
with the income realized from the business as the year goes, these expenses may
well be taken cared of. Thus, it is erroneous to say that the taxpayer is entitled to
retain enough liquid net assets in amounts approximately equal to current operating
 needs for the year to cover ‘cost of goods sold and operating expenses:’ for ‘it
excludes proper consideration of funds generated by the collection of notes
receivable as trade accounts during the course of the year."

If the CIR determined that the corporation avoided the tax on shareholders by
permitting earnings or profits to accumulate, and the taxpayer contested such
determination, the burden of proving the determination wrong, together with the
corresponding burden of first going forward with evidence, is on the taxpayer. This applies
even if the corporation is not a mere holding or investment company and does not have an
unreasonable accumulation of earnings or profits.

As enunciated in the Manila Wine Merchants case, reasonable needs of the business
means immediate needs. In case of failure to prove reasonable needs, the penalty tax
would apply.

The working capital needs of a business depend upon the nature of the business, its
credit policies, the amount of inventories, the rate of turnover, the amount of accounts
receivable, the collection rate, the availability of credit to the business, and similar factors.
Petitioner, by adhering to the "Bardahl" formula, failed to impress the tax court with the
required definiteness envisioned by the statute.

E. EXEMPT CORPORATION

CODAL PROVISION

"SECTION 30. Exemptions from Tax on Corporations. - The following organizations

shall not be taxed under this Title in respect to income received by them as such:

"(A) Labor, agricultural or horticultural organization not organized principally for

profit;

"(B) Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual
purposes and without profit;

"(C) A beneficiary society, order or association, operating for the exclusive benefit
of the members such as a fraternal organization operating under the lodge
system, or a mutual aid association or a nonstock corporation organized by
employees providing for the payment of life, sickness, accident, or other benefits
exclusively to the members of such society, order, or association, or nonstock
corporation or their dependents;

"(D) Cemetery company owned and operated exclusively for the benefit of its
members;

"(E) Nonstock corporation or association organized and operated exclusively for

religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall belong to or
inure to the benefit of any member, organizer, officer or any specific person;

"(F) Business league, chamber of commerce, or board of trade, not organized for
profit and no part of the net income of which inures to the benefit of any private
stockholder or individual;
"(G) Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare;

"(H) A nonstock and nonprofit educational institution;

"(I) Government educational institution;

"(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like organization
of a purely local character, the income of which consists solely of assessments,
dues, and fees collected from members for the sole purpose of meeting its
expenses; and

"(K) Farmers', fruit growers', or like association organized and operated as a sales
agent for the purpose of marketing the products of its members and turning back
to them the proceeds of sales, less the necessary selling expenses on the basis of
the quantity of produce finished by them;

"Notwithstanding the provisions in the preceding paragraphs, the income of

whatever kind and character of the foregoing organizations from any 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.

 NONSTOCK, NONPROFIT EDUCATIONAL INSTITUTION

An institution is nonstock “where no part of its income is distributable as dividends to

its members, trustees, or officers.

It is nonprofit if no income accrues to the benefit of any member of the corporation

 CHARITABLE INSTITUTIONS
Must be:
a) A non-stock corporation or association;
b) Organized exclusively for charitable purposes;
c) Operated exclusively for charitable purposes;and
d) No part ot its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.

CASES

5. GR No 124043, October 14, 1998

CIR v CA & YMCA

SYLLABUS

TAX EXEMPTION; COURT HAS ALWAYS APPLIED THE DOCTRINE OF STRICT

INTERPRETATION IN CONSTRUING THEREOF; APPLICATION IN CASE AT BAR. — Because
taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict
interpretation in construing tax exemptions. Furthermore, a claim of statutory exemption
from taxation should be manifest and unmistakable from the language of the law on which it
is based. Thus, the claimed exemption "must expressly be granted in a statute stated in a
language too clear to be mistaken." In the instant case, the exemption claimed by
the YMCA is expressly disallowed by the very wording of the last paragraph of then Section
27 of the NIRC which mandates that the income of exempt organizations (such as
the YMCA) from any of their properties, real or personal, be subject to the tax imposed by
the same Code. Because the last paragraph of said section unequivocally subjects to tax the
rent income of the YMCA from its real property, theCourt is duty-bound to abide strictly by
its literal meaning and to refrain from resorting to any convoluted attempt at construction.
It is axiomatic that where the language ofthe law is clear and unambiguous, its express
terms must be applied. Parenthetically, a consideration of the question of construction must
not even begin, particularly when such question is on whether to apply a strict construction
or a liberal one on statutes that grant tax exemptions to "religious, charitable and
educational propert[ies] or institutions." The phrase "any of their activities conducted for
profit" does not qualify the word "properties." This makes income from the property of the
organization taxable, regardless of how that income is used — whether for profit or for lofty
non-profit purposes. Verba legis non est recedendum. Hence,
Respondent Court of Appeals committed reversible error when it allowed, on
reconsideration, the tax exemption claimed by YMCA on income it derived from renting out
its real property, on the solitary but unconvincing ground that the said income is not
collected for profit but is merely incidental to its operation. The law does not make a
distinction. The rental income is taxable regardless of whence such income is derived and
how it is used or disposed of. Where the law does not distinguished, neither should we.

WHEN GRANTED; REQUISITES. — Private respondent is exempt from the

payment of property tax, but not income tax on the rentals from its property. The bare
allegation alone that it is a non-stock, non-profit educational institution is insufficient to
justify its exemption from the payment of income tax. For the YMCA to be granted the
exemption it claims under the aforecited provision, it must prove with substantial evidence
that (1) it falls under the classification non-stock, non-profit educational institution; and (2)
the income it seeks to be exempted from taxation is used actually, directly, and exclusively
for educational purposes. However, the Court notes that not a scintilla ofevidence was
submitted by private respondent to prove that it met the said requisites.

EDUCATIONAL INSTITUTION, CONSTRUED; WHEN NOT APPLICABLE; CASE AT BAR. — Is

the YMCA and educational institution within the purview of Article XIV, Section 4, par.
3 of the Constitution? We rule that it is not. The term "educational institution" or
"institution of learning" has acquired a well-known technical meaning, of which the
members of the Constitutional Commission are deemed cognizant. Under the
Education Act of 1982, such term refers to schools. The school system is synonymous with
formal education, which "refers to the hierarchically structured and chronologically graded
learnings organized and provided by the formal school system and for which certification is
required in order for the learner to progress through the grades or move to the higher
levels." The Court has examined the "Amended Articles of Incorporation" and "By-
Laws" of the YMCA, but found nothing in them that even hints that it is a school or an
educational institution. Furthermore, under the Education Act of 1982, even non-formal
education is understood to be school-based and "private auspices such as foundations and
civic-spirited organizations" are ruled out. It is settled that the term "educational
institution," when used in laws granting tax exemptions, refers to a ". . . school seminary,
college or educational establishment . . . ." Therefore, the private respondent cannot be
deemed one of the educational institutions covered by the constitutional provision under
consideration. ". . . Words used in the Constitution are to be taken in their ordinary
acceptation. While in its broadest and best sense education embraces all forms and
phases of instruction, improvement and development of mind and body, and as
well of religious and moral sentiments, yet in the common understanding and application it
means a place where systematic institution in any or all of the useful branches of learning is
given by methods common to schools and instruction of learning. That we conceive to be
the true intent and scope of the term [educational institutions] as used in the Constitution."

||| (Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 124043, [October 14,
1998], 358 PHIL 562-592)

Facts:

YMCA, Inc. is a non-stock, non-profit institution which conducts various programs and
activities that are beneficial to the public, especially the young people, pursuant to its
religious, educational and charitable objectives.

In 1980, YMCA earned an income of 676,829.80 from leasing out a portion of its premises
to small shop owners, like restaurants and canteen operators and 44,259 from parking fees
collected from non-members. The CIR issued an assessment to YMCA for deficiency taxes
which included the income from lease of YMCA’s real property. Private respondent protested
the assessment but the CIR denied the claims of YMCA. On appeal, the CTA ruled in favor of
YMCA and excluded income from lease to small shop owners and parking fees.

Issue:

Whether or not the rental income of the YMCA from its real estate subject to tax?

Ruling:

Section 27. Exemption from tax on corporations.- The following organizations shall not be
taxed under this title in respect to income received by them as such-

xxx xxx xxx

(g) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;

(h) Club organized and operated 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;

xxx xxx xxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any 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 the tax imposed under this Code.

In the case at bar, the exemptions claimed by YMCA is expressly disallowed by the very
wording of the last paragraph of section 27 which mandates that the income of exempt
organizations from any of their properties, real or personal, be subject to tax the rent
income of the YMCA from its real property.
YMCA is only exempt from payment of property tax, but not income tax on the rentals from
its property.

6. CIR VS. V. G. SINCO EDUC. COR

G.R. No. L-9276. October 23, 1956

SYLLABUS

1. SCHOOL AND COLLEGES; NON-PROFIT INSTITUTIONS; PAYMENT FOR SERVICES

RENDERED IS NOT DISTRIBUTION OF PROFIT; CASE AT BAR. — Appellee is a non-profit
institution and since its organization it has never distributed any dividend or profit to its
stockholders. Only part of its income went to the payment of its teachers or professors and
to the other expenses of the colleges incident to an educational institution but none of the
income had never been channeled to the benefit of any individual stockholders. Held:
Whatever payment is made to those who work for a school or college as a remuneration for
their services is not considered as distribution of profit as would make the school one
conducted for profit. In the case of Mayor and Common Council of Borough of Princeton vs.
State Board of Taxes & Assessments, et al., 115 Atl., 342, wherein the principal officer of
the school was formerly its owner and principal and as such principal he was given a salary
for his services, the court held that the school is not conducted for profit merely because
moderate salaries were paid to the principal and to the teachers.

2. ID.; ID.; CHARGING OF TUITION FEES DOES NOT MAKE SCHOOL PROFIT-MAKING
ENTERPRISE. — The fact that the appellant charges tuition fees and other fees for the
different services it renders to the students, which is its only source of income, does not in
itself make the school a profit-making enterprise that would place it beyond the purview of
the law. Thus, this Court has held that "the amount of fees charged by a school, college or
university depends, ultimately upon the policy and a given administration, at a particular
time. It is not conclusive of the purposes of the institution. Otherwise, such purpose would
vary with the particular persons in charge of the administration of the organization." (Jesus
Sacred Heart College vs. Collector of internal Revenue, 95 Phil., 16).

3. ID.; ID.; ACQUISITION OF ADDITIONAL FACILITIES; DISTRIBUTION OF ASSETS TO

STOCKHOLDERS UPON DISSOLUTION DOES NOT AFFECT RIGHT OF EXEMPTION. — While
the acquisition of additional facilities, such as buildings and equipment, may rebound to the
benefit of the institution itself, it cannot be positively asserted that the same will redound to
the benefit of its stockholder, for no one can predict the financial condition of the institution
upon its dissolution. At any rate, it has been held by several authorities that the mere
provision for the distribution of its assets to the stockholders upon dissolution does not
remove the right of an educational institution from tax exemption. Thus, in the case of U.S.
vs. Pickwick Electric Membership Corp., 158 F. 2d 272, 177, it was held — "The fact that the
members may receive some benefit on dissolution upon distribution of the assets is a
contingency too remote to have any material bearing upon the question where the
association is admittedly not a scheme to avoid taxation and its good faith and honesty of
purpose is not challenged."

4. TAXATION; TAX EXEMPTION; FAILURE TO PROVE RIGHT OF EXEMPTION CAN NOT

CONSTITUTE WAIVER OF RIGHT. — The proof of exemption required by section 243,
Regulation No. 2, Department of Finance is intended to relieve the tax-payer of the duty of
filing returns and paying the tax. The failure to observe the requirement called for therein
can not constitute a waiver of the right to enjoy the exemption. To hold otherwise would be
tantamount to incorporating into the tax laws same legislative matter by administrative
regulation.

||| (Collector of Internal Revenue v. G. Sinco Educational Corp., G.R. No. L-9276, [October
23, 1956], 100 PHIL 127-135)

Facts:

In 1949, Vicente G. Sinco established and operated Foundation College of Dumaguete, an

educational institution. Sinco would have continued operating said college were it not for the
requirement of the Department of Education that as far as practicable schools and colleges
recognized by the government should be incorporated, and so on September 21, 1951, the
V. G. Sinco Educational Institution was organized. This corporation was non-stock and was
capitalized by V. G. Sinco and members of his immediate family. This corporation continued
the operations of Foundation College of Dumaguete. Since its operation, this college
derived, by way of tuition fees gross profits.

The CIR assessed against the college an income tax for the years 1950 and 1951 in the
aggregate sum of P5,364.77, which was paid by the college. Two years thereafter, the
corporation commenced an action for the refund of this amount alleging that it is exempt
from income tax under section 27 (e) of the National Internal Revenue Code.

Invoking section 27 (e) of the National Internal Revenue Code, the Appellee claims that it is
exempt from the payment of the income tax because it is organized and maintained
exclusively for the educational purposes and no part of its net income inures to the benefit
of any private individual.

Issue: Whether or not V.G. Sinco Educational institution an educational institution

in which part of its income inures to the benefit of one of its stockholders.

Ruling:

Appellee is a non-profit institution and since its organization it has never distributed any
dividend or profit to its stockholders. Of course, part of its income went to the payment of
its teachers or professors and to the other expenses of the college incident to an
educational institution but none of the income has ever been channeled to the benefit of any
individual stockholder. The authorities are clear to the effect that whatever payment is
made to those who work for a school or college as a remuneration for their services is not
considered as distribution of profit as would make the school one conducted for profit.

it is not denied that the Appellee charges tuition fees and other fees for the different
services it renders to the students and in fact it is its only source of income, but such fact
does not in itself make the school a profit-making enterprise that would place it beyond the
purview of the law.

“Again, the amount of fees charged by a school, college or university depends, ultimately,
upon the policy and a given administration, at a particular time. It is not conclusive of the
purposes of the institution. Otherwise, such purpose would vary with the particular persons
in charge of the administration of the organization.”

With regard to the claim of Appellant that Appellee is not entitled to exemption because it
has not complied with the requirement of section 24, Regulation No. 2 of the Department of
Finance, we find correct the following observation of the Court of Tax Appeals:
“And regarding the proof of exemption required by section 24, Regulation No. 2,
Department of Finance which, according to the Defendant, is a condition precedent before
an educational institution can avail itself of the exemption under consideration, we
understand that it was probably promulgated for the effective enforcement of the provisions
of the Tax Code pursuant to Section 338 of the National Internal Revenue Code. Intended to
relieve the taxpayer of the duty of filing returns and paying the tax, it cannot be said that
the failure to observe the requirement called for therein constitutes a waiver of the right to
enjoy the exemption. To hold otherwise would be tantamount to incorporating into our tax
laws some legislative matter by administrative regulation.”

7. CIR vs. DLSU

G.R. No. 196596, November 09, 2016

Facts:

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority
(LOA) No. 2794 authorizing its revenue officers to examine the latter’s books of accounts
and other accounting records for all internal revenue taxes for the period Fiscal Year Ending
2003 and Unverified Prior Years.

BIR issued a Preliminary Assessment Notice to DLSU.

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed
DLSU the following deficiency taxes: (1) income tax on rental earnings from
restaurants/canteens and bookstores operating within the campus; (2) value-added
tax (VAT) on business income; and (3) documentary stamp tax (DST) on loans and lease
contracts. The BIR demanded the payment of P17,303,001.12, inclusive of surcharge,
interest and penalty for taxable years 2001, 2002 and 2003.

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU
filed on August 3, 2005 a petition for review with the CTA Division.

DLSU, a non-stock, non-profit educational institution, principally anchored its petition

on Article XIV, Section 4 (3) of the Constitution, which reads:

(3)

All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties.
xxx

the Commissioner posits that a tax-exempt organization like DLSU is exempt only from
property tax but not from income tax on the rentals earned from property. Thus, DLSU’s
income from the leases of its real properties is not exempt from taxation even if the income
would be used for educational purposes.

Issue: Whether DLSU’s income and revenues proved to have been used actually,
directly and exclusively for educational purposes are exempt from duties and
taxes.
Ruling:

I. The revenues and assets of non-stock, non-profit educational institutions proved to have
been used actually, directly, and exclusively for educational purposes are exempt from
duties and taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:

(3)

All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties.
Upon the dissolution or cessation of the corporate existence of such institutions, their assets
shall be disposed of in the manner provided by law. Proprietary educational institutions,
including those cooperatively owned, may likewise be entitled to such exemptions subject to
the limitations provided by law including restrictions on dividends and provisions for
reinvestment [underscoring and emphasis supplied]

Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions: (1) non-
stock, non-profit educational institutions and (2) proprietary educational institutions.[69]

Second, DLSU falls under the first category. Even the Commissioner admits the status of
DLSU as a non-stock, non-profit educational institution.[70]

Third, while DLSU’s claim for tax exemption arises from and is based on the Constitution,
the Constitution, in the same provision, also imposes certain conditions to avail of the
exemption. We discuss below the import of the constitutional text vis-a-vis the
Commissioner’s counter-arguments.

Fourth, there is a marked distinction between the treatment of non-stock, non-profit

educational institutions and proprietary educational institutions. The tax exemption granted
to non-stock, non-profit educational institutions is conditioned only on the actual, direct and
exclusive use of their revenues and assets for educational purposes. While tax exemptions
may also be granted to proprietary educational institutions, these exemptions may be
subject to limitations imposed by Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a

proprietary educational institution is crucial in determining the nature and extent of the tax
exemption granted to non-stock, non-profit educational institutions.

The Commissioner opposes DLSU’s claim for tax exemption on the basis of Section 30 (H) of
the Tax Code. The relevant text reads:

The following organizations shall not be taxed under this Title [Tax on Income] in respect to
income received by them as such:

xxxx

(H) A non-stock and non-profit educational institution

xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any 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. [underscoring and emphasis
supplied]

The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to
non-stock, non-profit educational institutions such that the revenues and income they
derived from their assets, or from any of their activities conducted for profit, are
taxable even if these revenues and income are used for educational purposes.

Did the 1997 Tax Code qualifY the tax exemption constitutionally-granted to non-stock,
non-profit educational institutions?

We answer in the negative.

While the present petition appears to be a case of first impression,[71] the Court in
the YMCA case had in fact already analyzed and explained the meaning of Article XIV,
Section 4 (3) of the Constitution. The Court in that case made doctrinal pronouncements
that are relevant to the present case.

The issue in YMCA was whether the income derived from rentals of real property owned by
the YMCA, established as a “welfare, educational and charitable non-profit corporation,” was
subject to income tax under the Tax Code and the Constitution.[72]

The Court denied YMCA’s claim for exemption on the ground that as a charitable
institution falling under Article VI, Section 28 (3) of the Constitution,[73] the YMCA is not
tax-exempt per se; “what is exempted is not the institution itself…those exempted from real
estate taxes are lands, buildings and improvements actually, directly and exclusively used
for religious, charitable or educational purposes.”[74]

The Court held that the exemption claimed by the YMCA is expressly disallowed by the last
paragraph of then Section 27 (now Section 30) of the Tax Code, which mandates that the
income of exempt organizations from any of their properties, real or personal, are subject to
the same tax imposed by the Tax Code, regardless of how that income is used. The Court
ruled that the last paragraph of Section 27 unequivocally subjects to tax the rent income of
the YMCA from its property.[75]

In short, the YMCA is exempt only from property tax but not from income tax.

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the
tax privilege granted under Article XIV, Section 4 (3) of the Constitution.

The Court denied YMCA’s claim that it falls under Article XIV, Section 4 (3) of the
Constitution holding that the term educational institution, when used in laws granting tax
exemptions, refers to the school system (synonymous with formal education); it includes a
college or an educational establishment; it refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal school system.[76]

The Court then significantly laid down the requisites for availing the tax exemption under
Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock,
non-profit educational institution; and (2) the income it seeks to be exempted from taxation
is used actually, directly and exclusively for educational purposes.[77]
We now adopt YMCA as precedent and hold that:

The last paragraph of Section 30 of the Tax Code is without force and effect with respect to
non-stock, non-profit educational institutions, provided, that the non-stock, non-profit
educational institutions prove that its assets and revenues are used actually, directly and
exclusively for educational purposes.

The tax-exemption constitutionally-granted to non-stock, non- profit educational

institutions, is not subject to limitations imposed by law.

The tax exemption granted by the Constitution to non-stock, non-profit educational

institutions is conditioned only on the actual, direct and exclusive use of their assets,
revenues and income[78] for educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable
institutions, churches, parsonages or convents, mosques, and non-profit cemeteries), which
exempts from tax only the assets, i.e., “all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes…,” Article
XIV, Section 4 (3) categorically states that “[a]ll revenues and assets… used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties.”

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the
Constitution is not without significance.

We find that the text demonstrates the policy of the 1987 Constitution, discernible from the
records of the 1986 Constitutional Commission[79] to provide broader tax privilege to non-
stock, non-profit educational institutions as recognition of their role in assisting the State
provide a public good. The tax exemption was seen as beneficial to students who may
otherwise be charged unreasonable tuition fees if not for the tax exemption extended
to all revenues and assets of non-stock, non-profit educational institutions.[80]

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does
not require that the revenues and income must have also been sourced from educational
activities or activities related to the purposes of an educational institution. The phrase all
revenues is unqualified by any reference to the source of revenues. Thus, so long as the
revenues and income are used actually, directly and exclusively for educational purposes,
then said revenues and income shall be exempt from taxes and duties.[81]

We find it helpful to discuss at this point the taxation of revenues versus the taxation
of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business
operations.[82] It may refer to the sale of goods, rendition of services, or the return of an
investment. Revenue is a component of the tax base in income tax,[83] VAT,[84] and local
business tax (LBT).[85]

Assets, on the other hand, are the tangible and intangible properties owned by a person or
entity.[86] It may refer to real estate, cash deposit in a bank, investment in the stocks of a
corporation, inventory of goods, or any property from which the person or entity may derive
income or use to generate the same. In Philippine taxation, the fair market value of real
property is a component of the tax base in real property tax (RPT).[87] Also, the landed
cost of imported goods is a component of the tax base in VAT on importation[88] and tariff
duties.[89]
Thus, when a non-stock, non-profit educational institution proves that it uses
its revenues actually, directly, and exclusively for educational purposes, it shall be
exempted from income tax, VAT, and LBT. On the other hand, when it also shows that it
uses its assets in the form of real property for educational purposes, it shall be exempted
from RPT.

To be clear, proving the actual use of the taxable item will result in an exemption, but the
specific tax from which the entity shall be exempted from shall depend on whether the item
is an item of revenue or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria,

the leased portion is not actually, directly and exclusively used for educational purposes,
even if the bookstore or canteen caters only to university students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley
College, Inc. v. Aquino.[90] We ruled in that case that the test of exemption from taxation
is the use of the property for purposes mentioned in the Constitution. We also held that the
exemption extends to facilities which are incidental to and reasonably necessary for the
accomplishment of the main purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes,
removes such asset from the property tax exemption granted under the
Constitution.[91] There is no exemption because the asset is not used actually, directly and
exclusively for educational purposes. The commercial use of the property is also not
incidental to and reasonably necessary for the accomplishment of the main purpose of a
university, which is to educate its students.

However, if the university actually, directly and exclusively uses for educational
purposes the revenues earned from the lease of its school building, such revenues shall be
exempt from taxes and duties. The tax exemption no longer hinges on the use of the asset
from which the revenues were earned, but on the actual, direct and exclusive use of the
revenues for educational purposes.

Parenthetically, income and revenues of non-stock, non-profit educational

institution not used actually, directly and exclusively for educational purposes are not
exempt from duties and taxes. To avail of the exemption, the taxpayer must factually
prove that it used actually, directly and exclusively for educational purposes the revenues or
income sought to be exempted.

The crucial point of inquiry then is on the use of the assets or on the use of the revenues.
These are two things that must be viewed and treated separately. But so long as the assets
or revenues are used actually, directly and exclusively for educational purposes, they are
exempt from duties and taxes.

The tax exemption granted by the Constitution to non-stock, non-profit educational

institutions, unlike the exemption that may be availed of by proprietary educational
institutions, is not subject to limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions differently from
proprietary educational institutions cannot be doubted. As discussed, the privilege granted
to the former is conditioned only on the actual, direct and exclusive use of their revenues
and assets for educational purposes. In clear contrast, the tax privilege granted to the latter
may be subject to limitations imposed by law.
We spell out below the difference in treatment if only to highlight the privileged status of
non-stock, non-profit educational institutions compared with their proprietary counterparts.

While a non-stock, non-profit educational institution is classified as a tax-exempt entity

under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary
educational institution is covered by Section 27 (Rates of Income Tax on Domestic
Corporations).

To be specific, Section 30 provides that exempt organizations like non-stock, non-profit

educational institutions shall not be taxed on income received by them as such.

Section 27 (B), on the other hand, states that [p]roprietary educational institutions…which
are nonprofit shall pay a tax of ten percent (10%) on their taxable income…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…[the regular
corporate income tax of 30%] shall be imposed on the entire taxable income…[92]

By the Tax Code’s clear terms, a proprietary educational institution is entitled only to the
reduced rate of 10% corporate income tax. The reduced rate is applicable only if: (1) the
proprietary educational institution is non- profit and (2) its gross income from unrelated
trade, business or activity does not exceed 50% of its total gross income.

Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply
to non-stock, non-profit educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect
for being contrary to the Constitution insofar as it subjects to tax the income and revenues
of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purpose. We make this declaration in the exercise of and consistent with our
duty[93] to uphold the primacy of the Constitution.[94]

Finally, we stress that our holding here pertains only to non-stock, non-profit educational
institutions and does not cover the other exempt organizations under Section 30 of the Tax
Code.

For all these reasons, we hold that the income and revenues of DLSU proven to have been
used actually, directly and exclusively for educational purposes are exempt from duties and
taxes.

8. CIR vs. St. Luke’s Medical Center

G.R. No. 195909, September 26, 2012

Facts:

St. Luke’s Medical Center is a hospital organized as a non-stock and non-profit organization.
Sometime in 2002, BIR assessed St. Luke’s deficiency taxes amounting to P76 Million for
1998 which was subsequently reduced. St. Luke’s protested and filed an administrative
protest with BIR but was not acted by the latter within the 180 period thus reaching to the
CTA.

According to BIR, Section 27B of the NIRC imposing a 10% preferential tax rate applies to
St. Luke’s. Its reason is that it amends the exemption on non-profit hospitals and which
prevails over the exemption on income tax granted under Section 30 for non-stock,
nonprofit charitable institution and civic organizations promoting social welfare. It further
claimed that St. Luke’s was actually operating for profit because only 13% came from
charitable purposes and that it had revenues from patient services in 1998.

Meanwhile, St. Luke’s contended that a part of it’s operating income is made up of its free
services and further claimed that its income does not inure to the benefit of anyone.
Furthermore, it argued that it falls under the exception provided under Sec. 30 (E) and (G)
of NIRC and making of profit per se does not destroy its tax exemption.

CTA ruled in favor of St. Luke’s exemption under Sec. 30 and identified St. Luke’s as a
charitable institution.

Issue: Whether or not St. Luke’s is liable for deficiency income tax in 1998 under
Sec. 27 (B) of the NIRC which imposes a preferential tax rate of 10% on the
income of proprietary non-profit hospitals.

Ruling:

Sec. 30 (E) of the NIRC provides that a charitable institution must be: (1) non-stock
corporation or association; (2) organized exclusively for charitable purposes; (3) operated
exclusively for charitable purposes; (4) No part of its net income or asset shall inure to the
benefit of any member , officer or any person. Under the last paragraph of Sec. 30 of the
NIRC if a tax exempt charitable institution conducts "any" activity for profit, such activity is
not tax exempt even as its not-for-profit activities remain tax exempt. It simply means that
even if a charitable institution organized and operated exclusively for charitable purposes is
nevertheless allowed to engage in “activities conducted for profit” without losing its tax
exempt status for its no-for-profit activities. However, as a consequence "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."
Therefore, services rendered to paying patients are activities conducted for profit and thus
taxable under Sec. 27 (B) of the NIRC.

St. Luke's fails to meet the requirements under Section 30 (E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit
hospital under Section 27 (B) of the NIRC as long as it does not distribute any of its profits
to its members and such profits are reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on
its net income from its for-profit activities.

9. Lung Center of the Philippines vs. Quezon City

G.R. No. 114104, June 29, 2004

Facts:

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established
by virtue of PD No. 1823. It is the registered owner of a parcel of land. Erected in the
middle of the lot is a hospital known as the Lung Center of the Philippines. A portion at the
ground floor is being leased to private parties, for canteen and small store spaces, and to
medical or professional practitioners who use the same as their private clinics for their
patients whom they charge for their professional services. A portion is also being leased for
commercial purposes to Elliptical Orchids and Garden Center, a private enterprise.
On 1993, both the land and the hospital building of the petitioner were assessed for real
property taxes. Petitioner filed a Claim for Exemption from real property taxes, predicated
on its claim that it is a charitable institution. It asserts that its character as a charitable
institution is not altered by the fact that it admits paying patients and renders medical
services to them, leases portions of the land to private parties, and rents out portions of the
hospital to private medical practitioners from which it derives income to be used for
operational expenses.

Issue: Whether or not petitioner is a charitable institution and whether the real
properties of the petitioner are exempt from real property taxes.

Ruling:

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether out-
patient, or confined in the hospital, or receives subsidies from the government, so long as
the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or
operating the institution. However, under the 1973 and 1987 Constitutions and Rep. Act No.
7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear
and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are
actually, directly and exclusively used for charitable purposes. Accordingly, only those
portions of the hospital used for patients whether paying or non-paying are exempt from
real property taxes. Those portions of its real property that are leased to private entities are
not exempt from real property taxes as these are not actually, directly and exclusively used
for charitable purposes.