197. Tax Exemption of Nonstock, Nonprofit Entities BDB 06.02.11
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BDB Law’s “Tax Law for Business”appears in the opinion section ofBusiness Mirrorevery Thursday. Tax exemption of nonstock, nonprofit entities Two cases recently decided upon by the Court of Tax Appeals (CTA) have caught my interest. Both of them involve a nonstock, nonprofit (NSNP) institution—one pertains to a hospital operated by a religious organization and the other pertains to a school, also operated by a religious organization. In both cases, the CTA upheld theirtax exemptions. The first involves Perpetual Succor Hospital Inc., a nonstock, nonprofit religious and charitable hospital owned by the Sisters of St. Paul de Charters (CTA No. 7304, December 1, 2010). It was assessed by the Bureau of Internal Revenue (BIR) of a 10-percent deficiency income tax on its income from hospital operations on the basis of Section 27(B) of the Tax Code that clearly imposes a 10-percent income tax on nonprofit hospitals. Perpetual Succor, however, claimed tax exemption on the basis of another section of the Tax Code (Section 30E), which exempts from tax the income of nonstock, nonprofit charitable institutions. Thus, the issue that has to be resolved was whether Perpetual Succor is a non-profit hospital subject to 10-percent income tax or a nonstock, nonprofit charitable hospital exempt from income tax. In this case, the CTA liberalized the normally strict interpretation of tax exemptions, applying instead the true intent of the law that as long as no part of the income flows or inure to the benefit of any member, organizer, officer or any specific person, any income that may be generated in furtherance of its purpose as NSNP shall still enjoy the tax exemption granted under Section 30 of the Tax Code. In short, the real test of exemption is not whether an income is earned by the NSNP but whether that income flowed to any member or organizer. In making a distinction between a nonprofit hospital subject to 10-percent income tax and a nonstock, nonprofit hospital exempt from income tax, the court made the following differentiation: A nonprofit hospital is a proprietary or private hospital which income from activity unrelated to hospital business is not more than 50 percent of its total gross income. A nonstock, nonprofit hospital, on the other hand, is a nonstock corporation operated exclusively for charitable purposes and no part of its income inures to the benefit of any member, organizer or a specific person. In fact, the court said the receipt of f ees from services rendered, such as t hose from pay-patients,
