CIR V DLSU G.R. 196596 Nov. 9 2016

Facts
In 2004, the Bureau of Internal Revenue (BIR) issued a letter authorizing it’s revenue officers to examine the book of accounts of and records for the year 2003 De La Salle University (DLSU) and later on issued a demand letter to demand payment of tax deficiencies for:

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 for the years 2001,2002, and 2003, amounting to  P17,303,001.12.

DLSU protested the assessment that was however not acted upon, and later on filed a petition for review with the Court of Tax Appeals(CTA). DLSU argues that as a non-stock, non-profit educational institution, it is exempt from paying taxes according to Article XIV, Section 4 (3) of the Constitution (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.)

The CTA only granted the removal of assessment on the load transactions. Both CIR and DLSU moved for reconsideration, the motion of the CIR was denied. The CIR appealed to the CTA en banc arguing that DLSU’s use of its revenues and assets for non-educational or commercial purposes removed these items from the exemption, 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.
DLSU on the other hand offered supplemental pieces of documentary evidence to prove that its rental income was used actually, directly and exclusively for educational purposes and no objection was made by the CIR.

Thereafter, DLSU filed a separate petition for review with the CTA En Banc on the following grounds:

1. The entire assessment should have been cancelled because it was based on an invalid LOA;
2. Assuming the LOA was valid, the CTA Division should still have cancelled the entire assessment because DLSU submitted evidence similar to those submitted by Ateneo De Manila University (Ateneo) in a separate case where the CTA cancelled Ateneo’s tax assessment; and
3. The CTA Division erred in finding that a portion of DLSU’s rental income was not proved to have been used actually, directly and exclusively for educational purposes.
4. That under RMO No.43-90, LOA should cover only 1 year, the LOA issued by CIR is invalid for covering the years 2001-2003

The CTA en banc ruled that the case of Ateneo is not applicable because it involved different parties, factual settings, bases of assessments, sets of evidence, and defenses, it however further reduced the liability of DLSU to P2,554,825.47

CIR argued that the rental income is taxable regardless of how such income is derived, used or disposed of. DLSU’s operations of canteens and bookstores within its campus even though exclusively serving the university community do not negate income tax liability. Article XIV, Section 4 (3) of the Constitution must be harmonized with Section 30 (H) of the Tax Code, which states among others, that the income of whatever kind and character of [a non-stock and non-profit educational institution] from any of [its] properties, real or personal, or from any of (its] activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed by this Code.
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.

DLSU argued that Article XIV, Section 4 (3) of the Constitution is clear that all assets and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes are exempt from taxes and duties. Under the doctrine of constitutional supremacy, which renders any subsequent law that is contrary to the Constitution void and without any force and effect. Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income of whatever kind and character of a non-­stock and non-profit educational institution from any of its properties, real or personal, or from any of its activities conducted for profit regardless of the disposition made of such income, should be declared without force and effect in view of the constitutionally granted tax exemption on “all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes.“
that it complied with the requirements for the application of Article XIV, Section 4 (3) of the Constitution.

Issue:

1. Whether DLSU is taxable as a non-stock, non-profit educational institution whose income have been used actually, directly and exclusively for educational purposes.
2. Whether the entire assessment should be void because of the defective LOA

Held:

1. First issue:
   1. 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.
   2. Revenues consist of the amounts earned by a person or entity from the conduct of business operations. 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, VAT, and local business tax (LBT). Assets, on the other hand, are the tangible and intangible properties owned by a person or entity. 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). Also, the landed cost of imported goods is a component of the tax base in VAT on importation and tariff duties. 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.
   3. 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 to uphold the primacy of the Constitution.
2. Second Issue:
   1. No.“A Letter of Authority LOA should cover a taxable period not exceeding one taxable year. The practice of issuing LOAs covering audit of unverified prior years is hereby prohibited. If the audit of a taxpayer shall include more than one taxable period, the other periods or years shall be specifically indicated in the LOA.”
   2. The requirement to specify the taxable period covered by the LOA is simply to inform the taxpayer of the extent of the audit and the scope of the revenue officer’s authority. Without this rule, a revenue officer can unduly burden the taxpayer by demanding random accounting records from random unverified years, which may include documents from as far back as ten years in cases of fraud audit.
   3. The assessment for taxable year 2003 is valid because this taxable period is specified in the LOA. DLSU was fully apprised that it was being audited for taxable year 2003. While the assessments for taxable years 2001 and 2002 are void for having been unspecified on separate LOAs as required under RMO No. 43-90.

Credit to: Karl Derrick Guevarra