COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. BISHOP OF THE MISSIONARY DISTRICT OF THE PHILIPPINE ISLANDS OF THE PROTESTANT EPISCOPAL CHURCH IN THE U.S.A. AND THE COURT OF T…

Bishop of the Missionary District versus Commissioner of Internal Revenue

The Case

This is a tax case about a refund. The Commissioner of Internal Revenue collected compensating tax on shipments of hospital and school supplies that a religious society had received from abroad, and the Bishop of the Missionary District of the Philippine Islands of the Protestant Episcopal Church in the United States of America asked for the money back, invoking the exemption in Republic Act Number 1916. The case matters because the Supreme Court settles three questions every tax examiner loves: whether a local branch and its foreign parent are the same person for purposes of a donation, whether a hospital that admits paying patients can still be a charitable institution, and whether the Secretary of Finance may narrow an exemption that Congress itself granted.

Procedural History

The Bishop filed claims for refund with the Commissioner of Internal Revenue. Because the two-year period for recovery of the tax was about to expire, he filed a petition for review in the Court of Tax Appeals without waiting for the Commissioner to act, and later filed two supplemental petitions covering other shipments. The Commissioner denied the claim on the ground that St. Luke's Hospital was not a charitable institution. After trial, the Court of Tax Appeals held the shipments exempt and ordered the Commissioner to refund the amount paid. The Tax Court denied reconsideration, and the Commissioner appealed to the Supreme Court.

Facts

The respondent Bishop is a corporation sole registered with the Securities and Exchange Commission, in charge of administering the temporalities and managing the estates and properties in the Philippines of the Domestic and Foreign Missionary Society of the Protestant Episcopal Church in the United States. The Missionary District of the Philippine Islands is a duly incorporated and established religious society. It owns and operates St. Luke's Hospital in Quezon City, Brent Hospital in Zamboanga City, and St. Stephen's High School in Manila.

On different dates in 1957, 1958 and 1959, the Missionary District received from the Missionary Society in the United States shipments of materials, supplies, equipment and other articles intended for the construction and operation of the new St. Luke's Hospital and of the Brent Hospital and St. Stephen's High School. It also received from a certain William Minnis of Canada a stove for the use of Brent Hospital.

On these shipments the Commissioner levied and collected a total of 118,847 pesos as compensating tax. The Bishop claimed a refund under Republic Act Number 1916. The Commissioner denied the claim, insisting that St. Luke's Hospital was not a charitable institution because it admitted paying patients, and he relied on a Department Order of the Secretary of Finance issued under the law. The Tax Court ruled for the Bishop, and the Commissioner appealed.

Issues

• Whether or not the shipments may be considered donations, given that the Missionary District in the Philippines is a branch of the Missionary Society in the United States.
• Whether or not the finding that the real donors were the contributors to the Missionary Society rests on competent evidence.
• Whether or not St. Luke's Hospital is a charitable institution despite admitting paying patients, and whether or not the Secretary of Finance may by regulation exclude such hospitals from the exemption.

Applicable Provisions

Section 1 of Republic Act Number 1916 provides:

SECTION 1. The provisions of existing laws to the contrary notwithstanding, all donations in any form and all articles imported into the Philippines, consigned to a duly incorporated or established international civic organization, religious or charitable society or institution for civic, religious or charitable purposes shall be exempt from the payment of all taxes and duties upon proof satisfactory to the Commissioner of Customs and/or Collector of Internal Revenue that such donations in any form and articles so imported are donations for its use or for free distribution and not for barter, sale, or hire; Provided, however, That in case such are subsequently conveyed or transferred to other parties for consideration, taxes and duties shall be collected thereon at double the rate provided under existing laws payable by the transferor; Provided, further That rules and regulations shall be promulgated by the Department of Finance for the implementation of this Act.

This is the exemption the Bishop invokes and the provision the Court construes, including the clause granting the Department of Finance power to promulgate implementing rules.

Ruling

On the first issue, the Court held that the importations were donations. By stipulation of the parties, the respondent Bishop is a corporation sole registered with the Securities and Exchange Commission, and the Missionary District is a duly incorporated and established religious society. They are therefore entities separate and distinct from the Missionary Society in New York. That the Missionary District is a branch of the Missionary Society is of no moment; the Roman Catholic Church in the Philippines is likewise a branch of the Universal Roman Catholic Apostolic Church, but only in religious matters, in matters of faith and dogma, and in other respects it is independent.

On the second issue, the Court held that the finding of the Tax Court did not rest solely on the testimony of the treasurer. The various deeds of donation state that the Missionary Society is a non-profit organization and derives its support from voluntary contributions.

On the third issue, the Court held that the admission of paying patients does not detract from the charitable character of a hospital if, as in the case of St. Luke's Hospital, its funds are devoted exclusively to the maintenance of the institution. The Court added that the Secretary of Finance cannot limit or otherwise qualify the enjoyment of the exemption granted under Republic Act Number 1916 in implementing the law.

Doctrine

Three rules follow. First, an exemption under Republic Act Number 1916 requires that the imported articles were donated, that the donee is a duly incorporated or established international civic organization, religious or charitable society or institution, and that the articles were donated for the use of the organization or for free distribution and not for barter, sale or hire. Second, a local religious society incorporated in the Philippines is a juridical person separate and distinct from its foreign parent society, so shipments between them are donations in the legal sense. Third, a hospital that admits paying patients remains a charitable institution where its funds are devoted exclusively to its maintenance, and the Secretary of Finance cannot, through implementing rules, limit or qualify an exemption that Congress granted.

Disposition

The Supreme Court affirmed the decision of the Court of Tax Appeals, without costs, and the Commissioner of Internal Revenue was ordered to refund the 118,847 pesos.

Remember This

Memorize the line that paying patients do not destroy the charitable character of a hospital whose funds are devoted exclusively to its maintenance. Examiners use this case on tax exemptions of religious and charitable institutions, and on the limits of the Secretary of Finance's power to issue implementing regulations.