G.R. No. L-13554; February 28, 1961
COLLECTOR OF INTERNAL REVENUE, petitioner, vs. UNIVERSITY OF THE VISAYAS, respondent.

FACTS

The Collector of Internal Revenue assessed the University of the Visayas for deficiency income taxes, including surcharges, for the years 1946 to 1950, totaling P46,592.03. The assessments were based on net income derived from the university’s educational operations, as determined by a Bureau of Internal Revenue examiner after the respondent failed to file its own returns. The university paid some installments under protest and subsequently filed a claim for refund, arguing it was exempt from income tax. The Court of Tax Appeals ruled in favor of the university, declaring the assessments null and void and ordering a refund of the amounts paid. The Collector appealed this decision to the Supreme Court.
The university was organized as a stock corporation. The Collector contended that the university was not operated exclusively for educational purposes but also for profit, pointing to its substantial net incomes, the supervision it provided to other schools for a fee, an offer to purchase its assets for a large sum indicating increased equity value, and the retention of profits for future distribution. The university denied receiving fees for supervising other schools and maintained all its activities and income were devoted solely to educational purposes.

ISSUE

Whether the University of the Visayas is exempt from the payment of income tax under Section 27(e) of the National Internal Revenue Code.

RULING

Yes, the University of the Visayas is exempt. The Supreme Court affirmed the Tax Court’s judgment. The legal logic hinges on the interpretation of “exclusively” in the tax exemption provision for corporations organized and operated exclusively for educational purposes. The Court clarified that “exclusively” does not mean “primarily” but signifies that the corporation must not engage in activities for profit. The generation of income or profit from its educational operations is not disqualifying, provided that such income is devoted solely to the institution’s educational mission and no part of it inures to the benefit of any private stockholder or individual.
The evidence showed the university’s income was derived solely from tuition and other school fees related to its educational function. The alleged supervision fees from other schools were not proven to have been received by the university corporation itself. The mere fact of profitability or the accumulation of surplus does not destroy the exemption, as the test is the destination of the income, not its existence. Since the university’s profits were reinvested and used for school operations and improvements, and there was no distribution of dividends to stockholders, it remained operated exclusively for educational purposes. The claim for refund for most payments was timely filed, as the last day of the two-year prescriptive period fell on a Sunday, making the filing on the next business day valid.