G.R. No. 124043 , October 14, 1998.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN’S CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC., respondents.

FACTS

Private Respondent Young Men’s Christian Association of the Philippines, Inc. (YMCA) is a non-stock, non-profit institution. In 1980, it earned an income of P676,829.80 from leasing out portions of its premises to small shop owners (e.g., restaurants, canteen operators) and P44,259.00 from parking fees collected from non-members. On July 2, 1984, the Commissioner of Internal Revenue (CIR) issued an assessment for deficiency taxes, including income tax, totaling P415,615.01. The YMCA protested. The CIR denied the protest. The YMCA filed a petition for review with the Court of Tax Appeals (CTA). The CTA ruled in favor of YMCA, dismissing the deficiency income tax assessment. It found the leasing of facilities and operation of the parking lot to be reasonably incidental and necessary for the accomplishment of YMCA’s objectives, with rentals and fees being minimal and used to support its activities. The CIR appealed to the Court of Appeals (CA). The CA initially reversed the CTA, but upon YMCA’s motion for reconsideration, it reversed itself and affirmed the CTA decision in toto. The CIR’s motion for reconsideration was denied, prompting this petition.

ISSUE

Is the income derived by the YMCA from rentals of its real property and from parking fees subject to income tax under the National Internal Revenue Code and the Constitution?

RULING

Yes. The petition is meritorious. The income from rentals and parking fees is subject to income tax. The Court held that the last paragraph of Section 27 of the National Internal Revenue Code (as amended by Presidential Decree No. 1457) explicitly states that the income of whatever kind and character of exempt organizations (like civic leagues or clubs not organized for profit) from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition of such income, shall be subject to tax. The YMCA’s claimed exemption under Section 27(g) as a civic league or organization not organized for profit does not apply to such rental income. The Court further ruled that the constitutional tax exemption under Article VI, Section 28(3) of the 1987 Constitution (and its predecessor provisions) for properties “actually, directly, and exclusively used for religious, charitable, or educational purposes” is a property tax exemption, not an income tax exemption. The income from the lease of the property is thus taxable, even if the property itself might be exempt from real property tax. The fact that the income is used to support YMCA’s charitable programs is immaterial, as the law taxes the income-generating activity itself. The Court distinguished this from activities that are strictly incidental to the main purpose of the institution. The CA erred in affirming the CTA’s conclusion that the rental income was tax-exempt. The assessments for deficiency income tax were reinstated.