G.R. No. 196596 /G.R. No. 198841/G.R. No. 198941, November 9, 2016
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. DE LA SALLE UNIVERSITY, INC., Respondent.

FACTS

The Bureau of Internal Revenue (BIR) issued Letter of Authority (LOA) No. 2794 to examine the books of De La Salle University, Inc. (DLSU) for the “Fiscal Year Ending 2003 and Unverified Prior Years.” Based on this audit, the BIR assessed DLSU for deficiency income tax, arguing that its rental income from concessionaires was not exempt. The Court of Tax Appeals (CTA) partially granted DLSU’s petition, finding that only a portion of the rental income was used for educational purposes and thus exempt. Both parties appealed to the Supreme Court.

ISSUE

The primary issue in this digest is the validity of LOA No. 2794. A secondary issue concerns the proper tax treatment of DLSU’s rental income under the constitutional tax exemption for non-stock, non-profit educational institutions.

RULING

Justice Leonen, in his dissenting opinion, argued that LOA No. 2794 was void in its entirety. The legal logic is grounded in administrative law and the principle that a revenue officer’s authority is strictly defined and limited by the LOA. Revenue Memorandum Order (RMO) No. 43-90 explicitly mandates that an LOA “should cover a taxable period not exceeding one taxable year” and prohibits the practice of covering “unverified prior years.” It requires that if multiple periods are audited, they must be “specifically indicated.” LOA No. 2794, by using the phrase “Fiscal Year Ending 2003 and Unverified Prior Years,” was impermissibly broad, indefinite, and uncertain. It violated the clear procedural rules established to prevent arbitrary assessments and undue harassment of taxpayers. Consequently, any assessment derived from an investigation conducted under this defective LOA is a nullity. On the second point, Justice Leonen disagreed with the CTA’s apportionment of DLSU’s rental income. He reiterated that under Article IV, Section 4(3) of the 1987 Constitution , all revenues of a qualified educational institution are exempt from tax if actually, directly, and exclusively used for educational purposes. The focus should be on the use of the income, not its source. Therefore, if DLSU proved the requisite educational use of the entire rental income, it should be fully exempt. The ponencia, however, upheld the validity of the LOA and the apportionment of the tax exemption.