Subject: Taxation Law I Topic: TAX EXEMPT CORPORATIONS Case Assignment No.

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SECOND DIVISION

June 26, 2019

G.R. No. 228539

ASSOCIATION OF NON-PROFIT CLUBS, INC. (ANPC), HEREIN REPRESENTED BY ITS AUTHORIZED

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari  are the Decision  dated July 1, 2016 and the Order  dated November
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7, 2016 of the Regional Trial Court of Makati City, Branch 134 (RTC), in Special Civil Case No. 14- 985, which
denied petitioner Association of Non-Profit Clubs, Inc. (ANPC)'s petition  for declaratory relief, thereby upholding in
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full the validity of Revenue Memorandum Circular (RMC) No. 35-2012. 5

The Facts

On August 3, 2012, respondent the Bureau of Internal Revenue (BIR) issued RMC No. 35-2012, entitled "Clarifying
the Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation, and Other Non-Profit
Purposes,"  which was addressed to all revenue officials, employees, and others concerned for their guidance
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regarding the income tax and Valued Added Tax (VAT) liability of the said recreational clubs. 7

On the income tax component, RMC No. 35-2012 states that "[c]lubs which are organized and operated
exclusively for pleasure, recreation, and other non-profit purposes are subject to income tax under the
National Internal Revenue Code [(NIRC)] of 1997,  as amended [(1997 NIRC)]."  The BIR justified the foregoing
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interpretation based on the following reasons:

According to the doctrine of casus omissus pro omisso habendus est, a person, object, or thing
omitted from an enumeration must be held to have been omitted intentionally. The provision in the
(1977 Tax Code] which granted income tax exemption to such recreational clubs was omitted in the
current list of tax exempt corporations under [the 1997 NIRC], as amended. Hence, the income of
recreational clubs from whatever source, including but not limited to membership fees,
assessment dues, rental income, and service fees are subject to income tax.  (Emphasis and
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underscoring supplied)

Likewise, on the VAT component, RMC No. 35-2012 provides that "the gross receipts of recreational clubs
including but not limited to membership fees, assessment dues, rental income, and service fees are subject
to VAT."  As basis, the BIR relied on Section 105,  Chapter I, Title IV of the 1997 NIRC, which states that even a
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nonstock, nonprofit private organization or government entity is liable to pay VAT on the sale of goods or services.13

On October 25, 2012, ANPC, along with the representatives of its member clubs, invited Atty. Elenita Quimosing
(Atty. Quimosing), Chief of Staff, Operations Group of the BIR, to discuss "specifically the effects of the said
[C]ircular and to seek clarification and advice from the BIR on how it will affect the operational requirements of each
club and their members/stakeholders."  During their meeting, Atty. Quimosing discussed the basis and effects of
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RMC No. 35-2012, and further suggested that the attendees submit a position paper to the BIR expressing their
concerns. 15

Consequently, ANPC submitted its position paper,  requesting "the non-application of RMC [No.] 35-2012 for
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income tax and VAT liability on membership fees, association dues, and fees of similar nature collected by [the]
exclusive membership clubs from [their] members which are used to defray the expenses of the said
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clubs."  However, despite the lapse of two (2) years, the BIR has not acted upon the request, and all the member
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clubs of ANPC were subjected to income tax and VAT on all membership fees, assessment dues, and service fees. 18

Aggrieved, ANPC, on behalf of its club members, filed a petition  for declaratory relief before the RTC on September
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17, 2014, seeking to declare RMC No. 35-2012 invalid, unjust, oppressive, confiscatory, and in violation of the due
process clause of the Constitution.  ANPC argued that in issuing RMC No. 35-2012, the BIR acted beyond its rule-
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making authority in interpreting that payments of membership fees, assessment dues, and service v fees are
considered as income subject to income tax, as well as a sale of service that is subject to VAT. 21

For its part, the Office of the Solicitor General (OSG), on behalf of the BIR, sought the dismissal of the petition for
ANPC's failure to exhaust all the available administrative remedies. It also argued that RMC No. 35- 2012 is a mere
amplification of the existing law and the rules and regulations of the BIR on the matter, positing that the said Circular
merely explained that by removing recreational clubs from the list of tax exempt entities or corporations, Congress
intended to subject them to income tax and VAT under the 1997 NIRC. 22

The RTC Ruling

In a Decision  dated July 1, 2016, the RTC denied the petition for declaratory relief  and upheld the validity and
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constitutionality of RMC No. 35-2012.  On the procedural issue, the RTC found that there was no violation of the
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doctrine of exhaustion of administrative remedies, since judicial intervention was urgent in light of the impending
imposition of taxes on the membership fees and assessment dues paid by the members of the exclusive clubs.  As 26

to the substantive issue, the RTC found that given the apparent intent of Congress to subject recreational clubs to
taxes, the BIR, being the administrative agency concerned with the implementation of the law, has the power to
make such an interpretation through the issuance of RMC No. 35-2012. As an interpretative rule issued well within
the powers of the BIR, the same need not be published and neither is a hearing required for its validity. 27

Undaunted, ANPC sought reconsideration,  which the RTC denied in an Order  dated November 7, 2016. Raising
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pure questions of law, ANPC, herein represented by its authorized representative, Ms. Felicidad M. Del Rosario,
filed the instant petition for review on certiorari directly before the Court.

The Issue Before the Court

The essential issue for the Court's resolution is whether or not the RTC erred in upholding in full the validity of RMC
No. 35-2012.

The Court's Ruling

The petition is partly meritorious.

I.

The Court first resolves the procedural issues.

In its Comment,  the BIR, through the OSG, seeks the dismissal of the present petition on the ground that ANPC
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violated the doctrine of hierarchy of courts due to its direct resort before the Court.  Moreover, it asserts that ANPC
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violated the doctrine of exhaustion of available administrative remedies, pointing out that ANPC should have first
elevated the matter to the Secretary of Finance for review pursuant to Section 4,  Title I of the 1997 NIRC.
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The contentions are untenable.

First, the Court holds that there was no violation of the doctrine of hierarchy of courts because the present petition
for review on certiorari, filed pursuant to Section 2 (c), Rule 41 in relation to Rule 45 of the Rules of Court, is
the sole remedy to appeal a decision of the RTC in cases involving pure questions of law. The doctrine of hierarchy

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of courts is violated only when relief may be had through multiple fora having concurrent jurisdiction over the case,
such as in petitions for certiorari, mandamus, and prohibition which are concurrently cognizable either by the
Regional Trial Courts, the Court of Appeals, or the Supreme Court. In Uy v. Contreras: 34

[W]hile it is true that this Court, the Court of Appeals, and the Regional Trial Courts have concurrent
original jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, and habeas
corpus, such concurrence does not accord litigants unrestrained freedom of choice of the court to
which application therefor may be directed. There is a hierarchy of courts determinative of the
venue of appeals which should also serve as a general determinant of the proper forum for
the application for the extraordinary writs. A becoming regard for this judicial hierarchy by the
petitioner and her lawyers ought to have led them to file the petition with the proper Regional Trial
Court.  (Emphasis and underscoring supplied)
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Clearly, the correctness of the BIR's interpretation of the 1997 NIRC under the assailed RMC is a pure question of
law,  because the same does not involve an examination of the probative value of the evidence presented by the
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litigants or any of them.  Thus, being the only remedy to appeal the RTC's ruling upholding the Circular's validity on
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a purely legal question, direct resort to this Court, through a Rule 45 petition, was correctly availed by ANPC.

Anent the issue of exhaustion of administrative remedies, the Court likewise holds that the said doctrine was not
transgressed.

At the onset, it is apt to point out that RMC No. 35-2012 only clarified the taxability (particularly, income tax and VAT
liability) of clubs organized and operated exclusively for pleasure, recreation, and other non-profit purposes based
on the BIR's own interpretation of the NIRC provisions on income tax and VAT. Evidently, it was not designed "to
implement a primary legislation by providing the details thereof' as in a legislative rule; but rather, was intended only
to "provide guidelines to the law which the administrative agency is in charge of enforcing,"  as the said Circular
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was, in fact, addressed to "[a]ll [r]evenue [o]fficials, [e]mployees[,] and [o]thers [c]oncerned"  to guide them in the
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enforcement of income tax and VAT laws against fees collected by the said clubs.

Given its nature, RMC No. 35-2012 is therefore subject to the administrative review of the Secretary of Finance
pursuant to Section 4, Title I of the 1997 NIRC, which provides:

Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power
to interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

x x x x (Emphases supplied)

Thus, as dictated by the rule on exhaustion of administrative remedies,  the validity of RMC No. 35-2012 should
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have been first subjected to the review of the Secretary of Finance before ANPC sought judicial recourse with the
RTC.

However, as exceptions to this rule, when the issue involved is purely a legal question (as above-explained), or
when there are circumstances indicating the urgency of judicial intervention  - as in this case where membership
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fees, assessment dues, and the like of all recreational clubs would be imminently subjected to income tax and VAT -
then the doctrine of exhaustion of administrative remedies may be relaxed.

Accordingly, ANPC's recourse to the RTC and now, before this Court are permissible and hence, are not grounds to
dismiss this case. That being said, the Court now proceeds to resolve the substantive issue on whether or not RMC
No. 35-2012 is valid.

II.

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To recount, RMC No. 35-2012 is an interpretative rule issued by the BIR to guide all revenue officials, employees,
and others concerned in the enforcement of income tax and VAT laws against clubs organized and operated
exclusively for pleasure, recreation, and other non-profit purposes ("recreational clubs" for brevity).

As to its income tax component, RMC No. 35-2012 provides the interpretation that since the old tax exemption
previously accorded under Section 21 (h),  Chapter III, Title II of Presidential Decree No. 1158, otherwise known as
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the "National Internal Revenue Code of 1977"  (1977 Tax Code), to recreational clubs was deleted in the 1997
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NIRC, then the income of recreational clubs from whatever source, including but not limited to membership
fees, assessment dues, rental income, and service fees, is subject to income tax.

The interpretation is partly correct.

Indeed, applying the doctrine of casus omissus pro omisso habendus est (meaning, a person, object or thing
omitted from an enumeration must be held to have been omitted intentionally ) , the fact that the 1997 NIRC omitted
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recreational clubs from the list of exempt organizations under the 1977 Tax Code evinces the deliberate intent of
Congress to remove the tax income exemption previously accorded to these clubs. As such, the income that
recreational clubs derive "from whatever source"  is now subject to income tax under the provisions of the 1997
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NIRC.

However, notwithstanding the correctness of the above-interpretation, RMC No. 35-2012 erroneously foisted a
sweeping interpretation that membership fees and assessment dues are sources of income of recreational
clubs from which income tax liability may accrue, viz.:

The provision in the [1977 Tax Code] which granted income tax exemption to such recreational clubs
was omitted in the current list of tax exempt corporations under the [1997 NIRC], as
amended. Hence, the income of recreational clubs from whatever source, including but not
limited to membership fees, assessment dues, rental income, and service fees [is] subject to
income tax.  (Emphases and underscoring supplied)
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The distinction between "capital" and "income" is well-settled in our jurisprudence. As held in the early case
of Madrigal v. Rafferty,  "capital" has been delineated as a "fund" or "wealth," as opposed to "income" being "the
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flow of services rendered by capital" or the "service of wealth":

Income as contrasted with capital or property is to be the test. The essential difference between
capital and income is that capital is a fund; income is a flow. A fund of property existing at an
instant of time is called capital. A flow of services rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of capital in relation to such fund through a period of
time is called income. Capital is wealth, while income is the service of wealth. (See Fisher, "The
Nature of Capital and Income.") The Supreme Court of Georgi;expresses the thought in the following
figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the
fruit; capital is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on
income is not a tax on property. "Income," as here used, can be defined as "profits or
gains." (London County Council vs. Attorney General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L.
T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax, second edition
[1915], Chapter IV; Black on Income Taxes, second edition [1915], Chapter VIII; Gibbons vs.
Mahon [1890], 136 U.S., 549; and Towne vs. Eisner, decided by the United States Supreme Court,
January 7, 1918.)  (Emphases and underscoring supplied)
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In Conwi v. Court of Tax Appeals,  the Court elucidated that "income may be defined as an amount of money
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coming to a person or corporation within a specified time, whether as payment for services, interest or profit
from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as a
flow of the fruits of one's labor." 50

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As correctly argued by ANPC, membership fees, assessment dues, and other fees of similar nature  only constitute
contributions to and/or replenishment of the funds for the maintenance and operations of the facilities
offered by recreational clubs to their exclusive members.  They represent funds "held in trust" by these
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clubs to defray their operating and general costs and hence, only constitute infusion of capital.  52

Case law provides that in order to constitute "income," there must be realized "gain."  Clearly, because of the nature
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of membership fees and assessment dues as funds inherently dedicated for the maintenance, preservation, and
upkeep of the clubs' general operations and facilities, nothing is to be gained from their collection. This stands in
contrast to the fees received by recreational clubs coming from their income-generating facilities, such as bars,
restaurants, and food concessionaires, or from income-generating activities, like the renting out of sports equipment,
services, and other accommodations: In these latter examples, regardless of the purpose of the fees' eventual use,
gain is already realized from the moment they are collected because capital maintenance, preservation, or upkeep
is not their pre-determined purpose. As such, recreational clubs are generally free to use these fees for whatever
purpose they desire and thus, considered as unencumbered "fruits" coming from a business transaction.

Further, given these recreational clubs' non-profit nature, membership fees and assessment dues cannot be
considered as funds that would represent these clubs' interest or profit from any investment. In fact, these fees are
paid by the clubs' members without any expectation of any yield or gain (unlike in stock subscriptions), but only for
the above-stated purposes and in order to retain their membership therein.

In fine, for as long as these membership fees, assessment dues, and the like are treated as collections by
recreational clubs from their members as an inherent consequence of their membership, and are, by nature,
intended for the maintenance, preservation, and upkeep of the clubs' general operations and facilities, then
these fees cannot be classified as "the income of recreational clubs from whatever source" that are
"subject to income tax."  Instead, they only form part of capital from which no income tax may be collected
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or imposed.

It is a well-enshrined principle in our jurisdiction that the State cannot impose a tax on capital as it constitutes an
unconstitutional confiscation of property. As the Court held in Chamber of Real Estate and Builders' Associations,
Inc. v. Romulo:55

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very
nature no limits, so that the principal check against its abuse is to be found only in the responsibility
of the legislature (which imposes the tax) to its constituency who are to pay it. Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any other statute, tax
legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of
life, liberty or property without due process of law." In Sison, Jr. v. Ancheta [215 Phil. 582 (1984)], we
held that the due process clause may properly be invoked to invalidate, in appropriate cases,
a revenue measure when it amounts to a confiscation of property. But in the same case, we
also explained that we will not strike down a revenue measure as unconstitutional (for being violative
of the due process clause) on the mere allegation of arbitrariness by the taxpayer. There must be a
factual foundation to such an unconstitutional taint. This merely adheres to the authoritative doctrine
that, where the due process clause is invoked, considering that it is not a fixed rule but rather a
broad standard, there is a need for proof of such persuasive character.

xxxx

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not
income.  In other words, it is income, not capital, which is subject to income tax. x x x.  (Emphases
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supplied)

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In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary,  the Court held that "[a]s
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a matter of power[,] a court, when confronted with an interpretative rule, [such as RMC No. 35-2012,] is free to (i)
give the force of law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii) give some
intermediate degree of authoritative weight to the interpretative rule."  Thus, by sweepingly including in RMC No.
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35-2012 all membership fees and assessment dues in its classification of "income of recreational clubs from
whatever source'' that are "subject to income tax,"  the BIR exceeded its rule-making authority. Case law holds that:
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[T]he rule-making power of administrative agencies cannot be extended to amend or expand

Accordingly, the Court hereby declares the said interpretation to be invalid, and in consequence, sets aside the
ruling of the RTC.

In the same way, the Court declares as invalid the BIR's interpretation in RMC No. 35-2012 that membership fees,
assessment dues, and the like are part of "the gross receipts of recreational clubs" that are "subject to VAT." 61

It is a basic principle that before a transaction is imposed VAT, a sale, barter or exchange of goods or
properties, or sale of a service is required.  This is true even if such sale is on a cost-reimbursement
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basis.  Section 105, Chapter I, Title IV of the 1997 NIRC reads:

Section 105. Persons Liable.- Any person who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders services, and any person who imports
goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to
the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services at the time of the effectivity of
Republic Act No. 7716.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization
(irrespective of the disposition of its net income and whether or not it sells exclusively to members
or their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in
the Philippines by nonresident foreign persons shall be considered as being rendered in the course
of trade or business. (Emphases supplied)

As ANPC aptly pointed out, membership fees, assessment dues, and the like are not subject to VAT because in
collecting such fees, the club is not selling its service to the members. Conversely, the members are not buying
services from the club when dues are paid; hence, there is no economic or commercial activity to speak of as these
dues are devoted for the operations/maintenance of the facilities of the organization.  As such, there could be no
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"sale, barter or exchange of goods or properties, or sale of a service" to speak of, which would then be
subject to VAT under the 1997 NIRC.

WHEREFORE, the petition is GRANTED. The Decision dated July 1, 2016 and the Order dated November 7, 2016
of the Regional Trial Court of Makati City, Branch 134, in Special Civil Case No. 14-985, are hereby  SET ASIDE.
The Court DECLARES that membership fees, assessment dues, and fees of similar nature collected by clubs which
are organized and operated exclusively for pleasure, recreation, and other nonprofit purposes do not constitute
as: (a) "the income of recreational clubs from whatever source" that are "subject to income tax"; and  (b) part of the

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"gross receipts of recreational clubs" that are "subject to [Value Added Tax]." Accordingly, Revenue Memorandum
Circular No. 35-2012 should be interpreted in accordance with this Decision.

SO ORDERED.

Carpio, (Chairperson), Caguioa, J. Reyes, Jr. and Lazaro-Javier, JJ., concur. 1âшphi1

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