ASSOCIATION OF NON-PROFIT CLUBS, INC. (ANPC) vs. BIR

GR No. 228539 dated June 26, 2019

FACTS: 

The Bureau of Internal Revenue (BIR) issued RMC No. 35-2012 which provides- 

• 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.
• the gross receipts of recreational clubs including but not limited to membership fees, assessment dues, rental income, and service fees are subject to VAT. 

Petitioners filed a petition for declaratory relief before the RTC 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-making authority in interpreting that payments of membership fees, assessment dues, and service fees are considered as income subject to income tax, as well as a sale of service that is subject to VAT, 

The RTC denied the petition for declaratory relief[24] and upheld the validity and constitutionality of RMC No. 35-2012.

ISSUE:

Whether all income generated from whatever source, including membership fees, assessment dues, rental income, and service fees. (a) all income generated from whatever source shall be liable for income tax and (b) gross receipts subject to VAT.

HELD:

NO. 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 “gross receipts of recreational clubs” that are “subject to [Value Added Tax].”

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,

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 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. Capital is wealth, while income is the service of wealth.

Case law provides that in order to constitute “income,” there must be realized “gain.” Clearly, because of the nature 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. 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 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.