BIR vs. First E-Bank Tower Condominium Corp.,

GR No. 215801 dated January 15, 2020

FACTS:

The First E-Bank filed the petition below for declaratory relief seeking to declare as invalid Revenue Memorandum Circular No. 65-2012 entitled “Clarifying the Taxability of Association Dues, Membership Fees and Other Assessments/ Charges Collected by Condominium Corporations”. 

The First E-Bank essentially alleged: It was a non-stock non-profit condominium corporation. RMC No. 65-2012 burdened the owners of the condominium units with income tax and VAT on their own money which they exclusively used for the maintenance and preservation of the building and its premises. RMC No. 65-2012 was oppressive and confiscatory because it required condominium unit owners to produce additional amounts for the thirty-two percent (32%) income tax and twelve percent (12%) VAT.

ISSUES:

(1) whether association dues, membership fees, and other assessments/charges collected by a condominium corporation in the usual course of trade or business shall be subject under income tax. 

(2) Compare the definition of income. 

HELD:

1. NO. RMC No. 65-2012 is invalid for ordaining that “gross receipts of condominium corporations including association dues, membership fees, and other assessments/charges are subject to VAT, income tax and income payments made to it are subject to applicable withholding taxes. 

First, The collection of association dues, membership fees, and other assessments/charges is purely for the benefit of the condominium owners. It is a necessary incident to the purpose to effectively oversee, maintain, or even improve the common areas of the condominium as well as its governance. As held in Yamane “[t]he profit motive in such cases is hardly the driving factor behind such improvements,  if  it were contemplated at all. Any profit that would be derived under such circumstances would merely be incidental, if  not accidental.” More, a condominium corporation is especially formed for the purpose of holding title to the common area and exists only for the benefit of the condominium owners.

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.  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.

Second, In defining taxable income, Section 31 of RA 8424 states:

• Section 31. Taxable Income Defined.- The term taxable income means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws.

• Gross income means income derived from whatever source, including compensation for services; the conduct of trade or business or the exercise of a profession; dealings in property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and a partner’s distributive share in the net income of a general professional partnership, among others (Sec. 32) 

On December 19, 2017, Section 31 was amended by Republic Act No. 10963 (RA 10963 )44 (The TRAIN Law). The provision now reads:

Sec. 31. Taxable Income Defined. The term “taxable income” means the pertinent items of gross income specified in this Code, less deductions if any, authorized for such types of income by this Code or other special laws.

There is no substantial difference between the original definition under RA 8424 and the subsequent definition under the TRAIN Law. The only difference is that the phrase “and/or personal and additional exemptions” was deleted. Still, both the former and current definitions are consistent— ‘taxable income’ refers to “the pertinent items of gross income specified in this Code.”
Section 32 of RA 8424 does not include association dues, membership fees, and other assessments/charges collected by condominium corporations as sources of gross income. The subsequent amendment under the TRAIN Law substantially replicates the old Section 32. Clearly, RMC No. 65-2012 expanded, if not altered, the list of taxable items in the law. RMC No. 65-2012, therefore, is void. Besides, where the basic law and a rule or regulation are in conflict, the basic law prevails.

2. There is no substantial difference between the original definition under RA 8424 and the subsequent definition under the TRAIN Law. The only difference is that the phrase “and/or personal and additional exemptions” was deleted. Still, both the former and current definitions are consistent— ‘taxable income’ refers to “the pertinent items of gross income specified in this Code.”