In a significant win for non-profit recreational clubs, the Supreme Court clarified that membership fees and assessment dues collected by these clubs are not considered income subject to income tax or value-added tax (VAT). This ruling protects these clubs from tax liabilities on funds that are used for maintenance and operations, affirming that such fees represent capital contributions rather than income. This decision provides much-needed clarity for recreational clubs, ensuring they can continue to operate without facing undue tax burdens on funds essential for their upkeep and services to members.

Private Clubs vs. Public Coffers: When Do Membership Dues Become Taxable Income?

The Association of Non-Profit Clubs, Inc. (ANPC) challenged Revenue Memorandum Circular (RMC) No. 35-2012 issued by the Bureau of Internal Revenue (BIR), which sought to clarify the taxability of recreational clubs. The BIR’s circular stated that these clubs were subject to income tax and VAT on all sources of income, including membership fees and assessment dues. ANPC argued that these fees are not income but contributions from members to cover operational expenses. This case reached the Supreme Court to determine whether RMC No. 35-2012 was a valid interpretation of the National Internal Revenue Code (NIRC).

The BIR based its position on the doctrine of casus omissus pro omisso habendus est, arguing that since recreational clubs were no longer explicitly exempt under the 1997 NIRC, their income from all sources should be taxable. The RMC interpreted membership fees and assessment dues as income subject to both income tax and VAT. ANPC, on the other hand, contended that these fees are merely contributions from members to cover operating costs, not income. The central legal question was whether the BIR’s interpretation of income and gross receipts to include membership fees and dues was a valid exercise of its rule-making authority.

The Supreme Court partly sided with ANPC. The Court agreed that the removal of the tax exemption for recreational clubs in the 1997 NIRC meant that they were now generally subject to income tax. However, it disagreed with the BIR’s broad interpretation that membership fees and assessment dues automatically constitute taxable income. The Court distinguished between capital and income, referencing the principle established in Madrigal v. Rafferty:

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.

The Court emphasized that membership fees and assessment dues are contributions to maintain and operate the clubs’ facilities for the benefit of their members. These funds are held in trust for specific purposes and do not represent a gain or profit for the club. The Supreme Court stated:

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.

Therefore, imposing income tax on these fees would amount to taxing capital, which the Court deemed an unconstitutional confiscation of property, citing Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo. The Court invalidated the BIR’s interpretation in RMC No. 35-2012 that swept all membership fees and assessment dues into the category of taxable income. This limitation on the BIR’s rule-making power ensures that administrative regulations do not exceed the scope of the law they seek to enforce.

Similarly, the Court invalidated the portion of RMC No. 35-2012 subjecting membership fees and dues to VAT. The VAT applies to the sale, barter, or exchange of goods or services. The Court explained:

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 “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.

Since the collection of membership fees and dues does not constitute a sale of goods or services, it falls outside the scope of VAT. This aspect of the ruling reinforces the principle that VAT is an indirect tax on consumption, not a tax on contributions for operational support.

The Court, in reaching its decision, addressed procedural questions as well. The BIR argued that ANPC violated the doctrine of hierarchy of courts by directly appealing to the Supreme Court and failed to exhaust administrative remedies by not first seeking review from the Secretary of Finance. The Supreme Court, however, ruled that direct resort was proper because the case involved a pure question of law. Furthermore, the urgency of the tax implications justified relaxing the exhaustion of administrative remedies rule, as the imposition of taxes on membership fees was imminent.

What was the key issue in this case?	The central issue was whether membership fees and assessment dues collected by non-profit recreational clubs should be considered income subject to income tax and VAT.
What did the BIR argue?	The BIR argued that since recreational clubs were no longer tax-exempt under the 1997 NIRC, their income, including membership fees, should be taxed. They relied on RMC No. 35-2012, which clarified this taxability.
What did ANPC argue?	ANPC contended that membership fees are not income but contributions for the maintenance and operations of the clubs, and thus should not be taxed. They argued that RMC No. 35-2012 exceeded the BIR’s rule-making authority.
What was the Supreme Court’s ruling?	The Supreme Court ruled that while recreational clubs are generally subject to income tax, membership fees and assessment dues intended for maintenance and operations are not considered income and are not subject to income tax or VAT.
Why aren’t membership fees considered income?	The Court reasoned that these fees are contributions to capital, held in trust for the clubs’ operations, and do not represent a gain or profit that would qualify as income.
Why aren’t membership fees subject to VAT?	The Court explained that the collection of these fees does not constitute a sale of goods or services, which is a prerequisite for VAT liability.
What is the practical implication of this ruling?	Non-profit recreational clubs are protected from tax liabilities on membership fees and dues used for essential operational expenses, providing financial relief and clarity.
What is the doctrine of casus omissus pro omisso habendus est?	This doctrine states that what is omitted from an enumeration must be considered intentionally omitted. The BIR used this to argue that the removal of tax exemptions meant intent to tax recreational clubs.

This decision clarifies the tax treatment of membership fees and assessment dues for non-profit recreational clubs. By distinguishing between capital contributions and taxable income, the Supreme Court has protected these organizations from undue tax burdens on funds essential for their operation. This ruling serves as a reminder of the limits of administrative agencies’ rule-making authority and the importance of adhering to constitutional principles of taxation.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: ASSOCIATION OF NON-PROFIT CLUBS, INC. (ANPC) VS. BUREAU OF INTERNAL REVENUE (BIR), G.R. No. 228539, June 26, 2019