The Supreme Court ruled that a medical arts center built by a hospital to house its doctors is an integral part of the hospital and should be taxed as a special real property at a lower rate, not as a commercial establishment. This means hospitals can provide facilities for their doctors without incurring higher property taxes, as long as these facilities primarily serve the hospital’s patients and are integral to its operations. This decision clarifies the tax treatment of hospital-related facilities and offers financial benefits to non-profit hospitals that provide accessible healthcare services.

Is a Medical Arts Center an Extension of Hospital Care or a Separate Commercial Venture?

At the heart of City Assessor of Cebu City v. Association of Benevola De Cebu, Inc. is the question of whether the Chong Hua Hospital Medical Arts Center (CHHMAC) should be classified as a commercial establishment or an integral part of Chong Hua Hospital (CHH) for property tax purposes. The City Assessor of Cebu City argued that the CHHMAC, being a separate building primarily leased to doctors, should be subject to a 35% assessment rate applicable to commercial properties. The Association of Benevola De Cebu, Inc., the owner of CHH, contended that CHHMAC is an integral part of the hospital and should, therefore, be subject to a 10% special assessment rate typically applied to hospitals.

The dispute arose after the construction of the CHHMAC in the late 1990s. The City Assessor classified the building as “commercial,” leading to a higher tax assessment. The Association Benevola de Cebu, Inc. appealed this classification, arguing that the CHHMAC houses accredited doctors essential to the hospital’s operations. They emphasized that other separate buildings, such as those housing the Dietary and Records Departments, also received the 10% special assessment. This difference in classification prompted a legal battle that ascended from the Local Board of Assessment Appeals (LBAA) to the Supreme Court.

The LBAA sided with the Association, reversing the City Assessor’s decision and declaring that the CHHMAC was entitled to the 10% assessment level. The LBAA reasoned that it is common knowledge that hospitals lease spaces to medical practitioners, and this practice is essential for tertiary hospitals like CHH. The Central Board of Assessment Appeals (CBAA) affirmed the LBAA’s decision, citing Herrera v. Quezon City Board of Assessment Appeals and Abra Valley College, Inc. v. Aquino. These cases established that tax exemptions extend to facilities incidental and reasonably necessary for the accomplishment of charitable or educational purposes.

Unsatisfied, the City Assessor elevated the case to the Court of Appeals (CA), arguing that the CBAA erred in its decision. However, the CA affirmed the CBAA’s decision, emphasizing that the CHHMAC’s facilities are necessary and indispensable for CHH to achieve its ultimate purpose. The appellate court also noted that the collection of rentals from accredited doctors does not alter the CHHMAC’s classification as part of the hospital. The CA relied on Sections 215 and 216 of the Local Government Code, which classify properties used for hospitals as special cases rather than commercial.

Before the Supreme Court, the City Assessor maintained that the CHHMAC is not an integral part of CHH and should not benefit from the 10% special assessment. The City Assessor argued that the CHHMAC is primarily used for leasing to doctors, and the hospital derives rental income from it, thus making it a commercial venture. They also contended that the CHHMAC is not essential for the hospital’s functions. However, the Supreme Court disagreed with the City Assessor’s arguments, affirming the CA’s decision and upholding the lower assessment rate for the CHHMAC.

The Supreme Court emphasized that the accredited doctors and medical specialists in CHHMAC are those who treat CHH’s patients, making the facility integral to the hospital’s operations. The Court referenced Administrative Order No. 68-A, which mandates that tertiary hospitals be fully departmentalized and equipped with the service capabilities needed to support certified medical specialists. Because the physicians holding offices or clinics in CHHMAC fulfill their roles in the hospital’s services for its patients, the Supreme Court found the medical center to be essential to the operation of the hospital.

The Court distinguished CHHMAC from a purely commercial building, noting that it is not open to non-accredited physicians. The Court also applied the Herrera ruling, stating that the tax exemption extends to facilities incidental to and reasonably necessary for the hospital’s purposes. The CHHMAC is used by the hospital’s accredited physicians for medical check-ups, diagnosis, treatment, and care of patients, and serves as a specialized outpatient department of the hospital. Moreover, the court recognized that the rentals charged by respondent for the space was for the purpose of recouping the investment of the building and its facilities.

The Supreme Court cited Sections 215 and 216 of the Local Government Code, reiterating that properties used for hospitals should be classified as “special.” These sections of the code provide that:

SEC. 215. Classes of Real Property for Assessment Purposes.–For purposes of assessment, real property shall be classified as residential, agricultural, commercial, industrial, mineral, timberland or special.

x x x x

SEC. 216. Special Classes of Real Property.––All lands, buildings, and other improvements thereon actually, directly and exclusively used for hospitals, cultural or scientific purposes, and those owned and used by local water districts, and government-owned or controlled corporations rendering essential public services in the supply and distribution of water and/or generation and transmission of electric power shall be classified as special. (Emphasis supplied.)

Building on this principle, the Supreme Court underscored that charging rentals for the offices used by accredited physicians does not equate to a commercial venture. It acknowledged the practical necessities behind charging rentals, such as recouping investment costs and maintaining the building. Furthermore, any net income from the lease income of CHHMAC is used for the respondent’s other charitable projects, further solidifying its non-commercial status. As such, the Court determined that the CHHMAC building should be classified as “special” and be imposed the 10% special assessment.

FAQs

What was the key issue in this case?	The key issue was whether the Chong Hua Hospital Medical Arts Center (CHHMAC) should be classified as a commercial establishment or an integral part of Chong Hua Hospital (CHH) for property tax assessment purposes. This classification determined whether the building would be subject to a 35% commercial assessment rate or a 10% special assessment rate.
Why did the City Assessor classify the CHHMAC as commercial?	The City Assessor classified the CHHMAC as commercial because it is a separate building primarily leased to doctors. The assessor considered the leasing arrangement and the rental income derived from it as indicative of a commercial venture.
What was the basis for the Association’s argument that CHHMAC should be considered part of the hospital?	The Association argued that CHHMAC houses accredited doctors essential to CHH’s operations and serves as a specialized outpatient department. They highlighted that other separate buildings of the hospital, like those housing the Dietary and Records Departments, also received the 10% special assessment.
What did the Local Board of Assessment Appeals (LBAA) decide?	The LBAA reversed the City Assessor’s decision, ruling that the CHHMAC was entitled to the 10% assessment level. The LBAA reasoned that it is common for hospitals to lease spaces to medical practitioners and that such arrangements are essential for tertiary hospitals like CHH.
How did the Court of Appeals (CA) rule?	The CA affirmed the CBAA’s decision, emphasizing that the CHHMAC’s facilities are necessary and indispensable for CHH to achieve its ultimate purpose. The appellate court also noted that the collection of rentals from accredited doctors does not alter the CHHMAC’s classification as part of the hospital.
What was the significance of Sections 215 and 216 of the Local Government Code in this case?	Sections 215 and 216 of the Local Government Code classify properties used for hospitals as special cases rather than commercial. These sections provided the legal basis for the courts to classify the CHHMAC as a special property subject to the lower assessment rate.
What are the key factors that the Supreme Court considered in determining that CHHMAC is an integral part of CHH?	The Supreme Court considered that the doctors in CHHMAC are accredited by CHH and treat the hospital’s patients, the facility serves as a specialized outpatient department, and charging rentals does not equate to a commercial venture. The Court noted that hospitals were required to be fully departmentalized and equipped with capabilities to support certified medical specialists and other licensed physicians rendering services.
What is the practical implication of this ruling for hospitals?	The practical implication is that hospitals can provide facilities for their doctors without incurring higher property taxes, as long as these facilities primarily serve the hospital’s patients and are integral to its operations. This decision clarifies the tax treatment of hospital-related facilities and offers financial benefits to non-profit hospitals.

The Supreme Court’s decision in this case underscores the importance of considering the integral relationship between a hospital and its affiliated facilities when determining property tax assessments. By classifying the CHHMAC as a special property, the Court has provided clarity and potential financial relief for non-profit hospitals, fostering an environment that supports accessible healthcare services for the community.

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: City Assessor of Cebu City v. Association of Benevola de Cebu, Inc., G.R. No. 152904, June 08, 2007