The Supreme Court ruled that membership fees and assessment dues collected by non-profit recreational clubs are not considered taxable income or subject to Value Added Tax (VAT), as long as these fees are used for the maintenance and operation of the club’s facilities. This decision clarifies the scope of Revenue Memorandum Circular (RMC) No. 35-2012, preventing the Bureau of Internal Revenue (BIR) from taxing funds used for the upkeep of these clubs. It provides financial relief to recreational clubs and their members, ensuring that contributions for operational expenses are not treated as income. This case underscores the principle that taxation should not extend to capital contributions intended for maintenance rather than profit.

Recreation vs. Revenue: When Do Club Fees Become Taxable Income?

This case, Association of Non-Profit Clubs, Inc. (ANPC) v. Bureau of Internal Revenue (BIR), revolves around the validity of RMC No. 35-2012, issued by the BIR, which sought to clarify the taxability of clubs organized exclusively for pleasure, recreation, and other non-profit purposes. ANPC challenged the circular, arguing that it incorrectly interpreted membership fees, assessment dues, and service fees as income subject to income tax and VAT. The central legal question was whether these fees, collected from members and used for the club’s maintenance and operations, could be considered “income” under the National Internal Revenue Code (NIRC).

The BIR’s stance, as reflected in RMC No. 35-2012, was that since the 1997 NIRC omitted the tax exemption previously granted to recreational clubs under the 1977 Tax Code, all income of these clubs, regardless of the source, became taxable. They invoked the doctrine of casus omissus pro omisso habendus est, arguing that the omission was intentional. The circular specifically mentioned membership fees, assessment dues, rental income, and service fees as sources of taxable income. The BIR also argued that these fees were subject to VAT under Section 105 of the NIRC, which applies to any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, or renders services, regardless of whether the entity is a non-profit organization.

However, ANPC contended that membership fees and assessment dues are merely contributions from members to cover the operational expenses of the club. They argued that these fees are not intended to generate profit but rather to maintain the facilities and services offered to members. Therefore, ANPC asserted that these fees should not be considered income subject to taxation.

The Supreme Court acknowledged the BIR’s authority to interpret tax laws but emphasized that such interpretation must be consistent with the fundamental principles of taxation. The Court recognized the distinction between “capital” and “income,” citing Madrigal v. Rafferty, which defines capital as a fund or wealth, while income is the flow of services rendered by capital or the service of wealth.

“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.” (Madrigal v. Rafferty, 38 Phil. 414 (1918))

Building on this principle, the Court differentiated between fees collected for the club’s maintenance and those derived from income-generating activities. Fees from bars, restaurants, or the rental of sports equipment were recognized as taxable income, as they represent realized gain. However, membership fees and assessment dues, which are inherently dedicated to the upkeep of the club, were deemed capital contributions, not income. The court in Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo held that an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.

“Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.” (Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, 628 Phil. 508, 531 (2010))

This approach contrasts with the BIR’s broad interpretation, which failed to distinguish between capital contributions and actual income. The Supreme Court also addressed the VAT implications, stating that for VAT to apply, there must be a sale, barter, or exchange of goods or properties, or sale of a service. Since membership fees are not payments for services but rather contributions for the club’s maintenance, they do not fall under the purview of VAT.

The Supreme Court ultimately ruled that RMC No. 35-2012 was invalid to the extent that it classified membership fees and assessment dues as taxable income and subject to VAT. The court clarified that as long as these fees are used for the maintenance, preservation, and upkeep of the clubs’ general operations and facilities, they are not subject to income tax or VAT. It provides a more nuanced understanding of the tax obligations of non-profit recreational clubs.

FAQs

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 taxable income and subject to VAT. The ANPC challenged the BIR’s interpretation in RMC No. 35-2012, arguing that these fees are used for maintenance and operations, not profit.
What did RMC No. 35-2012 state?	RMC No. 35-2012 clarified the BIR’s position that clubs organized for pleasure, recreation, and other non-profit purposes are subject to income tax and VAT. It interpreted that all income, including membership fees and assessment dues, is taxable due to the removal of the tax exemption previously granted.
What was the Court’s ruling on income tax for membership fees?	The Supreme Court ruled that membership fees and assessment dues are not considered taxable income as long as they are used for the maintenance, preservation, and upkeep of the club’s general operations and facilities. These fees are treated as capital contributions rather than income.
What was the Court’s ruling on VAT for membership fees?	The Court also ruled that membership fees and assessment dues are not subject to VAT. For VAT to apply, there must be a sale, barter, or exchange of goods or services, which does not occur when members pay dues for the club’s maintenance.
What is the doctrine of casus omissus pro omisso habendus est?	This doctrine states that a person, object, or thing omitted from an enumeration must be held to have been omitted intentionally. The BIR invoked this to argue that the removal of the tax exemption for recreational clubs in the 1997 NIRC meant they were intentionally made taxable.
What is the difference between capital and income?	Capital is a fund or wealth, while income is the flow of services rendered by capital. Capital is a stock concept representing wealth at a specific point in time, whereas income is a flow concept reflecting the earnings derived from that wealth over a period.
What types of fees are still considered taxable for recreational clubs?	Fees received from income-generating facilities, such as bars, restaurants, and rental of sports equipment, are still considered taxable. These fees represent realized gain and are not inherently dedicated to the club’s maintenance.
What is the significance of this ruling for non-profit recreational clubs?	This ruling provides financial relief to non-profit recreational clubs and their members by clarifying that contributions for operational expenses are not subject to income tax or VAT. It prevents the BIR from taxing funds used for the upkeep of these clubs.

The Supreme Court’s decision in Association of Non-Profit Clubs, Inc. v. BIR offers crucial guidance on the tax treatment of membership fees and assessment dues for recreational clubs. This ruling strikes a balance between the BIR’s power to interpret tax laws and the constitutional prohibition against taxing capital. By clarifying that fees used for maintenance are not income, the Court has provided much-needed clarity for these organizations.

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