BIR Ruling

August 3, 1967 Messrs. Bengson, Villegas & Sarraga 401-405 Samanillo Building Escolta, Manila Attention: Mr . Isidro Evangelista Gentlemen : This refers to your letter dated April 8, 1967 protesting against the deficiency income tax assessment issued by this Office on March 15, 1967 against El Colegio de San Jose, 2307 Herran St., Manila for the year 1961 in the aggregate amount of P14,480.96. The investigation conducted by this Office on the income tax liability of El Colegio for the year 1961 resulted in the disallowance of the deductions claimed by El Colegio for ordinary and necessary expenses allegedly incurred for the maintenance and support of the San Jose Seminary; and for net capital loss. The dividends received were taxes in full as against the view of El Colegio that the same is taxable only to the extent of 25% thereof. The questions to be resolved in this case are the following: (1) Whether or not the expenses of El Colegio for the support and maintenance of the San Jose Seminary are deductible from its investment income which is subject to tax under the second paragraph of Section 27(e) of the Tax Code; (2) Whether or not the dividends received by El Colegio from different domestic corporations are taxable to the extent of 25 per cent thereof in accordance with the last paragraph of Section 24(a) of the Tax Code. It appears that El Colegio established and organized the San Jose Seminary for boys (hereinafter referred to as the Seminary), a non-stock educational institution for the education and training of young boys for priesthood in accordance with the purposes for which El Colegio was created; that while the seminary is a separate and distinct corporate entity from El Colegio, it is financed and maintained by El Colegio out of its investment income such as dividends, interest and rents. cdtech The expenses in the amount of P89,035.91 being claimed as a deduction by El Colegio for the year 1961 represent the amount which was given to the seminary for its maintenance and support. The expenses were incurred not in relation with its incidental business of investing its fund and property for profit but in its religious and educational activity. "In the case of corporation, the test of deductibility of ordinary and necessary expenses is the relation of the expenses to the business." (par. 11, 032. P.H.) Notwithstanding the foregoing, however, this Office is not unmindful of the fact that the seminary cannot continue its operation without the much needed funds being given by El Colegio for its maintenance and support. When El Colegio utilized its property to produce income the motive is not for profit but to maintain its activities as a religious and educational organization. Considered in this light, this Office is of the opinion as it hereby holds that the expenses in the total amount of P89,035.91 incurred by El Colegio in its operation and maintenance of the Seminary are deductible from its taxable income. Dividends received by a domestic or resident foreign corporation from a domestic corporation subject to tax are taxable only to the extent of 25 per cent thereof. All other classes of income (except net capital gains, section 34) of corporations are taxable in full. (Section 17 Income Tax Regulations) The dividends therefore received by El Colegio from different domestic corporations are taxable only to the extent of 25 per cent thereof. In view of the foregoing, the 1961 deficiency income tax assessment issued by this Office against El Colegio de San Jose, 2307 Herran St., Manila, in the aggregate amount of P14,480.96 is hereby cancelled and this case may now be considered closed and terminated. cdll Very truly yours, (SGD.) AMBROSIO M. LINA Deputy Commissioner of Internal Revenue