BIR Ruling

January 11, 1977 Messrs. Guzman, Bocaling & Co. Certified Public Accountants 416 Regina Building, Escolta Manila Gentlemen : This refers to your request on behalf of your client, the Makati (Sports) Club, Inc., Makati, Rizal, for exemption from the payment of income tax and filing of the corresponding income tax return under Section 27(h) of the Tax Code. Investigation conducted by this Office disclosed that your client, the Makati (Sports) Club, Inc., is a stock corporation duly registered with the Securities and Exchange Commission; that the primary purpose for which the Club is organized are to establish, maintain and promote social, cultural, recreational and athletic activities on a non-profit basis among its stockholders; that pursuant to the Articles of Incorporation of the Club, it has an authorized capital stock of 1,500 shares without par value of which 1,050 are Class A (for Filipinos only) and 450 are Class B shares (for both Filipinos and aliens); that the authorized capital stock of 1,500 shares shall not be increased at any time during the first ten (10) years from and after incorporation and 200 shares (140 Class A and 60 Class B) shall not be issued by the Corporation at any time during the first five (5) years from and after incorporation; and that the shares may be issued for such consideration in cash or security as the Board of Directors may from time to time fix but in no event at less than P5.00 per share. It appears also that no profit shall inure to the benefit of any of its stockholders; hence, no dividends shall be declared in their favor; that stockholders shall be entitled only to a pro-rata share of the assets of the corporation at the time of the dissolution or liquidation of the corporation; (No. 3, Par. 7, Amended Articles of Incorporation); and that the income of the Club is derived from dues assessed on members as well as those resulting from the operation of the bar and restaurant, sports facilities and other activities. Finally, it appears that the facilities of that club are not available to the general public, the same being limited only for the use of regular and honorary members of the club, as well as the immediate members of the family of regular members, guests of regular members and visitors accompanied by members. The regular member shall pay the dues for each guest introduced by him in an amount equivalent to 50% of his regular monthly dues. (Section 2, 4, 5, 6, By-Laws.) Social activities are limited to those sponsored by a member, subject to such conditions prescribed by the Board of Directors. (Sec. 7, Ibid) Section 27(h) of the Tax Code provides: "SEC. 27. Exemptions from tax on corporations . The following organizations shall not be taxed under this Title in respect to income received by them as such "xxx xxx xxx "(h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no part of the net income of which inures to the benefit of any private stockholder or member;" Section 33 of Revenue Regulations No. 2 provides: "SEC. 33. Social clubs . The exemption applies to practically all social and recreation clubs which are supported by membership fees, dues, and assessments. If the club, by reason of the comprehensive powers granted in the charter, engages in business or in agriculture or horticulture, for profit, such club is not organized and operated exclusively for pleasure, recreation, or social purposes, and any profit realized from such activities is subject to tax." It has been ruled that an exempt social club must in general be supported solely by payments from members; it may not conduct a business for profit, for example by selling food, drink or facilities to the general public; it may permit non-members to use its facilities for a fee, provided that the fee is fixed by the cost of maintenance and is not more than the amount members pay for the use of the facilities; its by-laws may not permit the declaration of a dividend, an increase in services without a corresponding increase in fees, or an increase in assets distributable to members on dissolution. (34 Am. Jur. 2d, 1969 Ed. p. 659). In view thereof, the Makati (Sports) Club, Inc., Makati, Rizal is considered a club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, within the purview of Section 27 (h) of the Tax Code. Accordingly, it is exempt from the payment of income tax and the filing of the corresponding income tax return. However, it is required to file on or before April 15 of each year a balance sheet, profit and loss statement together with the annual information return under oath, stating its gross income and expenses incurred during the preceding year, and a certificate showing that there has not been any substantial change in its by-laws, articles of incorporation, manner of operation and activities as well as sources and disposition of income. However, the Club is subject to the fixed and percentage taxes imposed by Sections 182(A)(1) and 191 of the Tax Code in connection with its operation of a bar and restaurant. aisadc Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3