BIR Ruling [DA-005-99]

January 7, 1999 BIR RULING [DA-005-99] Ramon F. Garcia & Company Suite 410 Manila Bank Building Ayala Avenue, Makati City Attention: Mr . Josefino F . Garcia Partner Gentlemen : This refers to your letters dated March 18, 1998 and October 7, 1998 requesting on behalf of your client, Total Person Care (Topec) Foundation, Inc . (TFI) exemption from the payment of the creditable withholding tax on the sale of its real property, the proceeds of which will be used to fund its day care center. It is represented that TFI is a non-stock, non-profit religious organization whose purpose is to uplift the spiritual and physical well being of an individual most especially children; that it has a piece of property located at Montojo St., Makati City with a total area of 60.05 square meters; that it likewise has a day care center catering for the daily needs of children; that funds coming from various donations of individuals are being used to sustain its operations and daily activities; that however, such donations are not enough to fund its operation; and that because of this, your client had to sell its above-mentioned real property with the intention of using the proceeds thereof to fund the said center. prcd In reply, we quote hereunder the pertinent portion of BIR Ruling No. 26-143-59-569-88 as follows: "Notwithstanding the provision in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax imposed under this Code." In holding that the above-quoted provision does not apply to the instant case, the Secretary of Justice in his opinion, said the following: "Considering the history of the provision in question, it would seem that the statute as now amended has restricted the tax exemption of religious, educational and other organizations therein specified only to the extent of withdrawing the exemption with respect to income realized (a) from the productive use of their real and personal properties e.g. rents, dividends, or interest (b) from profitable business pursuits which properties or businesses are not essential to or necessarily connected with, their religious, charitable or educational purposes, etc., as the case may be. Thus, I am more inclined to subscribe to the view that the projected sale at a profit of the present site and church building of the Union Church of Manila, for the sole purpose of acquiring a new site and of constructing a new church in place where most of its members now reside, does not come within the reach of the provision of Section 27(e) quoted above, and is therefore not subject to the income tax. I attach a great weight to the fact that the Union Church, which is organized and operated exclusively for religious purposes, i.e., the transfer of the church to a new site. The profit or income resulting from the transaction would be merely incidental to said religious purposes. And as the present church site was not acquired for speculation or as an investment to be eventually sold primarily for monetary gain, I think there is reason enough to say that income to be derived from the sale of said property is not within the contemplation of the proviso of said Section 27(e)." The foregoing portion of the opinion of the Secretary of Justice was quoted and applied by the Court of Tax Appeals in its decision in the case of the Manila Polo Club vs. Collector of Internal Revenue (CTA Case No. 293, August 31, 1959) which involves similar facts, i.e. proceeds of sale of real property was used exclusively to acquire and develop another property for purposes for which the club was organized. In the case of Xavier School, Inc. vs. Commissioner of Internal Revenue (CTA Case No. 1682, October 8, 1969), the Tax Court exempted from income tax, the gain derived by the school, stating that taxpayer's isolated sale of real property and using the proceeds thereof to purchase lots for a new site and constructing improvements thereon in furtherance of its educational purposes cannot be considered as an activity conducted solely for profit because a single transaction of incidental character does not constitute engaging in business. prll In view thereof, this Office is of the opinion is it hereby holds that having been derived from a single and isolated transaction in furtherance of the purposes for which the Total Person Care (Topec) Foundation, Inc. is organized, the proceeds from the sale of its real property located at Montojo St., Makati City, cannot be considered income from the productive use of its property and, therefore, the same is not subject to income tax and consequently, to the creditable expanded withholding tax. However, the Deed of Absolute Sale of said real property shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended by R.A. No. 7660. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. (BIR Ruling No. 387-93 dated September 16, 1993) LLpr Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV (Legal and Enforcement Group)