BIR Ruling [DA-025-01]

February 26, 2001 BIR RULING [DA-025-01] 27 (D) (5); 196 DA-005-99; DA-560-98 The Philippine Foundation for Cultural & Educational Development, Inc . Rm. 202, Alexander House, 132 Amorsolo St. Legaspi Village, Makati City Attention: Josephine Q . Javelona General Manager Gentlemen : This refers to your letter dated February 6, 2001 requesting for a ruling that the proceeds from the sale of your real property located at New Manila, Quezon City covered with TCT No. RT-35343 (367227) is not subject to tax in view of Section 30 of the Tax Reform Act of 1997. It is represented that Philippine Foundation for Cultural and Educational Development ("PFCED") is a non-stock, non-profit corporation duly registered with the Securities and Exchange Commission (SEC) with SEC Registration No. 28182 dated January 5, 1982; that it is organized primarily for the purpose of establishing and operating centers for cultural, educational and spiritual formation of students and professional men and all others who may be so interested in such a formation, such as residence, cultural centers, schools of all levels, vocational and technical schools, etc.; that its income is derived mainly from donations and grants; that its funds are used exclusively for acquiring, setting up and maintaining centers of formation and for running programs in furtherance of its objectives; that no part of its income inures to the personal benefit of its members, and that surplus funds, if any, are temporarily invested in stocks and negotiable instruments to stabilize its incomes for carrying out its objectives; that not more than 30% of its donation income is used for administrative expenses of the said foundation; that PFCED is the registered owner of a land and building situated at 152 9th St., New Manila with an area of One Thousand Two Hundred Ninety One (1,291) square meters covered by TCT No. RT#35343; that the above property was used by Mayana Cultural Center, a project of PFCED, as a venue of its activities and programs related to cultural, educational and spiritual well-being of students and young professionals pursuant to its corporate objectives; that the property includes a chapel and various function rooms and has likewise served as a residence for those who carry out the projects of the foundation; that PFCED sold the above-mentioned property to the Local Superior of the Congregation of the Sacred Hearts, Inc . , also a non-stock non-profit organization on January 24, 2001; that a portion of the proceeds of the sale was used to purchase another lot in Quezon City and the balance has been reserved for the future construction of a bigger center which will serve the same purpose as Mayana Cultural Center; In reply, please be informed that the proviso in Section 30 of the Tax Code of 1997, provides: "Notwithstanding the provisions 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 No. 45 dated March 10, 1959 said in part as follows: "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 purpose, 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 constructing a new church in a place where most of its members now reside, does not come within the reach of the proviso of Section 27(e) quoted above, and is therefore not subject to income tax. I attach a great weight to the fact that the Union Church, which is organized and operated exclusively for religious purposes, owns and holds said property 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)." (cited in BIR Ruling No. 387-93 dated September 16, 1993) aAcHCT 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 Manila Polo Club (CTA Case No. 293, August 31, 1959( which involves similar facts, i.e., proceeds of the 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. (CTA Case No. 1682, October 8, 1969), the Tax Court exempted the gain derived from income tax by stating that the 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. In view thereof, this Office is of the opinion as it hereby holds that having been derived from a single and isolated transaction in furtherance of the purposes for which the PFCED, Inc. is organized, the proceeds from the sale of its real property located at New Manila, Quezon 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. (BIR Ruling No. DA-560-98 dated December 9, 1998 and DA-005-99 dated January 7, 1999) 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 of 1997. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group