BIR Ruling [DA-034-97]

January 22, 1997 BIR RULING [DA-034-97] De Borja, Medialdea, Bello Guevarra, Serapio & Gerodias Strata 100 Building, Emerald Avenue Ortigas Center, Pasig City Attention: Attys . P . A . De Borja and D . S . Flores-Castro Gentlemen : This refers to your letter dated October 7, 1996, representing that your client, Word for the World (Ayala Alabang) Foundation, Inc. (WWFI), is a non-stock, non-profit religious corporation duly organized and existing under and by virtue of the Philippine laws; that the main purpose of WWFI is to promote the teaching of the gospel; that WWFI owns a parcel of land, on which stands a two-storey building located at No. 110 Madrigal Avenue, Ayala Alabang Village, Muntinlupa City, with an area of 789 square meters, covered by Transfer Certificate of Title No. 202198; that the property is actually, directly and exclusively used by WWFI for religious purposes; that more specifically, the property is used as WWFI's office, a sanctuary or rectory of its pastors and as a venue for bible studies and Christian value formation seminars; that in view of the growth of WWFI's ministries and the present expansion projects and programs (e.g. a worship center for its members), the need for a bigger space and structure has now become imperative; that in order to meet such need, the WWFI plans to sell the property and use the proceeds to build a bigger structure in one of its properties; and that tentatively, WWFI is eyeing its 1,056 square meter property in Buencamino St., Las Pias, Metro Manila for the new building. You now request for a ruling that the sale of the Muntinlupa property the proceeds of which shall be used to build a bigger structure in another property, is exempt from income tax under Section 26 of the Tax Code, as amended. In reply, please be informed that the pertinent portion of Section 26 of the Tax Code, as amended states 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 proceeds of the sale of property of a religious organization, the Union Church of Manila, the Secretary of Justice, in his Opinion No. 45 dated March 20, 1959 stated the following: "Considering the history of the provision in question, it would seem that the statutes 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 business 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 constructing a new church in 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 provision of said Section 27(e)." (cited in BIR Ruling No. 569-88 dated March 29, 1988) 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 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 the 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 Word for the World (Ayala Alabang) Foundation, Inc. is organized, the proceeds from the sale of its property in Muntinlupa cannot be considered income from the productive use of its property and, therefore, the same is not subject to income tax. 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) cdta Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)