BIR Ruling [DA-052-96]

February 2, 1996 BIR RULING [DA-052-96] Philippine Province of the Religious of the Assumption, Inc. San Lorenzo Village 1223 Makati City Attention: Sr . Margarita Amistoso Provincial Treasurer Gentlemen : This refers to your letter dated September 29, 1995 stating that Phil. Province of the Religious of the Assumption, Inc. is a religious congregation duly organized and existing under the laws of the Philippines; that it owns a parcel of land together with the improvements thereon containing an area of 1,085 square meters located at No. 49 Baler Street, Quezon City and covered by TCT No. 41352 of the Register of Deeds of Quezon City; that the land and its improvements were declared as exempt from taxation under Section 28, Article VI of the 1987 Constitution because the land and its improvements are being used actually, directly and exclusively for religious purposes; that you are proposing to sell the above-described property to Universal Apa Corporation, a corporation duly organized and existing under the laws of the Philippines, with office and business address at No. 87 Panay Avenue, Quezon City; that the proceeds of the sale shall be used by the congregation for the construction of the New Convent-Formation House in Alpha Village; and that you are of the opinion that the sale was an isolated transaction involving a land exclusively held for religious purposes and in furtherance of the purpose for which Philippine Province of the Religious of the Assumption, Inc. was organized, the proceeds thereof cannot be considered as an income and therefore not subject to income tax. cdta Based on the foregoing representations, you are now requesting for a ruling as to whether or not the above transaction is tax exempt considering that the proceeds thereof will be used for another religious purpose. In reply, please be informed that the proviso in Section 26 of the Tax Code, as amended, provides, viz: "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 proceeds of the sale of property of a religious organizations, the Union Church of Manila the Secretary of Justice, in his opinion No. 45 dated March 10, 1959, stating 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 a 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 sale 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 and is going to part with the same solely 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. 564-88 dated November 29, 1988) The foregoing portion of the opinion of the Secretary of Justice was quoted and applied by the Court of Tax Appeals on its decision in Manila Polo Club (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. (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 improvement 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. Such being the case, this Office is of the opinion as it hereby holds that the proceeds from the sale of the above-mentioned real property which it used to defray the construction costs of the new convent-formation house in Alpha Village cannot be considered as income from the productive used of its property and, therefore, the same is not subject to income tax and consequently, to the creditable withholding tax on sales, exchange or transfers of real property under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94. (BIR Ruling No. 387-93 dated September 16, 1995) However, the said transaction is subject to documentary stamp tax.(BIR Ruling No. 543-93 dated December 28, 1993) 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. UN144-95, dated April 10, 1995) cd Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)