BIR Ruling [DA-060-97]

February 4, 1997 BIR RULING [DA-060-97] United Evangelical Church of Greenhills 18 J. de Mesa Street, Little Baguio San Juan, Metro Manila Attention: Dr . Carlo Lu Chairman Gentlemen : This refers to your letters dated January 2, 1992, December 15, 1992 and August 16, 1996 requesting for a refund in the amount of P299,250.00 representing your alleged erroneous payment of capital gains tax for the year 1991 which was referred to this Office for a ruling to the effect that since you are a religious corporations falling within the purview of Section 26(e) of the Tax Code, as amended, your sale of your condominium unit identified as Unit 3-D of the Strata Bldg. Condominium, the proceeds of which shall be used to raise funds for the construction of a new church where its members can congregate and meet for religious purposes is exempt from income tax and consequently to the creditable withholding tax imposed under Revenue Regulations No. 6-85 as amended by Revenue Regulations No. 12-94 implementing Section 50(b) of the Tax Code, as amended. Records of this case disclosed that United Evangelical Church of Greenhills is a non-stock, non-profit religious corporation duly registered with the Securities and Exchange Commission (SEC); that it is primarily organized for the purpose of establishing an independent religious society and operating a church for worship; that pursuant to its corporate purpose, it purchased Units C and D of Strata 200 Building situated at Emerald Ave., Ortigas Shopping Center, Pasig City for the establishment of a church which the members used exclusively for their place of worship; that on June 28, 1991, a Deed of Absolute Sale was made and executed by and between United Evangelical Church of Greenhills and Saisho Onkyo, Inc. whereby the former sold in favor of the latter its condominium unit identified as Unit 3-D of Strata Building Condominium together with the improvements and appurtenances in washroom areas situated at the 3rd Floor Strata 200 Building, Emeralds Ave., Ortigas Complex, Pasig City covered by Condominium Certificate of Title No. 4140 issued by the Registry of Deeds of Metro Manila District II for and in consideration of P5,985,000.00; that the purpose of said sale transaction was to raise funds for the construction of a new church where its members can congregate and meet for religious purposes; that it paid the amount of P299,250.00 as creditable withholding tax under C. R. No. 2333562 dated July 26, 1991 which has been certified to have been remitted to the Government by the Accounting Division of this Office; and that as a consequence thereof, United Evangelical Church of Greenhills filed with this Office, the aforesaid letter requesting for the refund of the amount of P299,250.00 on the ground that its said tax payment was erroneously made since it is exempt from income tax under Section 26(e) of the Tax Code, as amended. In reply, please be informed that the proviso in Section 27(e) (now 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 abovequoted provision does not apply to the 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 10, 1959, stated 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 interests 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 subscribed 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 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 was 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 its 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. 569-88 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 in 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 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. Such being the case, this Office is of the opinion as it hereby holds that the proceeds from the sale of your aforementioned condominium unit identified as Unit 3-D of the Strata Building, Emerald Ave., Ortigas Complex, Pasig City, covered by Condominium Certificate of Title No. 4140 issued by the Registry of Deeds of Metro Manila. District II, which will be used to raise funds for the construction of a new church where its members can congregate and meet for religious purposes, cannot be considered income from the productive use of your property and therefore, the same is not subject to income tax and consequently to the creditable withholding tax on sale, exchange or transfers of real property imposed under Revenue Regulations No. 6-85 as amended by Revenue Regulations No. 1-90 implementing Section 50(b) of the Tax Code, as amended. (BIR Ruling No. 387-93 dated September 16, 1993) However, the said transaction is subject to documentary stamp tax. BIR Ruling No. 543-93 dated December 28, 1993) cdtech This ruling is being issued on the basis of the foregoing facts 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, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)