BIR Ruling [DA-073-98]

March 11, 1998 BIR RULING [DA-073-98] Landbank Countryside Development Foundation, Inc. Landbank Bldg. II, 7th Floor 317 Sen. Gil J. Puyat Ave. Ext. Makati City Attention: Mr . James Aldana Executive Director Gentlemen : This refers to your letter dated June 4, 1997 stating that the Landbank Countryside Development Foundation, Inc. (LCDFI ) is a non-stock, non-profit organization duly registered with the Securities and Exchange Commission on March 8, 1983; that the main purpose of the foundation is to promote social welfare, focusing its efforts in strengthening the capabilities of small farmers and fishermen cooperatives, and cooperative rural banks in the countryside; that on November 24, 1992, LCDFI was registered as a Donee Institution with the BIR and was granted exemption from the payment of income tax by the BIR on September 14, 1993; that on April 14, 1997, LCDFI completed the sale of its 3.4 hectares lot situated in Nancayasan, Urdaneta, Pangasinan, which was donated by the Landbank of the Philippines to LCDFI on March 11, 1985; that the sale was a single and isolated transaction and the entire proceeds of which shall be exclusively used to support LCDFI's projects in furtherance of its main purpose; that pursuant to Section 1 of Revenue Regulations No. 12-94, LCDFI paid the 7.5% EWT; and that said payment was made in compliance with the last paragraph of Section 26 of the NIRC which was cited by the BIR in its September 14, 1993 letter of exemption to qualify LCDFI's income tax exemption. LLcd Based on the foregoing you now request for a confirmation of your opinion on the following issues: "1. The Secretary of Justice, in its Opinion No. 45 dated March 10, 1959, clarified that the foregoing last paragraph of Section 26 refers only to income realized "from the productive use of their real and personal properties, e.g. rents, dividends, or interests." "2. The Court of Tax Appeals, in the case of Manila Polo Club (CTA Case No. 293, August 31, 1959), as well as in the case of Xavier School, Inc. (CTA Case No. 1682 October 8, 1969), applied the said opinion of the Secretary of Justice and held that the proceeds of sale of real property by both entities are tax exempt. "3. The BIR, anchoring its opinion on Nos. 1 and 2 above, confirmed under BIR Ruling No. 569 dated November 23, 1988, the tax exemption of Manila Bethel Temple, Inc. on the sale of its real property. "4. The circumstances obtaining in LCDFI's sale of its 3.4 hectares lot are substantially similar tax on the proceeds of the aforesaid sale. In reply, we quote hereunder the last paragraph of Section 26 of the Tax Code, as amended, reading: "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 its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax imposed under this Code." shall not apply to the proceeds of the sale of property of the foundation for social welfare purposes under Section 26(g) of the Tax Code, as amended [now Section 30(G) of the Tax Code of 1997]. In the case of 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 interest (h) 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 the profit of the present 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(c) 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 the income to be derived from the sale of said property is not within the contemplation of the proviso of said Section 27(c) (now Section 30[E])." (Emphasis supplied) We beg to disagree. The aforequoted opinion is correct in so far as the case of the Union Church of Manila is concerned, but not in your case. The sale of your 3.4 hectares lot situated in Nancayasan, Urdaneta, Pangasinan which was donated to you by the Landbank of the Philippines on March 11, 1995, the entire proceeds of which shall be exclusively used to support LCDFI's projects in furtherance of its main purpose is nevertheless "income" falling within the purview of the provision of Section 26 of the Tax Code, as amended [now Section 30 of the Tax Code of 1997], which provides that the income of whatever kind and character of the . . . organization from any of their properties, real or personal, (i. e., the monetary benefit from sale of your 3.4 hectares lot) or from any of their activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax imposed under the Tax Code. In view thereof, this Office is of the opinion that the sale of 3.4 hectares lot situated at Nancayasan, Urdaneta, Pangasinan, shall be subject to the corporate income tax of 35% imposed under Section 24(a) of the Tax Code, as amended [now Section 27(A) of the Tax Code of 1997], and consequently to the creditable expanded withholding tax under Revenue Regulations No. 12-94, the same falling within the contemplation of the last paragraph of Section 26 of the Tax Code, as amended [now Section 30 of the Tax Code of 1997]. (BIR Ruling No. 023-97 dated March 10, 1997) LLphil Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)