BIR Ruling [DA-088-05]

March 14, 2005 BIR RULING [DA-088-05] Section 30; Article VI (28) of 1987 Constitution S-30-010-2003 Sisters of St. Paul of Chartres P.O. Box 1065, Antipolo 1870 Rizal Philippines Attention: Sister Mary Magdalen Torres, SPC Provincial Superior Gentlemen : This refers to your letter dated May 10, 2004 requesting confirmation that as a religious organization, you are exempt from the payment of capital gains tax. It is represented that you are registered with the Securities and Exchange Commission under the name Community of the Sisters of St. Paul of Chartres, Inc. under SEC Registration No. PW-526 dated July 17, 1985; that you own the following parcels of land: Place TCT No. Area in square meters Bukal, Calamba Laguna TCT-212199 10,391 TCT-211279 2,568 TCT-211278 1,000 TCT-200602 1,000 TCT-200603 1,000 TCT-200604 1,115 Laguna Hills Subdivision TCT-503741 204 TCT-503743 204 Palatiw, Pasig City TCT-105069 6,085 That the above described parcels of land in Calamba, Laguna are used solely for the spiritual formation of the Sisters and other religious purposes; that the retreat house located thereon is being used by the Sisters and the students of St. Paul schools; and that the lot in Palatiw, Pasig City is appropriated as a retirement home for the elderly members of your congregation; that you have the intention to sell the above properties, the proceeds of which will be used to finance your on-going construction for your eldering sisters located at Tikling, Taytay Rizal. In reply, please be informed that the last paragraph of Section 30 of the Tax Code of 1997 (then Section 26 of the Tax Code, as amended), clearly subjects to tax the income of whatever kind and character derived by any organization otherwise exempt under the same section, from any of its properties or activities conducted for profit, regardless of the disposition made of such income. Specifically, the Tax Code provides thus: "SEC. 30. Exemptions from Tax on Corporations . The following organizations shall not be taxed under this Title in respect to income received by them as such: xxx xxx xxx "(E) Nonstock corporation or association organized and operated exclusively for religious, ...,no part of its net income or assets shall belong to or inure to the benefit of any member, organizer, officer or any specific person; xxx xxx xxx "Notwithstanding, the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any properties, real or personal, or from any of the activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code." The above-quoted provision is literal in its language and plain and categorical in its meaning. The last paragraph of Section 30 (then Section 26), particularly, does not leave any room for interpretation; the income from any of the organization's properties is subject to tax under the Tax Code, regardless of the disposition made of such income. In relation to this, Section 30 of Revenue Regulations No. 2, as amended, provides, among others, that the income of such tax-exempt corporation which is considered as income from their properties, real or personal, includes profits from the sale of property. In other words, the contemplated sale of property owned by Sisters of St. Paul of Chartres is subject to the corresponding income tax imposed under the Tax Code of 1997. DTISaH The Constitution mandates that "charitable institutions, churches, and parsonages or convents appurtenant thereto, mosques, nonprofit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation." [Section 28(3), Article VI, Constitution] Although the above-quoted constitutional provision seems to grant a sweeping tax exemption, the Supreme Court of the Philippines, in the case of Lladoc vs. Commissioner of Internal Revenue (L-19201) decided on June 16, 1965, held that the phrase "exempt from taxation" similarly contained in the 1935 Constitution should not be interpreted to mean exemption from all kinds of taxes. Thus, although in that case the cash received was actually spent by the parish priest for the intended purpose of constructing a new Catholic church, the Court nevertheless ruled against the exemption applied for in view of the interpretation it has given the Constitutional provision. The Highest Tribunal ruled that the exemption provided by the Constitution is only from the payment of taxes assessed on such properties enumerated as property or realty taxes. Finally, it held that there was no clear, positive or express grant of exemption privilege by law in favor of petitioner therein, hence, the denial. In view of the above Supreme Court decision, this Office ruled in BIR Ruling No. 121-91 dated June 25, 1991 that the excess of the selling price over the acquisition cost of the property (i.e. the profit/income) to be sold by the Society of Divine Word and used exclusively for religious purposes shall be subject to income tax/capital gains tax. The same BIR Ruling No. 121-91 expressly revoked BIR Ruling No. 569-88 dated November 29, 1988. On the other hand, BIR Ruling No. 569-88 expressly revoked BIR Rulings Nos. 65-80, 66-80, 67-80 and 165-94. Other BIR Rulings; DOJ Opinion; and the Manila Polo Club (CTA Case No. 298 decided on August 31, 1959) and Xavier School, Inc. (CTA Case No. 1682 decided on October 8, 1969) cases which exempted from income tax the gain derived from the sale of property based on an "isolated transaction" and using the proceeds thereof to purchase another property for a new site in furtherance of the purposes for which the respective organizations in the said cases were established, are subordinate to the Supreme Court case of Lladoc vs. Commissioner of Internal Revenue (L-19201) decided on June 16, 1965. In view of the foregoing, this Office hereby rules that the real property to be sold by the Sisters of St. Paul of Chartres, the proceeds of which will be used to finance your on-going construction for your eldering sisters located at Tikling, Taytay Rizal, shall be subject to capital gains tax based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, of such land and/or buildings pursuant to Section 27(D)(5) of the same Code (Section 4(c)(i), Revenue Regulations No. 7-2003). SaIACT 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group