BIR Ruling [DA-138-96]

April 3, 1996 BIR RULING [DA-138-96] Young Men Christian Association of Davao, Inc. (YMCA) D. Suazo and Juan Luna Streets Davao City Attention: Mr. Efren J. Veneracion President Gentlemen : This refers to your letter dated February 2, 1996 in effect requesting for a ruling that the income to be received from the sale of real property owned by the Young Men Christian Association of Davao, Inc. (YMCA) is exempt from income tax if the proceeds are to be used for the purchase of another real property for the construction of YMCA Sports facilities. It is represented that YMCA is a non-stock, non-profit charitable corporation; that it is engaged in the development of a well-balanced Christian personality, mission in life and usefulness of individuals, as well as to promote unity among Christians and understanding among peoples of all faiths; to promote on equal basis the physical, mental, social and spiritual welfare of boys and youth and to emphasize reverence for God, social discipline, responsibility for the common good, respect for human dignity, and the observance for the Golden Rule; that it owns a parcel of land situated at the D. Suazo and Juan Luna Streets, Davao City with an area of 4,623 square meters, more or less covered by Transfer Certificate of Title No. 118097; that considering its limited area, you are contemplating to sell the said real property so that the proceeds from such sale will be used for the purchase of another real property with an area of at least one hectare to be utilized in pursuance of the corporation's objectives. TSEAaD In reply, we quote hereunder the pertinent portion of BIR Ruling No. 569-88 dated November 29, 1988 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 the instant case, the Secretary of Justice in his opinion, said 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 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 of 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 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 proviso of said Section 27 (e)." DEICTS 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 the 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 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 can not be considered as an activity conducted solely for profit because a single transaction of incidental character does not constitute engaging in business. In view thereof, having been derived from a single and isolated transaction in furtherance of the purposes for which the Young Men's Christian Association of Davao, Inc. is organized, the proceeds from the sale of the abovementioned real property cannot be considered income from the productive use of its property and, therefore, the same is not subject to income tax. However, YMCA is liable to pay the documentary stamp tax on the document conveying the property to the purchaser as imposed under Section 196 of the Tax Code, as amended. 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) AcEIHC Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: (SGD.) ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)