BIR Ruling [DA-216-A-96]

June 25, 1996 BIR RULING [DA-216-A-96] Boy Scouts of the Philippines 181 Concepcion St., Ermita Metro Manila Attention: Mayor Jejomar C . Binay National President Gentlemen : This refers to your letters dated May 3 and 23, 1996, stating that the Boy Scouts of the Philippines (BSP) owns a property in Ayala-Malugay Sts., Makati City, consisting of 10,000 square meters, more or less, which is at present being leased to Sime Darby Pilipinas, Inc. for twenty-five years the lease of which will expire by the year 2001; that BSP is now in the process of selling said property to any interested developer; that the proceeds of the sale will be used for the principal purpose of promoting scouting in the Philippines consisting of the following: (i) upgrading and repairs of dilapidated facilities and equipment of the organization, particularly those in the ten (10) scouting regions nationwide, which are essential for carrying out its mandate under its Charter, Commonwealth Act No. 111, as amended by Presidential Decree No. 460 and Republic Act No. 7278; (ii) implementation of programs for the training of scouts and scouters alike in scoutcraft, as well as advanced courses therefor; (iii) to carry out programs which will promote and encourage through organization and cooperation with other agencies the ability of boys to do useful things for themselves and others, as well as to inculcate in them the virtues of patriotism, civic consciousness, responsibility, courage, self-reliance, discipline and other kindred virtues as well as moral values, with special emphasis on spiritual values, which altogether constitute the basic foundation of a strong character; that the task becomes all the more overwhelming with the organization's limited financial resources; and that the sale of said property will provide the organization with the much needed means to accomplish its goal to the utmost. In connection therewith, you are requesting a ruling to the effect that the sale by the BSP of its aforementioned property is exempt from the capital gains tax. In reply thereto, please be informed that under Section 8 of Republic Act No. 7278 amending Commonwealth Act No. 111 as amended by Presidential Decree No. 460 entitled "An Act to Create a Public Corporation to be known as the Boy Scouts of the Philippines and to Define its Powers and Purposes", BSP is considered as a corporation organized for charitable, scientific, athletic or cultural purposes; operated exclusively for the promotion of social welfare; and for other non-profitable purposes pursuant to Section 26 (e) (g) and (h) of the Tax Code, as amended. The proviso in Section 27 (e) [now Section 26) of the Tax Code, as amended, provides: cdta "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 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 productive use of their real and personal property e.g. rents, dividends, or interest (b) from profitable business pursuits with 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 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 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 the 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 having been derived from one (1) isolated transaction in furtherance of the purposes for which the Boy Scouts of the Philippines was organized, the proceeds from the sale of its property in Ayala-Malugay Sts., Makati City cannot be considered income from the productive use of its property and, therefore, the same is not subject to income tax. 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. cdt Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)