BIR Ruling [DA-238-96]

July 10, 1996 BIR RULING [DA-238-96] Bengzon Narciso Cudala Pecson Bengson & Jimenez 6TH Floor, SOL Building 112 Amorsolo Street, Legaspi Village 1229 Makati, Metro Manila Attention: Atty . Enrico G . Valdez Gentlemen : This refers to your letter dated November 6, 1995 stating that your client, Isabela Cultural Corporation (ICC) is a corporate sole duly organized and existing under the then Commonwealth of the Philippines, having been registered in the Bureau of Commerce as such on August 22, 1907; that ICC holds title to all temporalities and other properties owned and belonging to the Philippine Province of the Society of Jesus (Jesuits); that ICC owns a parcel of land along Katipunan Avenue, Loyola Heights, Diliman, Quezon City, with an area of one thousand four hundred forty-nine (1,449) square meters, more or less, and covered by TCT No. RT-106412(81215) of the Registry of Deeds of Quezon City; that said land as well as the buildings and other improvements thereon are actually, directly and exclusively used for religious purposes, that is, as pre-novitiate, seminary and church; that being along Katipunan Avenue, said property is no longer suitable for meditation and reflection required of a pre-novitiate, seminary and church considering that the constant flow of vehicles along Katipunan, Avenue presents a continuing source of noise and irritation which is expected to worsen with the ongoing upgrade of Katipunan Avenue as part of circumferential road no. 5 (C-5); that ICC has decided to sell the aforesaid property and has entered into a Contract to Sell with Mendrez Management Corporation (MMC); and that the proceeds of the sale shall be used to transfer the pre-novitiate, seminary and church to a new location inside Loyola Heights. Based on the foregoing representations, you are requesting this Office to confirm your opinion that the sale of said parcel of land including the improvements thereon is tax-exempt considering that the proceeds thereof will be used to transfer the pre-novitiate, seminary and church to another location. In reply, please be informed that the proviso in 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 above-quoted provision does no 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, 1954, 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 (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 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 provision of said Section 27(e)" cited in BIR Ruling No. 564-88 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 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 to be derived by Isabela Cultural Corporation from the sale of its aforementioned real property together with the improvements thereon, which will be used to transfer its pre-novitiate, seminary and church to a new location inside Loyola Heights cannot be considered as income from the productive use of its property and, therefore, the same is not subject to income tax and consequently, to the creditable expanded withholding tax on sales, exchange or transfers of real property under Revenue Regulations No. 12-94. (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) This ruling is being issued on the basis of your representations and will be revoked if the facts are not as represented. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)