BIR Ruling [DA-256-96]

July 18, 1996 BIR RULING [DA-256-96] Far Eastern University Dr. Nicanor Reyes Medical Foundation P.O. Box 616, Manila Attention: Ms . Josephine C . Reyes Chairman Gentlemen : This refers to your letter dated June 5, 1996 requesting in effect for a ruling that the proceeds from sale of real properties sold by Far Eastern University Dr. Nicanor Reyes Medical Foundation, are exempt from income tax. It is represented that FEU Dr. Nicanor Reyes Medical Foundation, Inc. is a non-stock, non-profit educational institution duly recognized by the government; that the Foundation is already a grantee of a tax exemption certificate (BIR Ruling No. 605-58 dated December 29, 1988); that it owns a land consisting of 3,987.10 square meters (2 titles) registered in the name of Tamaraw Realty Corporation, the real absolute owner thereof is the Foundation being the sole stockholder of 1,333,065 shares of stock of the Tamaraw Corporation; that Tamaraw is only a trustee or holding company of the Foundation; that the Foundation is now selling the Hospital and the Institute of Medicine buildings and the land upon which these are erected, located at N. Reyes (formerly Morayta) Street, Sampaloc, Manila to Mr. David Floro of the Mindanao Portland Cement Corporation; that the proceeds from sale will be used to buy 5,000 square meters lot located at Regalado Avenue, Fairview, Quezon City, which is contiguous to the one (1) hectare school site previously bought by the Foundation; and, that the Hospital and Institute of Medicine will be relocated to this school site because its present location, having become highly commercial, has already become untenable for school purposes; In reply, we quote hereunder the pertinent portion of BIR Ruling No. 26-143-569-88 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 No. 45 dated March 10, 1959, said, in part, 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 provision 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 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)." 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. With respect to income of whatever kind and character of the foregoing organizations, like the FEU Dr. Nicanor Reyes Medical Foundation, from any of their properties, real or personal, the above opinion of the Secretary of Justice states that the same refers only to the income realized "from the productive use of their real and personal properties e.g., rents, dividends, or interests." This meaning of the word "income" has also been adopted by the Tax Court in the case of Congregacion de la Mission de San Vicente de Paul. (CTA Case No. 1468, October 14, 1968) Accordingly, any income from the said sale of FEU Dr. Nicanor Reyes Medical Foundation of the said real property, having been derived from a single and isolated transaction in furtherance of the purposes for which it is organized cannot be considered as income from the productive use of its property since the latter connotes a regular, continuous and a series of transactions. Accordingly, said income of FEU Dr. Nicanor Reyes Medical Foundation is not subject to income tax, and to the creditable expanded withholding tax prescribed under Revenue Regulations No. 6-85 as amended by Revenue Regulations no. 12-94. (BIR Ruling No. 387-93 dated September 16, 1993) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation the facts turned out to be different, then this ruling shall be considered null and void. cdtech Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head, Revenue Executive Assistant Legal Service