BIR Ruling [DA-263-03]

August 13, 2003 BIR RULING [DA-263-03] DA-560-98 & DA-025-01; DA-130-2003-A Secs. 30 & 109 (w) The Metropolitan Club, Inc. Estrella cor. Amapola Streets Guadalupe Viejo, Makati City Attention: Francisco J. Buencamino President/Board of Trustees Gentlemen : This refers to your letter dated May 23, 2003 requesting confirmation of your opinion that your proposed sale of real property is exempt from income tax and value-added tax. FACTS OF THE CASE The Metropolitan Club Inc. (Metroclub), is a non-stock, non-profit corporation organized for the conduct of recreational, sports and athletic activities, as well as for social, cultural and educational purposes. It was duly registered with the Securities and Exchange Commission on June 27, 1975 under SEC Registration No. 62163. As such organization, it has been granted tax-exempt status under Section 30 of the National Internal Revenue Code pursuant to BIR Ruling No. S30-011-2002 dated April 11, 2002. On February 14, 2002, the Metroclub granted a group of property developers the option to purchase a portion of its 1.2-hectare compound in Makati City for the purpose of constructing thereon a residential condominium building. The condominium project will occupy a land area of 1,145 sq.m. located within the compound. An assigned value of P50,000 per sq.m. has been committed by the prospective buyer-developers to Metroclub amounting to P57,250,000 as projected proceeds for the sale of the land. The said proceeds will be used by Metroclub for the renovation of its existing clubhouse and the refurbishing and addition of facilities for the sports club. The sale is also expected to strengthen Metroclub's financial capability by providing adequate working capital to efficiently operate the Club and service its existing debts. Metroclub management represented and recommended the sale for approval of the members in its annual membership meeting in 2001 because the Club was then operating at a loss for four (4) consecutive years already. The Club's operating losses were largely due to lack of patronage from the members because of the antiquated and outdated state of the Club's facilities. In addition, the difficult economic times have affected the capability of the members to sustain support for the Club on a broad scale. Most of the members are entrepreneurs whose business have faced reversals since the onslaught of the ASEAN financial crisis. Given their situation, forcing assessments on them to meet losses would only create added problems, while increasing membership dues may precipitate fall-outs altogether. Having been granted tax exemption under Sec. 30 of the Tax Code, Metroclub committed to a land value of P50,000 per sq.m. from the buyer-developers because the estimated proceeds would be sufficient to meet its programs. However, if taxes will be imposed on its sale of the land to the buyer-developers, there will hardly be any proceeds left for Metroclub aforestated plans. Hence, this request. DISCUSSION I. Income Tax The Club is not subject to income tax on its receipt of the proceeds from the sale of its land to the buyer-developers because the said proceeds will be used exclusively in furtherance of its purposes as stated in its Articles of Incorporation. In BIR Ruling No. DA-025-01, the BIR rules as exempt from income tax (and consequently, the withholding tax) the sale of a land and building by a cultural foundation similarly granted tax-exempt status under Sec. 30 of the Tax Code. The BIR noted that the proceeds from the sale cannot be considered as income from the productive use of the property, having been derived from a single and isolated transaction in furtherance of the purposes for which the cultural foundation is organized . A portion of BIR Ruling No. DA-025-01 is quoted as follows: "In reply, please be informed that the proviso in Sec. 30 of the Tax Code of 1997 provides: "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 provisions does not apply to the instant case, the Secretary of Justice in his Opinion No. 45 dated March 10, 1959 said in part as follows: "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 purpose, 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, 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 29(e)." (cited in BIR Ruling No. 387-93 dated September 16, 1993) 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. In view thereof, this Office is of the opinion as it hereby holds that having been derived from a single and isolated transaction in furtherance of the purposes for which the PFCED, Inc. is organized, the proceeds from the sale of its real property located at New Manila, Quezon City, cannot be considered 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. (BIR Ruling No. DA-560-98 dated December 9, 1998 and DA-005-99 dated January 7, 1999)" The foregoing interpretation (favorable to the taxpayer) echoes the decision of the Court of Tax Appeals in the case of Maynilad Cultural Foundation, Inc. vs. Comm. of Internal Revenue , CTA Case No. 5625, promulgated on March 12, 1999. In the said case, the CTA unanimously ruled that the income derived from the sale by the cultural foundation of its real property is exempt from income tax because said sale was not in pursuit of any intent to engage in the real estate business. It was further declared in the CTA decision that a sale which is a mere isolated transaction falls within the exemption provided by then Section 26 (now, Section 30) of the Tax Code. II. Value-added Tax The Club is not subject to VAT on its receipt of the proceeds from the sale of its land to the buyer-developers because the said proceeds will be used exclusively in furtherance of its purpose as a non-stock, non-profit organization as stated in its Articles of Incorporation. The BIR has ruled that for as long as the revenues are derived by the non-stock, non-profit organization from its "non-stock, non-profit activities," the same are exempt from the 10% VAT. In BIR Ruling No. 023-03 dated March 3, 2003, the BIR ruled in this wise: "Based on records submitted with your aforesaid letter, it appears that your foundation is a non-stock, non-profit organization duly licensed in the Philippines as evidenced by SEC Registration No. AFO95-102 which is not organized for the private gain of any person and whose specific and primary purpose is to engage solely in charitable and educational activities and that its way of carrying out the foundation's project is through donations and the funds that come from the home office. "In reply, please be informed that, under Section 105 in relation to Sections 106, 107, and 108 of the National Internal Revenue Code of 1997, the 10% VAT imposed on "any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods". Accordingly, since no amount of the revenues are derived from sale of services or sale of goods made in the course of business but rather in connection with its non-stock non-profit activities, the revenues thereof derived from donations are exempt from the 10% VAT. (VAT Ruling No. 005-00)" CONCLUSION In the view of the foregoing thereof, this Office hereby rules as follows: I. Considering that the proceeds of the proposed sale will be used by Metroclub in furtherance of the purpose for which it is created, i.e. , for the renovation of its existing clubhouse and the refurbishing and addition of facilities for the sports club, as well as to strengthen Metroclub's financial capability by providing adequate working capital to efficiently operate the Club and service its existing debts, the income derived therefrom is exempt from income tax. Accordingly, since the proposed sale of real property is not in pursuit of any intent to engage in the real estate business but mainly in furtherance of the purposes for which the Metroclub is organized, the proceeds therefrom cannot be considered to have been conducted for profit and, therefore, the same is not subject to income tax and consequently, to the creditable expanded withholding tax. (citing BIR Ruling No. DA-560-98 dated December 9, 1998, as reiterated in DA-005-99 dated January 7, 1999) II. Based on Section 105, in relation to Sections 106, 107, and 108 of the National Internal Revenue Code of 1997, the 10% VAT is imposed on "any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods." A non-stock non-profit organization may be entitled to tax exemption under the Tax Code, but will cover only taxes for which it is directly liable. The person liable for the payment of VAT is not the purchaser but the seller or importer of goods or services. The seller may however, shift or pass on the ten percent (10%) VAT to its purchaser as it is an indirect tax. Once shifted it is no longer a tax, but forms part of the cost of the goods or service. In the instant case, the sale of real property is not the business of Metroclub. Since the real property subject of the proposed sale is being held neither for sale to customers, nor primarily for lease in the ordinary course of trade or business, the same shall be exempt from VAT pursuant to Section 109(w) of the Tax Code of 1997, as implemented by Sec. 4.103-(B)(w)(1) of Rev. Regs. No. 7-95, as amended. (BIR Ruling DA-130-2003-A dated April 25, 2003) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different; then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group