BIR Ruling [DA-291-03]

September 2, 2003 BIR RULING [DA-291-03] Padilla Law Office 7/F, Padilla-delos Reyes Building 232 Juan Luna Street Binondo, Manila Attention: Atty. Sabino Jose M. Padilla III Gentlemen : This refers to your letter dated August 4, 2003 stating that your client, the Provincial Superior of the Pious Disciples of the Divine Master, Inc. (PDDM) is a religious corporation sole duly organized and existing under the laws of the Philippines; that it is the owner in fee simple of a parcel of land together with the improvements thereon located at No. 8 Zaragoza Street, Araneta Subdivision, Barangay Doa Imelda, Quezon City and covered by TCT No. N-174918 issued by the Registry of Deeds for Quezon City; that the aforesaid property is used actually, directly and exclusively for religious, charitable and educational purposes, namely the provincialate, convent, formation house and school conducted by the corporation sole; that PDDM is selling the said property to TSPS Realty and Development Corporation in the amount of P9,700,000.00, that the entire proceeds of the sale of the aforesaid property will be used to purchase the parcel of land covered by TCT No. 17871 issued by the Registry of Deeds for Quezon City, where the Salesian Society of St. John Bosco, Inc. was erected, in the amount of P20,000,000.00; and that the land and improvements thereon shall be used actually, directly and exclusively for religious, charitable and educational purposes of PDDM. Based on the foregoing representations, you now request for a ruling that the proposed sale of a parcel of land together with the improvements thereon by PDDM, a non-stock, non-profit religious corporation, where the proceeds of which shall be used to acquire another property to be used actually, directly and exclusively for its purpose, is exempt from income tax under Section 30 of the Tax Code of 1997. In reply thereto, please be informed that the pertinent portion of Section 30 of the Tax Code of 1997 states 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 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 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, 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. 569-88 dated March 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 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 holds that having been derived from a single and isolated transaction in furtherance of the purposes for which the PDDM is organized, the proceeds from the sale of its property in Quezon City cannot be considered income from the productive use of its property and, therefore, the same is not subject to income tax. 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. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service