BIR Ruling [DA-307-05]

July 5, 2005 BIR RULING [DA-307-05] RA 7278; DA-255-96 Boy Scout of the Philippines National Office 181 Natividad Almeda-Lopez St. Ermita, Manila Attention: Mr. J. Rizal C. Pangilinan Secretary General Gentlemen : This refers to your letter dated June 9, 2005 stating that under Republic Act (RA) No. 7278 amending Commonwealth Act No. 111, the Boy Scouts of the Philippines (BSP) is considered to be as a corporation organized for religious, charitable, scientific, athletic or cultural purposes, operated exclusively for the promotion of social welfare and for other non-profitable purposes; that RA 7278 provides that the BSP shall be exempt from income tax pursuant to Section 26(e) [now Section 30(E) of the Tax Code of 1997]; that BSP currently owns a property in J.P. Laurel Avenue, Lanang, Davao City consisting of Two Thousand Nine Hundred Forty (2,940) square meters, more or less, covered by TCT No. T-56707; that it is now in the process of selling the said property to any interested developer; that the proceeds of such sale will be used for the principal purpose of promoting scouting in the Philippines consisting of the following: 1. Upgrading and repairs of dilapidated facilities and equipment of the organization, particularly in the ten 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; 2. Implementation of programs for the training of scouts and scouters alike in scoutcraft, as well as advanced courses therefore; 3. 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 other, 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; and 4. The said corporation shall have the powers of perpetual succession, to sue and be sued; to enter into contracts; to acquire, own, lease, convey and dispose of such real and personal estate, land grants, rights and choses in action as shall be necessary for corporate purposes, and to accept and receive funds, real and personal property by gift, devise, bequest or other means, to conduct fund-raising activities. that the proceeds that will be derived from the sale of the said property shall provide BSP with much needed funds to accomplish the aforementioned purposes of BSP ; and that considering BSP's limited resources, it would be of great benefit to the organization if the said transaction shall not be subject to capital gains tax. CASTDI 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 30(E),(G) and (H) of the Tax Code of 1997. The proviso in Section 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 provision 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 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 proviso of said section 27(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. CTAIHc 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 Boy Scouts of the Philippines was organized, the proceeds from the sale of its real property located at J.P. Laurel Avenue, Lanang, Davao City covered by Transfer Certificate of Title No. T-56707, 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-255-96 dated June 25, 1996; BIR Ruling No. DA-560-98 dated December 9, 1998 and DA-005-99 dated January 7, 1999) However, the Deed of Absolute Sale of said real property shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service