Josue, Alcoriza & Co., CPA's

August 31, 2007 BIR RULING [DA-475-07] DA 560-98 Josue, Alcoriza & Co., CPA's No. 59-B Panay Avenue Quezon City Attention: Ms. Catalina S. Alcoriza Partner Gentlemen : This refers to your letter dated June 21, 2007 stating that your client, Good Shepherd Convent, Inc., is a non stock, non-profit religious and charitable corporation with office address at 1043 Aurora Boulevard, Quezon City; that the Republic of the Philippines through the Department of Public Works and Highways (DPWH) had constructed the widening of Aurora Boulevard in Quezon City (now completed) which totally affected the lot of Good Shepherd Convent, Inc., identified as Lot No. 4-A (Road Widening), as shown on the subdivision plan, Psd-13-005527 containing an area of 1,887 square meters; that the ownership of the aforementioned lot is evidenced by TCT No. N-139805 issued by the Registry of Deeds for Quezon City and Tax Declaration No. D-056-01252 both in the name of Good Shepherd Convent, Inc.; that the corporation shall be compensated for the public use of its property by the government in the amount of P16,854,684.00 of which P566,762.82 released shall be paid as the down-payment and the balance as soon as the funds become available; that inasmuch as the payment is in installment, the Deed of Absolute Sale shall be registered after at least 50% of the purchase price had already been paid; that to date, an additional payment of P5,717,758.42 had been received by the corporation; that the proceeds of the above sale were spent and/or are to be spent on the rehabilitation of the properties damaged by typhoon/calamities, mostly in the Bicol Region and construction of new buildings and chapels that are needed in the furtherance of its religious purposes; that the details of the actual and intended use of the proceeds of the sale are as follows: COMPLETED CONSTRUCTION: Bicol Region Renovation/Repairs/Extension of Good Shepherd Convent in Legaspi City 500,000.00 Repairs of Good Shepherd Home for Girls in Legaspi City 70,000.00 Renovation of Good Shepherd Convent and St. Bridget School in Buhi, Camarines Sur 520,000.00 P1,090,000.00 PROPOSED CONSTRUCTION: Bicol Region Convent of the Contemplative Sisters of the Good Shepherd in Virac, Catanduanes City to replace the residence that was totally destroyed by Typhoon Reming P4,100,000.00 Convent Fencing and Ground improvements in Virac, Catanduanes City 1,200,000.00 Chapel of the Contemplative Sisters of the Good Shepherd in Virac, Catanduanes City 3,700,000.00 Metro Manila cCaEDA Renovation of the 3rd and 4th Floors of the Good Shepherd Convent in Quezon City for the use of old and sick sisters 6,800,000.00 P15,800,000.00 GRAND TOTAL P16,890,000.00 ============ In connection therewith, you now request confirmation of your opinion that any gain or profit derived from the sale of the above-mentioned property to the Government of the Philippines through DPWH is exempt from income tax and consequently from withholding tax. In reply thereto, please be informed that the proviso in Section 27 (e) [now 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 the said Code." 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 ) ATcaEH 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. SUCH BEING THE CASE, this Office holds that the proceeds from the sale of the above-mentioned property cannot be considered income from the productive use of its property and, therefore, the same is not subject to income tax, the same having been derived from a single and isolated transaction in furtherance of the purposes for which the Good Shepherd Convent, Inc. is organized. However, the said transaction is subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997. ( BIR Ruling No. 543-93 dated December 28, 1993 ) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service