BIR Ruling [DA-544-98]

December 2, 1998 BIR RULING [DA-544-98] Tax Counseling, Inc. Unit 2204C Tektite Towers East PSE Bldg., Exchange Road Ortigas Center Pasig City Attention: Atty . Reynoso B . Floreza Gentlemen : This refers to your letter dated November 16, 1998 requesting for a reconsideration of BIR Ruling No. 023-97 dated March 10, 1997 which denied the request of your client, PROCESS (Participatory Research, Organization of Communities, and Education towards the Struggle for Self-Reliance) for exemption from the payment of capital gains tax on the sale of its house and lot which served as its National Headquarters. cdt As represented, PROCESS is a duly registered non-stock, non-profit and non-governmental corporation organized to initiate, undertake or arrange projects in community organizing participatory research, legal resources development, community communications and economic self-reliance in order to identify socio-economic problems of rural workers and to propose solutions thereto; that on December 16, 1986, PROCESS bought a house and lot in Bel-Air Village, Makati City for P2,000,000.00, coming from the endowment or donation of Friedrich Naumann Foundation of Germany; that these house and lot were used as the Manila Headquarters of PROCESS; that in 1996, the said properties were sold for P23,500,000.00; that the proceeds from the sale have been placed on time deposit with the Philippine National Bank (U.P. Diliman Branch), and PROCESS is being subjected to the withholding 20% final tax; that these interest payments are being used only for the purposes for which PROCESS was organized, while the time deposit (proceeds of sale) is in perpetual trust in the PNB; and that in view of BIR Ruling No. 023-97, PROCESS was ordered to pay the 35% corporate income tax on the gain derived from the sale and, consequently, the corresponding 7.5% creditable withholding tax thereon in the amount of P2,517,835.94 including increments. In reply, we quote hereunder the last paragraph of Section 30 of the Tax Code of 1997, reading: "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, said 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 or 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 the 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 a reason enough to say that income to be derived from the sale of 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 vs. Collector of Internal Revenue (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. vs. Commissioner of Internal Revenue (CTA Case No. 1682, October 8, 1969), the Tax Court exempted from income tax, the gain derived by the school, 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 of all the foregoing, 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 PROCESS is organized, the proceeds from the sale of its office in Makati cannot be considered income from the productive use of its property and does not constitute engaging in business, therefore, the same is not subject to income tax. Moreover, on the basis of the same arguments, the establishment and the perpetuation as a trust fund of the proceeds of the sale of the subject property to be administered by a five-member committee who will at the same time ensure that the interests and earnings of the said trust fund are used to support only such activities on projects as may be consistent with the primary purpose and the vision, mission and goals of PROCESS, is in effect, not constituting as engaging in business. (BIR Ruling No. 569-88) This will serve as your authority to claim for refund the amount of P2,517,835.94 representing the 7.5% creditable withholding tax paid on April 4, 1997 by virtue of BIR Ruling No. 023-97. aisadc This revokes BIR Ruling No. 023-97 dated March 10, 1997. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue