BIR Ruling [DA-560-98]

December 9, 1998 BIR RULING [DA-560-98] Zambrano Gruba & Associates 18th Floor Solid Bank Building 777 Paseo de Roxas Makati City Attention: Attys . Lily K . Gruba and Marie Evangeline B . Bautista Gentlemen : This refers to your letter dated August 8, 1997 requesting on behalf of your client, Task Force Detainees of the Philippines, Inc. (TFD), for a ruling that the proceeds from an isolated sale of a parcel of land by the TFD to the Center for Human Rights, Inc. is exempt from income tax. LexLib It is represented that TFD is a non-stock, non-profit domestic corporation duly registered with the Securities and Exchange Commission (SEC); that it owns a parcel of land located at No. 45 St. Mary Street, Cubao, Quezon City which was acquired from Mr. Claudio C. Amador and still covered by TCT No. RT-54318(116612) issued by the Registry of Deeds for Quezon City; that it intends to sell the said property to the Center for Human Rights and Development, Inc., a non-stock, non-profit corporation; and that the proceeds of such sale shall be used to finance the corporation's human rights educational programs and legal assistance programs for the benefit of political prisoners; In reply, 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) 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 is of the opinion as it hereby holds that the proceeds from the sale of the said 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 derived from a single and isolated transaction in furtherance of the purposes for which the TFD is organized. However, the said transaction is subject to documentary stamp tax imposed under Sec. 196 of the Tax Code of 1997. (BIR Ruling No. 543-93 dated December 28, 1993) LibLex 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)