BIR Ruling [DA-579-04]

November 12, 2004 BIR RULING [DA-579-04] Section 30; BIR Ruling No. DA384-04 Regina Apostolorum Society, Inc . SRA Convento San Antonio, Azucena St. Zamboanga City Attention: Sr. Jessica O. Suico Gentlemen : This refers to your letter dated May 18, 2004 requesting for exemption from the payment of capital gains tax on your sale of a real property in furtherance of your objectives. Documents show that Regina Apostolorum Society, Inc. is a non-stock, non-profit religious corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 148656 dated February 22, 1988; that on February 27, 2004, you were authorized by the Board of Trustees to sell a parcel of land located at 48 Cenacle Drive, Sanville Subdivision, Tandang Sora, Quezon City, covered by Transfer Certificate of Title (TCT) No. RT-49687 (379878), containing an area of 422 sq.m., more or less, in order to raise funds for urgent projects of the corporation; that the said property was used as rehabilitation center for abused children; and that on May 13, 2004, you executed a Deed of Absolute Sale covering the above-described property in favor of Spouses Ferdinand and Eileen Manalastas. In reply, please be informed that the last paragraph of Section 30 of the Tax Code of 1997 (then Section 26 of the Tax Code, as amended), clearly subjects to tax the income of whatever kind and character derived by any organization otherwise exempt under the same section, from any of its properties or activities conducted for profit, regardless of the disposition made of such income. Specifically, the Tax Code provides thus: "SEC. 30. Exemptions from Tax on Corporations . The following organizations shall not be taxed under this Title in respect to income received by them as such: xxx xxx xxx "(E) Nonstock corporation or association organized and operated exclusively for religious, . . . . . ., no part of its net income or assets shall belong to or inure to the benefit of any member, organizer, officer or any specific person; IcaHTA xxx xxx xxx "Notwithstanding, the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any properties, real or personal, or from any of the activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code." (emphasis supplied) The above-quoted provision is literal in its language and plain and categorical in its meaning. The last paragraph of Section 30 (then Section 26), particularly, does not leave any room for interpretation; the income from any of the organization's properties is subject to tax under the Tax Code, regardless of the disposition made of such income. In relation to this, Section 30 of Revenue Regulations No. 2, as amended, provides, among others, that the income of such tax-exempt corporation which is considered as income from their properties, real or personal, includes profits from the sale of property. In other words, the sale of real property owned by Regina Apostolorum Society, Inc. is subject to the corresponding income tax imposed under the Tax Code of 1997. The Constitution mandates that "charitable institutions, churches, and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation." [Section 28(3), Article VI, Constitution] (Emphasis supplied) Although the above-quoted constitutional provision seems to grant a sweeping tax exemption, the Supreme Court of the Philippines, in the case of Llandoc vs. Commissioner of Internal Revenue (L-19201) decided on June 16, 1965, held that the phrase "exempt from taxation" similarly contained in the 1935 Constitution should not be interpreted to mean exemption from all kinds of taxes. Thus, although in that case the cash received was actually spent by the parish priest for the intended purpose of constructing a new Catholic church, the Court nevertheless ruled against the exemption applied for in view of the interpretation it has given the Constitutional provision. The Highest Tribunal ruled that the exemption provided by the Constitution is only from the payment of taxes assessed on such properties enumerated as property or realty taxes. Finally, it held that there was no clear, positive or express grant of exemption privilege by law in favor of petitioner therein, hence, the denial. In view of the above Supreme Court decision, this Office ruled in BIR Ruling No. 121-91 dated June 25, 1991 that the excess of the selling price over the acquisition cost of the property (i.e. the profit/income) to be sold by the Society of Divine Word and used exclusively for religious purposes shall be subject to income tax/capital gains tax. The same BIR Ruling No. 121-91 expressly revoked BIR Ruling No. 569-88 dated November 29, 1988. On the other hand, BIR Ruling No. 569-88 expressly revoked BIR Rulings Nos. 65-80, 66-80, 67-80 and 165-84. Other BIR Rulings; DOJ Opinion; and the Manila Polo Club (CTA Case No. 298 decided on August 31, 1959) and Xavier School, Inc. (CTA Case No. 1682 decided on October 8, 1969) cases which exempted from income tax the gain derived from the sale of property based on an "isolated transaction" and using the proceeds thereof to purchase another property for a new site in furtherance of the purposes for which the respective organizations in the said cases were established, are subordinate to the Supreme Court case of Llandoc vs. Commissioner of Internal Revenue (L-19201) decided on June 16, 1965 (BIR Ruling No. 384-2004 dated July 13, 2004). In view of the foregoing, this Office hereby rules that the real property sold by Regina Apostolorum Society, Inc., the proceeds of which will be used in furtherance of its objectives, shall be subject to capital gains tax based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, of such land and/or buildings pursuant to Section 27(D)(5) of the same Code (Section 4(c)(i), Revenue Regulations No. 7-2003). 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. CSHcDT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group