BIR Ruling [DA-699-06]

December 13, 2006 BIR RULING [DA-699-06] DA 307-05 Chato & Vinzons-Chato 8th Floor, STRATA 2000 F. Ortigas, Jr. Road Ortigas Center Pasig City Attention: Atty. Esther R. Ibaez Gentlemen : This refers to your letter dated November 20, 2006 stating that your client, Boy Scouts of the Philippines (BSP) is considered to be 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 under Republic Act (R.A.) No. 7278, amending Commonwealth Act No. 111; that R.A. No. 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 intends to enter into Deed of Absolute Sale with Empire Estate Holdings, Inc., Empire East Land Holdings, Inc., Valle Properties, Inc. and/or their subsidiaries and assignees regarding its property, which is located along Eagle Street, Barrio Ugong, Pasig City and covered by TCT No. T-488604 issued by the Registry of Deeds for Pasig City; that the proceeds of the impending sale shall be used by BSP for the following purposes: (1) Upgrading and repairs of dilapidated facilities and equipment of the organization, particularly those in the ten (10) scouting regions nationwide, which are essential in carrying out its mandate under its Charter, Commonwealth Act No. 111, as amended by Presidential Decree No. 460 and R.A. No. 7278; (2) Implementation of programs for the training of scouts and scouters alike in scoutcraft, as well as advanced courses therefor; (3) To carry out the programs which will promote and encourage through organization and cooperation with other agencies, the ability of the boys to do useful things for themselves and others, 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 all together constitute the basic foundation of a strong character. and that due to the limited financial resources of BSP, the sale of the subject property and the exemption thereof from capital gains tax will provide BSP with much needed means to accomplish aforementioned goals. In connection therewith, you now request for a ruling that the proposed sale of the above-mentioned property by BSP is exempt from the payment of capital gains tax. In reply thereto, please be informed that under Section 8 of R.A. 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. In view thereof, this Office holds that having been derived from a single and isolated transaction in furtherance of the purposes for which the BSP was organized, the proceeds to be derived 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 and consequently, to the creditable expanded withholding tax. (BIR Ruling Nos. DA255-96 dated June 25, 1996; DA560-98 dated December 9, 1998 and DA005-99 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service