Philippine Business for Social Progress

May 21, 2010 BIR RULING [DA-(C-015) 071-10] Sec. 30; 27 (D) (5); BIR Ruling No. 049-90; DA-048-06; DA-(C-058) 206-09 Philippine Business for Social Progress Philippine Social Development Center, Magallanes cor. Real Streets, Intramuros, Manila Attention: Gil T. Salazar Executive Director Gentlemen : This refers to your letter dated January 14, 2010 requesting confirmation of your opinion that the proceeds from the sale by Philippine Business for Social Progress (PBSP) of its real properties is not subject to income tax, particularly, capital gains tax. cSHATC It is represented that PBSP, with TIN 000-263-358-000, is a non-stock, non-profit corporation committed to social development; that it is registered with the Securities and Exchange Commission under SEC Registration No. 43546 dated March 5, 1971; that PBSP plans to sell its premises located in Intramuros, Manila consisting of three (3) contiguous lots with an aggregate area of 2,686.90 sq.m. and covered by Transfer Certificates of Title No. 170193 and 183674 of the Registry of Deeds of Manila, as well as a three-storey building with an estimated floor area of 3,386 sq.m.; that the said properties are currently being used by PBSP as its principal office or headquarters and no part of the said property is being used in order to acquire a new site and/or transfer to a new site for its head office and thus use the proceeds of the sale in furtherance of the organization's purposes; that it is PBSP's opinion that having been derived from a single and isolated transaction in furtherance of the purposes for which PBSP was organized, the proceeds that it receives from the sale of the aforementioned properties cannot be considered income from productive use of its properties and, therefore, the same is not subject to income tax and consequently, to capital gains tax. In reply, please be informed that the last paragraph of Section 30 of the 1997 Tax Code, as amended (then Section 26 of the old Tax Code), 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: "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, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, 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; xxx xxx xxx (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; 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." cTECIA In BIR Ruling No. 049-90 dated March 30, 1990 , the BIR ruled that the sale of an unimproved property of a homeowners association, which is a non-stock, non-profit corporation, is subject to payment of capital gains tax. It states as follows: "In reply, please be informed that your request cannot be granted for lack of legal basis. This Office has consistently ruled that a homeowner's association organized for non-profitable purposes falls within the purview of Section 26(h) of the Tax Code, as amended; hence, income received by it as such shall not be taxed under Title II of the said Code. However, the income of whatever kind and character of such organization from any of its properties, real or personal, or from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax imposed under the same Code. (Section 26, Tax Code) Such being the case, should the sale of your aforementioned property materialize, the gain you derived therefrom is subject to income tax and consequently to the 5% creditable withholding tax imposed under Revenue Regulations No. 12-89 as amended by Revenue Regulations No. 1-90 implementing Section 50(b) in relation to Section 24(a), both of the Tax Code, as amended, based on the gross selling price or the total amount of consideration or its equivalent. For this purpose, the term "Gross selling price" means the consideration stated in the sales documents or the fair market value/zonal value, whichever is higher. (Revenue Memorandum Circular No. 7-90)" Still referring to the same Tax Code provision, it is stated in BIR Ruling No. DA-048-06 dated February 15, 2006 that "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 its properties, real or personal, includes profits from the sale of property. In other words, the sale by BSP of its real property shall be subject to the corresponding income tax imposed under the Tax Code of 1997." This Office, in BIR Ruling No. DA-(C-058) 206-09 dated April 22, 2009 , explained: "We note that the exemption from income tax of Dr. Jose P. Rizal Memorial Foundation, Inc. under Section 8 of R.A. No. 7278 is pursuant to Section 26 (e), (g) and (h) of the old Tax Code, viz. : "The corporation shall be entitled to the following tax and duty privileges: DaEcTC (a) Exemption from income tax pursuant to Section 26(e), (g) and (h) of the National Internal Revenue Code, as amended; xxx xxx xxx" The same provision is now Section 30 (E) and (G) of the Tax Code of 1997. Then Section 26 (h) in the old Tax Code has been deleted in the Tax Code of 1997 while the last paragraph of Section 26 (now Section 30) of the Tax Code has been retained in the new Code. Paragraphs (e), (g) and (h) of Section 26 [now par. (E) and (G) of Section 30] of the Tax Code should be read together with the last paragraph of the same Section since statutes must be construed as a whole. In fact, a cardinal rule of statutory construction is that legislative intent must be ascertained from a consideration of the statute as a whole, and not of an isolated part or a particular provision alone (Aboitiz Shipping Corporation, et al. vs. City of Cebu, et al. , 13 SCRA 449). Accordingly, the last paragraph of Section 30 (then Section 26) of the Tax Code, as well as the whole section should be understood and interpreted in connection and jointly with all the other provisions of the same law, and in the light of the preceding and subsequent provisions, giving a meaning to each word or expression in said Section 30 ( Chartered Bank vs. Imperial, 48 Phil. 931). Moreover, 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 its properties, real or personal, includes profits from the sale of property. In other words, the sale by Dr. Jose P. Rizal Memorial Foundation, Inc. of its real property shall be subject to the corresponding income tax imposed under the Tax Code of 1997. Such being the case, this Office hereby rules that the sale by Dr. Jose P. Rizal Memorial Foundation, Inc. of its real property located in the Municipality of Muntinlupa covered by TCT No. 7693 is 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). Moreover, the Deed of Absolute Sale of said real property shall be subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997." As to PBSP's reliance on the cases of Manila Polo Club (CTA Case No. 293, August 31, 1959) and Xavier School, Inc. (CTA Case No. 1682, October 8, 1969) which support the opinion that proceeds from the sale of its properties is exempt from having been derived from a single and isolated transaction in furtherance of the purposes for which PBSP was organized, the issue has been settled in BIR Ruling No. DA-048-06 citing BIR Ruling No. 121-91 dated June 25, 1991, to wit: EDATSC "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 Ruling 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 Lladoc vs. Commissioner of Internal Revenue (L-19201) decided on June 16, 1965. xxx xxx xxx In view of the foregoing, this Office hereby rules that the sale by BSP of its Davao property is 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)." Based on the foregoing, this Office is of the opinion and hereby holds that the sale by PBSP of its three (3) contiguous lots, with an aggregate area of 2,686.90 sq.m. and covered by Transfer Certificates of Title No. 170193 and 183674 of the Registry of Deeds of Manila, is 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 lands and building pursuant to Section 27 (D) (5) of the same Code (Section 4 (c) (i), Revenue Regulations No. 7-2003). Moreover, the Deed of Sale of said real properties shall be subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended. HSCATc This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group