Taxability of the Activities Conducted for Profit by a Religious and Educational Corporation

January 10, 1967 BIR RULING NO. 005-67 Mr. Galo D. Weygan Certified Public Accountant Caguioa Bldg., Baguio City S i r : This refers to your letter requesting legal opinion on the following questions: "1. Religious schools are 100% exempted from taxes. How about their subsidiary which are either on-educational or partly educational but profit making activities? "2. if such activities are taxable for example, to what extent are they taxable? "3. If they are taxable up to the income tax, to which classification do they fall? As a part of the religious school not subject to income tax, school subject to income tax or as a business corporation subject to the 22 & 30% income tax? "4. If further, they are subject to the business corporate income tax, may it not be prejudicial and discriminatory in the sense that the administration of the Church and school, in which case the salaries and expenses are not shard by the waving room or subsidiary activity. In this instance, the non-inclusion of the financial and administrative costs tend to increase the profits that are legal and deductible expenses were they to be found in a private corporation? "5. What are the implications of Section 27(c) Internal Revenue Code in this case and that of the decision of the Supreme Court in the appealed and re-considered case of the University of the Visayas vs. The Commissioner of Internal Revenue that has been decided in 1964? If there are other pertinent leading cases on the above matter what are their effects and applicability in the instant case?" You represented that the "Easter School of the Domestic & Foreign Missionary Society of the Protestant Episcopal Church of the United states of America (hereinafter referred to as the School) is a religious and educational corporation; that while the school charges tuition fees from its students, such fees are nominal and the School's operating expenses are being subsidized by the Church; that the school has a subsidiary activity which is conducted and undertaken by a weaving room is also operated with the use of hired weavers and the products are sold to the public for profit; and that the School has been filing its income tax return and has been paying the corresponding income tax as well as the percentage and privilege taxes. In reply, I have the honor to inform you that a corporation or association organized and operated exclusively for religious, charitable, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual is exempt from taxation; provided, that the income of whatever kind and character from any of its properties, real or personal, or from any activity conducted for profit, regardless of the disposition made of such income, shall be liable to tax imposed under the Tax Code. (Sec. 27(e), NIRC). It is admitted in your representation that the so-called Weaving Room of the School is an activity conducted for profit. Such being the case, the net income derived therefrom is taxable under the proviso of Section 27(e) of the Tax Code. The tax is, however, to be computed at the flat rate of 10%. Expenses incurred in the operation of the weaving room and in the production of the income thereat are deductible from the gross income derived from the sales of its products. Under Section 27(c) of the Tax Code, a fraternal beneficiary society is exempt from tax only if operated under the "lodge system" or for the exclusive benefit of the member of the society so operating. In order to be exempt, it is also necessary that the society has an established system for payment to its members or their dependent of life, sick, accident, or other benefits (Section 27, Rev. Reg. No. 2). The aforecited provision of law has, therefore, no application to the instant case. cdtech Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue