Request for Exemption from the Payment of Capital Gains Tax on the Sale of a House and Lot which Served as PROCESS National Headquarters

March 10, 1997 BIR RULING NO. 023-97 26 023-97 Process 3rd Floor, PSSC Building Commonwealth Avenue Quezon City Attention: Mr . Alfredo T . Tadiar Trustee Gentlemen : This refers to your letter dated July 10, 1996 requesting for exemption from the payment of capital gains tax on the sale of a house and lot which served as your National Headquarters. cdta It is represented that PROCESS (Participatory Research, Organization of Communities, and Education Towards the Struggle for Self-Reliance) is a duly registered non-stock, non-profit and non-governmental corporation organized to initiate, undertake or arrange projects in community organizing participatory research, legal resources development, community communications and economic self-reliance in order to identify socio-economic problems of rural workers and to propose solutions thereto; that its activities are principally funded by the Friedrich Naumann Foundation, Inc. in Konigswinter, Federal Republic of Germany; that on December 16, 1986, it bought a house and lot located at 54 Estrella St., Bel-Air Village, Makati City for its Manila Headquarters in the amount of P2,000,000.00 with funds provided by Friedrich Naumann Foundation to support the programs and projects implemented by PROCESS; that Friedrich Naumann Foundation, however, unexpectedly cut-off its funding on May 30, 1993 seven months before the expiry of its Contract of Cooperation on December 31, 1993; that this led to the decision of PROCESS Board to sell said property being then used as its National Headquarters; that a Contract to Sell was thereupon entered into whereby the Bel-Air property shall be sold for P23,500.00; that the PROCESS Board has passed a Resolution that the net proceeds of the sale shall be held and perpetuated in trust and that only the interest and earnings therefrom may be used for projects or activities in pursuance of the above-mentioned objectives; that a five-member committee, one member of whom shall be the representative of the Friedrich Naumann, shall be formed to administer the trust fund, perpetuate it, and ensure that its proceeds are used to support only such activities or projects as may be consistent with the primary purpose and the vision, mission and goals of PROCESS; and that the Chair shall oversee the establishment of a perpetual trust fund and the organization of the trust fund committee, including compliance with the legal requirements thereof; and that it is your opinion that the said sale should be treated as an isolated transaction which is not covered by the last paragraph of Section 26 of the Tax Code, as amended. In reply, we quote hereunder the last paragraph of Section 26 of the Tax Code, as amended, reading: " Notwithstanding the provision 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 ." However, it is your opinion that the above-quoted provision does not apply to the instant case because your said that the subject sale of your National Headquarters should be treated as an isolated transaction which is not covered by the aforequoted paragraph, thus falling within the contemplation of the opinion of the Secretary of Justice, viz: " Considering the history of the provision in question, it would seem that the statute as now amended has restricted the tax exemption of religious, education 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 or 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 . This, 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 new church in a place where most of its members now reside, does not come within the reach of the provision of Sec . 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 a reason enough to say that income to be derived from the sale of property is not within the contemplation of the proviso of said Sec . 27(E) ." (Emphasis supplied.) We beg to disagree. The aforequoted opinion is correct in so far as the case of the Union Church of Manila is concerned, but not in your case. The establishment and the perpetuation of a Trust Fund out of the proceeds from the sale of the subject property to be administered by a five-member committee who will at the same time ensure that the interests and earnings of the said Trust Fund are used to support the organization's activities or projects is nevertheless 'income realized from the productive use of personal properties'. The provision of Sec. 26 of the Tax Code, as amended, is very emphatic when it states that ' the income of whatever kind and character of the . . . organizations from any of their properties, real or personal, (i . e . , interest income, yield or any other monetary benefit from the Trust Fund in your case) 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 Tax Code. In view thereof, this Office is of the opinion that the sale of a house and lot located at 54 Estrella St., Bel-Air Village, Makati City, which served as PROCESS' National Headquarters, in the amount of P23,500,000.00 shall be subject to the corporate income tax of 35% imposed under Sec. 24(a) of the Tax Code, as amended, and consequently to the creditable expanded withholding tax under Revenue Regulations No. 12-94, the same falling within the contemplation of the last paragraph of Sec. 26 of the Tax Code, as amended. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue