Deductibility of Donation Made to a Foundation

No date supplied BIR RULING NO. 034-70 Donation made to a Foundation : Deductibility of . Under Section 30(h) of the Tax Code, as amended by Republic Act No. 6110, a distinction should be made between a donation or contribution that is made to or for the use of domestic corporations or associations organized and operated exclusively for educational purposes, and a donation or contribution that is made to a school, college or university recognized by the Government in order to determine whether, for income tax purposes, the donation or contribution is deductible in full, or is subject to the 6% or 3% limitation, as the case may be. Consequently, a donation made direct to a school shall be deductible in full from the gross income of the donor. On the other hand, where the donation is made to a Foundation regardless of whether or not there is an express provision as to its purpose, e.g., "Donated to the Foundation for the exclusive improvements of college X", the same shall be considered merely a donation to a domestic corporation organized for educational purposes and is, therefore, subject to the 6% or 3% limitations, as provided in Section 30(h) of the Tax Code. cdt Method of reporting income derived from the sale of subdivided lots . Generally, income from the sale of land may be reported either on the installment basis or on the deferred-payment basis, not on the installment plan. From the viewpoint of passage of title from the seller to the purchaser, deferred-payment sale of real property may be classified into two kinds. First, there is the case of the seller who conveys title to the property at the outset and who takes a mortgage to secure the unpaid portion of the purchase price. Second, there is also the case of the seller who retains title to the property and who conveys it only after all or a substantial portion of the purchase price has been paid by the purchaser. (Sec. 175, Rev. Regs. No. 2) From the viewpoint of consideration, each of these two cases may be a sale of the property on the installment plan (Sec. 176, Rev. Regs. No. 2) or a sale on a deferred-payment basis, not on the installment plan. (Sec. 177, Rev. Regs. No. 2). The basic distinction between a sale of real property on the installment plan and a sale on a deferred-payment basis, not on the installment plan, lies on the amount of the "initial payments received by the seller. (See Section 43 (b) in the year of sale do not exceed twenty-five per cent (25%) of the selling price. If the initial payments in the year of sale exceed twenty-five per cent (25%) of the selling price, then the sale is on the deferred-payment basis, not on the installment plan. The term "initial payments" is defined in the statute to mean payments received "in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale or other disposition is made". This term must not be equated with what is commonly called "down payment" because its meaning is much broader than that. (2 Mertens, Federal Income Taxation 447). While it covers any down payment made, it goes further and includes all payments actually or constructively received during the year of sale. (Gertrude H. Sweet, 8BTA 404; Cortland Specially Co., 22 BTA 808; amoe E. Binig, 19 BTA 1105) And the aggregate of all such payments determines whether or not the limit which the law has set has been exceeded. Initial payments do not include the amount of mortgage on the real property sold except when such mortgage exceeds the cost or other basis of the property to the seller. Where the mortgage exceeds the cost or other basis of the property to the seller, the excess has to be included in the initial payments. (See Sec. 175, Rev. Regs. No. 2) Also excluded from initial payments are notes or other evidences of indebtedness issued by the purchaser to the seller at the time of sale. The term "initial payments" assumes that there must be more than one payment so as to qualify the transaction as a sale on the installment plan. If the total purchase price is to be paid in one lump sum in the year of sale or in a later year, or where no payment in cash or property is received by the seller in the year of sale, the transaction will very likely fall outside the scope of a sale of property on the installment plan. cd From the statute and the rules adopted to implement it, it seems that a sale of real property to be treated as a sale on the installment plan must satisfy several important conditions. These conditions can be briefly stated as follows: First, there must be a sale of the real property involved. Second, there must be at least two or more payments in cash or property over two or more taxable periods. Third, initial payments in cash or property must be made in the year of sale. Finally, the aggregate initial payments in the year of sale must not exceed twenty-five per cent (25%) of the selling price of the real property. If the transaction satisfies all these conditions the seller may report his gain on the installment method. If not, his gain will have to be reported on the deferred-payment basis, not on the installment plan. Obviously, all of the above-enumerated prerequisites are complied with in the transaction described in the letter. The amount of P2,000 collected during the year of sale does not exceed 25% of P20,000, which is the selling price of the 100 square meters of land sold at P200 per square meter. If as orally represented, the aforementioned mortgage on the property sold does not exceed the cost or other basis of the property to the Foundation the amount of the mortgage shall not form part of the initial payment otherwise, the excess has to be included in the initial payment of P2,000. Under the installment method, the Foundation is allowed to return as income for each of the taxable years during which the purchaser will pay the purchase price, a proportion of the installment payments actually received during each such years, which the total profit realized or to be realized when the property sold is fully paid bears to the total contract price. When a tract of land is subdivided into lots and sold before the contemplated development work is completed, the profit realized should be determined on the basis of the cost of the land, or its fair market value on March 1, 1913, if acquired to that date, plus estimated future expenditures for the development of the property in accordance with the contract of sale. (Milton A. Mackay, 11 B.T.A. 569; see also Sec. 35(a) and (b), N.I.R.C.) Cost of a tract of land subdivided and sold in lots includes not only its original price but amounts spent on improvements subsequent to the taxable period. (Birdneck Realty Corp. vs. Commissioner of Internal Revenue, 25, B.T.A 1084) The latter amount should be taken into consideration in the determination of the increase in net worth or the profit realized by the seller in the year of the sale of his property. In other words, reserves or estimated future expenditures for contractual improvements or for the development of subdivided lots sold on installment should be treated as part of the cost of the lots sold, and the gain derived from such sales is the difference between the selling price and the cost of the lots sold plus the estimated future expenditures for contractual improvements or development. (Mackay, supra ; Cambria Development Co. supra ; Kentucky Land, Gas & Oil Co. vs. Commissioner of Internal Revenue, 2 B.T.A. 838; Cagood Land and Livestock Co. vs. Commissioner of Internal Revenue 22 B.T.A 387; Birdneck Realty Corp. ( supra ) Accordingly, the total development cost of P100,000 in the example should be treated as part of the cost of the entire subdivision. Since the acquisition cost of the latter is P50,000, the total cost thereof is P150,000. Cost of sale per square meter of the total 1,000 square meters subdivided lot is P150 and the total contract price per square meter is P200. In fine, where, as illustrated, 100 square meters were sold in the first year for P20,000 (100 sq. m. x P200/sq. m.) of which P2,000 was paid in cash in the year of sale, the formula may be properly applied, viz: Gross profit to be realized x Initial payment or total Total contract price installments received during the taxable year = income to be reported for the taxable year or P5,000 x P2,000 = P500 P20,000 P5,000 is the difference between the contract price of P20,000 and P15,000 (100 sq. m. x P150/sq. m.), the acquisition cost for the 100 square meter lot sold. The amount of P6,000 actually spent for development cannot be allocated as an item of cost for any particular lot but for the entire subdivision lot. Besides, representation adopted the system whereby the reserves for development cost had already been taken up as part of the cost of sales.