Taxability of a Deed of Exchange Entered into by and between the Spouses Patricio Rivera and Corazon Dimaano and the Roman Catholic Bishop of Lipa for the Exchange of a Parcel of Land with Two Parcels of Land Owned by the Roman Catholic Bishop of Lipa

March 15, 1996 BIR RULING NO. 041-96 26 (e) 000-00 041-96 Ms. Corazon Dimaano Kumintang Ibaba Batangas City M a d a m : This refers to your letter dated March 12, 1996 stating that on October 23, 1995, a Deed of Exchange was entered into by and between the Spouses Patricio Rivera and Corazon Dimaano and the Roman Catholic Bishop of Lipa, represented by His Eminence Gaudencio Rosales, Archbishop of Lipa, for the exchange of a parcel of land situated in Barrio Sambat, Batangas City covered by TCT No. T-213 with an area of 422 square meters, owned in fee simple by the spouses, with two parcels of land owned by the Roman Catholic Bishop of Lipa, situated in the same locality and covered by TCT Nos. 25654 and 25656 with an aggregate area of 417 square meters; that the Roman Catholic Bishop of Lipa is an entity which is tax exempt under our existing laws; that the exchange was made without any financial consideration from either of the parties; and that the main purpose of said exchange is to build a church on the said property of the spouses. LLpr Based on the foregoing representation and documents submitted, you now request for a ruling on the taxability of the exchange of the said properties. In reply, please be informed that under Section 21(e) of the Tax Code, as amended, capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts, shall be taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. On the other hand, income of whatever kind and character of a religious organization 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 the Tax Code, as amended. However, the said provision does not apply to the instant case. The Secretary of Justice in his Opinion No. 45, in pertinent part, said the following: "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 of constructing a new church in a place where most of its members now reside, does not come within the reach of the provision 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)." 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 the case of the Manila Polo Club vs. Collector of Internal Revenue (CTA Case No. 293, August 31, 1959) which involves similar facts, i.e. proceeds of 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. vs. Commissioner of Internal Revenue (CTA Case No. 1682, October 8, 1969), the Tax Court exempted from income tax, the gain derived by the school, stating that 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 is of the opinion as it hereby holds that the Spouses Patricio Rivera and Corazon Dimaano are subject to the 5% capital gains tax on the said exchange based on the fair market value or zonal value of their property, whichever is higher. However, on the part of the Roman Catholic Bishop of Lipa, being a single and isolated transaction and in furtherance of the purposes for which it is organized, its exchange of property is not subject to income tax and consequently, to the creditable expanded withholding tax. LLcd However, the Deed of Exchange of said properties shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code as amended by R.A. No. 7660. (BIR Ruling No. 543-93 dated December 28, 1993) Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue