Proceeds from Sale of Property by Good Shepherd Convent Not Subject to Capital Gains Tax

June 22, 1999 BIR RULING NO. 080-99 Sec. 30 BIR Ruling 387-93-080-99 DeGuzman & Celis Law Office Suite C. 15th Floor, Strata 200 Bldg. Emerald Avenue, Ortigas Center Pasig City Attention: Atty . F . G . DeGuzman Gentlemen : This refers to your letter dated March 19, 1999 requesting for a ruling in favor of your client, Good Shepherd Convent, Inc., that the proceeds of the sale of a portion of its property along Aurora Boulevard to the Light Rail Transit Authority (LRTA), which sale is not voluntary but compelled by public authority, is exempt from capital gains tax. It is represented that your client, Good Shepherd Convent, Inc., is a non-stock, non-profit religious corporation duly registered with the Securities and Exchange Commission; that it owns three (3) adjoining parcels of land, as follows: T .C.T . No. Area Land Area RT-87109 1,441 sq.m. 92.22 sq.m. N-139408 14,838 sq. m. 32.83 sq.m. N-139807 12,273 sq. m. 112.06 sq.m. that your client was compelled to sell the said lots to LRTA; that LRTA will also acquire subterranean rights over 844.90 square meters of the said properties; that by reason of the take-over of a portion of your client's properties, the corporation has to redevelop their remaining property and will use the proceeds of the sale for the general improvements thereof; that the proceeds cannot be considered income realized from a profit activity under Section 30 of the Tax Code of 1997. prcd In reply, please be advised that Section 30(E) of the Tax Code of 1997 exempts from income tax non-stock, non-profit corporation or association organized and operated exclusively for religious purposes. However, a portion of said provision likewise provides that "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." Nonetheless, since Good Shepherd is organized and operated exclusively for religious purposes and owns and holds said property for this purpose, it has been held that the profit or income resulting from the transaction would be merely incidental to said religious purposes. (Opinion No. 45 dated March 10, 1959 of the Secretary of Justice in the case of Union Church of Manila). The opinion of the Secretary of Justice was quoted and applied by the Court of Tax Appeals in its decision in Manila Polo Club (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 case of Xavier School, Inc. (CTA Case No. 1682, October 8, 1969), the Tax Court exempted the gain derived from income tax by stating that taxpayer's isolated sale of real property and using the proceeds thereof to purchase lots for a new site and constructing as an activity conducted solely for the profit because a single transaction of incidental character does not constitute engaging in business. (BIR Ruling No. 387-93 dated September 16, 1993). In view thereof, this Office is of the opinion as it hereby holds that having been derived from a single and isolated transaction in furtherance of the purposes for which the Good Shepherd Convent, Inc. is organized, the proceeds from the sale of a portion of its property in Aurora Blvd., cannot be considered income from the productive use of its property and, therefore, the same is not subject to capital gains tax. Moreover, on the basis of the same arguments, the use of the proceeds of the sale to redevelop its remaining property for the general improvement thereof, is in effect, use of the proceeds of the sale of real property for the furtherance of the purpose for which Good Shepherd Convent, Inc. was organized. Thus, the same shall be treated as a transaction of incidental character which does not constitute engaging in business and not subject to capital gains tax. However, the said transaction is subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997. (BIR Ruling S30-7-98). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group