Taxability of Sale of a Property Used for Religious Purposes

June 25, 1991 BIR RULING NO. 121-91 26 000-00 121-91 Gentlemen : This refers to your letter dated May 17, 1990 reiterating your request for confirmation of your opinion that the sale of a property used for religious purposes is not subject to income/capital gains tax. It is represented that the Society of the Divine Word is a religious corporation duly organized and existing under the laws of the Philippines and was incorporated as such on February 28, 1912; that the Society owns two (2) parcels of land along E. Rodriguez Avenue, Quezon City, with an area of forty-two thousand two hundred and eighty-seven (42,287) square meters and sixty-six thousand one hundred forty (66,140) square meters, more or less, and evidenced by TCT Nos. 293747 and 293746, respectively; that the said parcels of land, as well as the buildings and other improvements thereon are used actually, directly and exclusively for religious purposes, that is, for formation house (seminary), provincialate (offices) of the Society, mission office, and church; that the church is considering the idea of selling a portion of the land covered by TCT No. 293747 to the extent of thirty-eight thousand four hundred (38,400) square meters, more or less, to any party interested in acquiring it subject to the condition that it will be used strictly for residential purposes; and finally that the entire proceeds of the sale will be devoted exclusively for religious purposes. In reply, please be informed that it is now beyond cavil that the tax exemption granted on religious organization under Section 28 (3), Article VI of the 1987 Constitution of the Republic of the Philippines (Constitution for short) is limited to exemption from payment of property taxes only. Also, the last paragraph of the Section 26 of the Tax Code, as amended, clearly subjects to tax the income of whatever kind and character derived by any organizations otherwise exempt under the same section, from any of its properties or activities conducted for profit, regardless of the disposition made of such income. cdta Specifically, the Tax Code, provides thus: "Section 26. Exemptions from Tax on Corporations . The following organizations shall not be taxed under this Title [II on Income] in respect to income received by them as such: xxx xxx xxx (e) Corporation or association organized and operated exclusively for religious, . . ., no part of the net income of which inures to the benefit of any private stockholder or individual; xxx xxx xxx Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing 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 this Code ." (emphasis supplied) The above-quoted provision is literal in its language and plain and categorical in its meaning. The last paragraph of Section 26, particularly, does not leave any room for interpretation; the income from any of the organization's properties is subject to tax under the Tax Code, as amended, regardless of the disposition made of such income. In relation to this, Section 30 of the Revenue Regulations No. 2, as amended, provides, among others, that the income of such tax-exempt corporation which is considered as income from their properties, real or personal, includes profits from the sale of property. In other words, the contemplated sale of property owned by the Society of Divine Word is subject to the corresponding income tax imposed under the Tax Code, as amended. The Constitution mandates that "charitable institutions, churches and personages or convents appurtenant thereto , mosques, non-profit cemeteries, and all lands, buildings and improvements, actual, directly, and exclusively used for religious , charitable, or educational purposes shall be exempt from taxation ." [Section 28 (3), Article VI, Constitution] (Emphasis supplied) Although the above-quoted constitutional provision seems to grant a sweeping tax exemption, the Supreme Court of the Philippines, in the case of Lladoc v. Commissioner of Internal Revenue (L-19201) decided on June 16, 1965, held that the phrase "exempt from taxation" similarly contained in the 1935 Constitution should not be interpreted to mean exemption from all kind of taxes. Thus, although in that case the cash received was actually spent by the parish priest for the intended purpose of constructing a new Catholic church, the Court nevertheless ruled against the exemption applied for in view of the interpretation it has given the Constitutional provision. The Highest Tribunal ruled that the exemption provided by the constitution is only from the payment of taxes assessed on such properties enumerated as property or realty taxes. And finally, it held that there was no clear, positive or express grant of exemption privilege by law in favor of petitioner therein, hence, the denial. cdta In view of all the foregoing, this Office is of the opinion as it hereby holds that the excess of the selling price over the acquisition cost of the property (i.e. the profit/income) to be sold by the Society of Divine Word shall be subject to income tax and consequently, to the 5% withholding tax pursuant to Sections 50 and 51 of the Tax Code as implemented by Revenue Regulations 1-90. This revokes BIR Ruling No. 569-88 dated November 29, 1988. Very truly yours, (SGD.) JOSE U. ONG Commissioner