Face Value of Patroon Certificates With No Redemption Privilege are Considered Donations to PFST Exempt From Donor's Tax

November 18, 1996 BIR RULING NO. 122-96 29 (h) (2) (C); 94 000-00 122-96 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . E . C . Alcantara Gentlemen : This refers to your letter dated October 29, 1996 representing that the Philippine Foundation for Science and Technology (PFST) is a non-stock, non-profit private foundation whose purpose is the promotion of science and technology among Filipinos; that it is duly accredited by the Department of Science and Technology as a foundation organized for scientific advancement and whose funds are dedicated to scientific pursuits; that it seeks to expand its programs and envisions the establishment of a new, world-class, state-of-the-art Philippine Science Centrum; that the Centrum shall house Fifteen (15) galleries with more than 300 interactive, hands-on exhibits on different science themes and concepts; that it will be equipped with a seasonal exhibit area which can be rented, as well as training and workshop areas, a multimedia Science Resource Unit, the first IMAX Dome Projection System in the Philippines, science shops, its own exhibit fabrication facility, training and educational programming and many others; that these will all serve to complement and supplement formal school instruction in a more relaxed and stimulating atmosphere; that the Science Centrum building can be an exhibit in itself; that the Science Centrum building will have 21st century state-of-the-art features such as solar panels, smart building technology to minimize energy use, fiber optic technology for communication, office automation, life safety, waste management, water conservation devices, etc.; that to finance the construction of the Science Centrum, PFST will issue the Philippine Foundation for Science and Technology Patroon Certificates ("Patroon Certificates") that the Patroon Certificates is designated as a patronage certificate backed by an asset pool of which a portion shall provide leasehold income to enable PFST to complete the building, purchase the required equipment and maintain the operations of the Philippine Science Centrum; that holders of Patroon Certificates are entitled to certain token benefits, as follows: cdt 1. Incorporation of the holder's logo in all media/press releases and in all print materials; 2. Invitation to all Philippine Science Centrum and Science Works special activities; 3. Free admission for ten persons per holder throughout the holding period to the IMAX Dome; 4. Eligibility for the holder to be part of the Project Advisory Board subject to election by majority of the holders; 5. Continuing subscription to the PSC quarterly publication/journal; 6. Special discount card for purchases made at all the PSC souvenir shops; 7. Permanent engraving of the name of the holder on the PSC building member to be located at the main lobby of the building; 8. Right-of-first refusal to purchase leasehold rights/merchandising rights over the use of the designated science and food shops for 25 years at a "premium" rate; and 9. Right-of-first refusal to avail of the "Adopt-A-Gallery" facilities for 5 years at a "premium" rate. that the Patroon Certificates, while it is outstanding, represents one unit of participation with the corresponding privileges and benefits; that the Patroon Certificates has a total amount of P200 million, divided into 200 units of 1 million each; that two kinds of Patroon Certificates will be issued: a) certificate with no redemption privilege; and b) certificate with redemption privilege on a "best effort basis"; that should a donor acquire a Patroon Certificate with no redemption privilege, PFST will immediately issue a Certificate of Donation; that the donor/holder may then deduct from his gross income the full value of the certificate; that on the other hand, if what was acquired was a Patroon Certificate with a redemption privilege, PFST will redeem the certificate only on a "best effort" basis, thus, PFST will not be obliged to redeem the certificate but will do so only if finances permit; and that as such, a Certificate of Donation will likewise be issued upon subscription thereof subject to the condition that if and when the said certificate is redeemed by PFST, the holder thereof will declare the redemption amount as income. Based on the foregoing, you request confirmation of your opinion that: a) The face value of a non-redeemable Patroon Certificate is deductible in full from gross income in the year of acquisition; b) The donor/holder of a redeemable Patroon Certificate may deduct in full the face value of his certificate at the time of issuance of the same; and thereafter, declare as income any redemption that he may receive in the future; and c) The donor/holder of a Patroon Certificate is exempt from the donor's tax on his donation represented by the face value of the certificate. In reply, please be informed that Section 29(h)(2)(C) of the Tax Code, as amended, states: "(2) Contributions deductible in full . Notwithstanding the provisions of the preceding subparagraphs, donations to the following institutions or entities shall be deductible in full: xxx xxx xxx "(C) Donations to certain private foundations . The term 'private foundation' means a non-profit domestic corporation: "(i) Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual; "(ii) Which, not later than the 15th day of the third month after the close of the foundation's taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated; "(iii) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance but in no case to exceed thirty percent (30%) of total expenses; and "(iv) The assets of which, in the event of dissolution, would be distributed to another non-profit domestic corporation organized for similar purpose or purposes, or to the State for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized." Such being the case, your opinion that the face value of the Patroon Certificate with no redemption privilege shall be deducted in full by the corporate donor/holder from its taxable income from business in the year the amount is donated to PFST, is hereby confirmed. Moreover, under Section 94(a)(3) and (b)(2) of the Tax Code, as amended, stating thus: "SEC. 94. Exemption of certain gifts . The following gifts or donations shall be exempt from the tax provided for in this Chapter: "(a) In the case of gifts made by a resident. xxx xxx xxx "(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization; provided, however, that not more than thirty per centum of said fits shall be used by such donee for administration purposes. For the purpose of this exemption, a non-profit educational and/or charitable corporation, institution, foundation, trust or philanthropic organization and/or research institution or organization is a school, college or university and/or charitable corporation, foundation, trust or philanthropic organization and/or research institution or organization, incorporated as a non-stock entity paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students' fees or gifts, donations , subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its articles of incorporation . xxx xxx xxx "(b) In the case of gifts made by a nonresident not a citizen of the Philippines. xxx xxx xxx "(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation , trust or philanthropic organization or research institution or organization; provided, however, that not more than thirty per centum of said gifts shall be used by such donee for administration purposes." the face value of such Patroon Certificates with no redemption privilege are considered donations to PFST exempt from the payment of donor's tax, subject to the condition that not more than 30% of the said gift shall be used by the donee for administration purposes. (BIR Ruling No. 248-92 dated September 6, 1992). This ruling is being on the basis of the forgoing 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. cdta Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue