Proceeds from Sale of a Portion of St. Paul's Real Property Not Subject to Income Tax

September 16, 1993 BIR RULING NO. 387-93 PROCEEDS FROM SALE OF A PORTION OF ST. PAUL'S REAL PROPERTY NOT SUBJECT TO INCOME TAX 26-00 115-92 387-93 Tan & Venturanza 3/F, ALCCO Building Ortigas Avenue Greenhills, San Juan Metro Manila Attention: Ma . Gracia Pulido-Tan This refers to your letter dated September 30, 1992 in effect requesting a confirmation that the income of the Society of Saint Paul, Inc. from the sale of a portion of its real property which is the site of its seminary, church, printing press, bookstore, and the quarters for its priests and brothers, be exempt from income tax, if the proceeds are used to purchase another real property in Cavite to relocate and construct another seminary. It is represented that your client, the Society of Saint Paul, Inc. is a congregation of religious priests and brothers engaged in propagating Catholic doctrine; that in furtherance of its mission and specific apostolic work, the Society has established and maintains a Catholic-Church, operates publishing houses that produce and diffuse Bibles, books for religious growth and the total development of the human person, articles of religious devotion, and magazines or periodicals for Christian value information; and, to assure continuity of mission, the Society establishes its own seminaries and training centers for the formation of members; that since its incorporation in 1944, the Society has not conducted any activity for profit, much more devoted any of its properties, real or personal, into any such activity and that no part of its income inures to the benefit of any private individual but is devoted solely, exclusively and directly for the religious purpose for which it was organized; that in the pursuit of its objectives, the Society has, among others, built and to this day maintains a Catholic Church in its premises at 7708 St. Paul Road, San Antonio Village, Makati, Metro Manila; that in the same premises, the Society erected and operates to this day a seminary, printing press, bookstore, and a housing quarters for its members; that in addition, it has started building a seminary in Silang, Cavite, where it intends to completely relocate its existing seminary at Makati; that this move is prompted mainly by the fact that the Makati site has become highly urbanized and congested, rendering it not conducive any more to contemplative and quiet atmosphere that seminary life and training ought to have; that the Society has been compelled to contract loans from financial institutions, primarily to finance the construction of its seminary in Silang, Cavite; that it must now raise sufficient funds to meet amortization payments on said loan, not to mention operational costs and expenses of the existing seminary and training centers, and to complete the construction of the seminary at Silang; that in view thereof, it is now constrained to sell a portion of its property in Makati, so that it may be able to complete and consequently operate and maintain its seminary and thereby continue its mission of which the training of clergy is a vital component. It is further represented that for the principal purposes of (1) paying its loan which was incurred to initially finance the construction of its seminary in Silang, Cavite; (2) completing the construction thereof and consequently, of operating and maintaining the same; (3) erecting a bigger church in its Makati premises to accommodate a greater number of the faithful; (4) as well as of reimbursing its Mother House in Italy for advances made to the Society for the purpose of meeting the operational needs of its seminary, missionary work and training, the Society intends to sell around sixteen thousand nine hundred eighty four (16,984) sq. meters of its property at 7708 St. Paul Road, San Antonio Village, Makati, Metro Manila. This property, presently covered by TCT No. 178704 was acquired in 1955 through a grant from the Society's Mother House in Rome, primarily to house its seminary, church, printing press, bookstore, and quarters for its priests and brothers, where all of such structures are still located. In reply, we quote hereunder the pertinent portion of BIR Ruling No. 26-143-59-569-88 as follows: "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." In holding that the above-quoted provision does not apply to the instant case, the Secretary of Justice in his opinion, 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 the 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 provision 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 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 the 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. 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 Society of Saint Paul, Inc. is organized, the proceeds from the sale of a portion of its property in Makati cannot be considered income from the productive use of its property and, therefore, the same is not subject to income tax. Moreover, on the basis of the same arguments, the use of that portion of the proceeds of the sale to pay a loan incurred to purchase another real property to relocate and finance the construction of its seminary in Silang, Cavite is in effect, use of the proceeds of the sale of real property to acquire and develop another property for the purpose for which the Society of Saint Paul is organized; thus, the same shall be treated as a transaction of incidental character which does not constitute engaging in business. Accordingly, even to the extent of the sale proceeds used for that purpose, the Society of St. Paul, Inc. is also exempt from income tax and not within the contemplation of the last paragraph of Section 26 of the Tax Code, as amended. 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. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue