Excess in the Selling Price Over the Original Cost of the Land and the Church Building

November 29, 1988 BIR RULING NO. 569-88 26 143-59 569-88 Gentlemen : This refers to your letter dated July 29, 1988 requesting confirmation of your opinion that the excess of the selling price over the original cost of the land and the church building of your client, Manila Bethel Temple, Inc. (MBTI), is exempt from the ordinary corporate income tax prescribed under Section 24(a) of the Tax Code. You have represented that your abovenamed client is a non-stock, non-profit corporation organized and operated exclusively for religious purposes; that it owns a parcel of land and a church building and improvements thereon which are being used directly, solely and exclusively for church activities; that it now intends to sell the said property; and that the net proceeds from the sale would be used exclusively for the purchase of a new church site and the construction thereon of a church building or a new church site with an existing building which can be converted into a church site with an existing building which can be converted into a church or place of worship. To support your stand, you cited BIR Ruling No. 143 issued by this Office on March 20, 1959 which ruling is in accordance with Opinion No. 45 dated March 10, 1959 of the Secretary of Justice. However, in your letter dated September 7, 1988, you invited the attention of this Office to BIR Ruling No. 165-84 to the effect that the gains derived from a similar sale of real property by a religious corporation is subject to the ordinary corporate income tax. In said ruling which reiterated BIR Ruling Nos. 65-80, 66-80 and 67-80, this Office held that while a corporation or association organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans, no part of the net income of which inures to the benefit of any private stockholder or individual, is exempt from tax on income received by them as such, nevertheless, the income of whatever kind and character of the organization from any of its properties, real, or personal, or from any of its activities conducted for profit , regardless of the disposition of such income shall be subject to tax pursuant to Section 27 (now Section 26) of the Tax Code, as amended. In reply, please be informed that after a re-study of the above present rulings on this matter, this Office has finally decided to reconsider the same. It is noted that the aforesaid rulings are based on the pertinent portions of Section 27(e) which is now the last paragraph of Section 26 of the Tax Code, reading as follows: "Notwithstanding the provisions 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 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 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, owns and holds said property for religious purposes, and is going to part with the same solely 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)." cdtech 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 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 the case of the income of whatever kind and character of the foregoing organizations from any of its properties, real or personal, which apparently is the basis of the above ruling subjecting the gains in question to income tax, the above opinion of the Secretary of Justice states that the same refers only to the income realized "from the productive use of their real and personal properties e.g., rents, dividends, or interests." This meaning of the word "income" has also been adopted by the Tax Court in the case of Congregacion de la Mission de San Vicente de Paul (CTA Case No. 1468, October 14, 1968)) Obviously, the income involved in the case of your client as well as the tax exempt organizations subject of the above ruling, having been derived from a single and isolated transaction in furtherance of the purposes for which they were organized cannot be considered as income from the productive use of their property since the latter connotes regular, continuous and a series of transactions. Accordingly, said income of your client is not subject to income tax. This revokes BIR Ruling Nos. 65-80, 66-80, 67-80 and 165-84. cd Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner