BIR Ruling [UN-047-94]

February 8, 1994 BIR RULING [UN-047-94] Eugenio Lopez Foundation, Inc. Ground Floor, Benpres Building (formerly Chronicle Building) Meralco Avenue, Pasig Metro Manila Attention: Mr . Rommel S . Duran Trustee Gentlemen : This refers to your letter dated January 24, 1994 requesting a ruling to the effect that the sale of your real property situated in Pasay City, Metro Manila covered by TCT No. T-16758 of the Registry of Deeds for Pasay City is exempt from the 5% creditable withholding tax. It is represented that you are a non-stock and non-profit corporation duly organized and existing in accordance with the laws of the Republic of the Philippines for the following purposes: to promote and encourage the advancement of anthropology, archeology, ethnology, Philippine culture and history, both ancient and modern, natural and literary, the applied arts and other sciences, and scientific researches directed toward benefitting the general public; that the foundation shall be maintained through financial support, grants, donations, bequests, contributions and other forms of financial aid and assistance exclusively from the members and out of the funds of the foundation as well as from corporations, partnerships, entities or other institutions of which the members are stockholders, partners, directors, officers and/or members; that on March 15, 1993 a Certificate of Accreditation was issued by the Department of Science and Technology (DOST) to the effect that the foundation has been determined to have been organized for scientific advancement and that its funds are dedicated to scientific pursuits within the meaning of Section 24 of R.A. No. 2067, as amended by R.A. No. 3589; that in a Resolution of your Board of Trustees dated December 1, 1993, you were authorized to sell your aforementioned property and to use the proceeds thereof to purchase another real property which will be your permanent site/house; and that a Deed of Absolute Sale was executed by and between you and Mr. Jose Mari Chan covering your aforementioned real property. cd In reply, please be informed that in holding that the proviso in Section 27(e) (now Section 26) of the Tax Code as amended, reading: "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". does not apply to the proceeds of the sale of property of a religious organization, the Union Church of Manila, the Secretary of Justice, in his Opinion No. 45 dated March 10, 1959, stated 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 proviso 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 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 provision of said Section 27(e)." (cited in BIR Ruling No. 569-88 dated November 29, 1988) 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. Such being the case, this Office is of the opinion as it hereby holds that the proceeds from the sale of your aforementioned real property which will be used to purchase another real property to be your permanent house and/or site, cannot be considered as income from the productive use of your property and, therefore, the same is not subject to income tax and consequently, to the 5% creditable withholding tax on sales, exchanges or transfers of real property under Revenue Regulations No. 1-90. (BIR Ruling No. 387-93 dated September 16, 1993) However, the said transaction is subject to documentary stamp tax. (BIR Ruling No. 543-93 dated December 28, 1993). 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, JAIME M. MAZA Assistant Commissioner (Legal Service)