BIR Ruling [UN-420-95]

November 29, 1995 BIR RULING [UN-420-95] De Guzman, Florentino, Celis, Moncupa & Torio Suite C, 15th Floor Strata 200 Building Emerald Avenue, Ortigas Center Pasig City Attention: F.G. De Guzman Gentlemen : This refers to your letter dated November 20, 1995 requesting, in effect, for a ruling that the proceeds from the sale by the Philippine Rural Reconstruction Movement, Inc. (PRRM) of its property which was previously donated to it, are exempt from income tax. It is represented that PRRM is a non-governmental organization (NGO) which has been in existence for the last 43 years; that it is also a registered tax-exempt organization under Section 26 of the Tax Code; that PRRM owns a property located at Mandaluyong City, covered by Transfer Certificate of Title No. PT-85301 of the Registry of Deeds of Pasig; that on December 17, 1992, the Board of Trustees of PRRM had approved a resolution to sell the abovementioned property; that PRRM will use the proceeds of the sale exclusively for its logistic support in having a sustainable capacity to carry out its plans and programs specially the "The Way of Power" which go hand and hand with President Ramos "Philippines 2000"; and that you are of the opinion that since the sale was an isolated transaction involving a property exclusively held for social welfare purposes and in furtherance of the purpose for which PRRM was organized, the proceeds thereof cannot be considered as an income and therefore not subject to income tax. In reply, please be informed that the proviso in Section 27(e) (now Section 26) of the Tax Code, as amended, provides: "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 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. 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)" (cited in BIR Ruling No. 387-93 dated September 16, 1993). 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 the 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 the 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 having been derived from a single and isolated transaction in furtherance of the purposes for which the PRRM is organized, the proceeds from the sale of its property in Mandaluyong cannot be considered income from the productive use of its property and, therefore, the same is not subject to income tax. 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, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)