Rev. Rul. 59-166

Advice has been requested whether the documentary stamp tax imposed by section 4361 of the Internal Revenue Code of 1954 is applicable to the delivery of an instrument called `Surrender of Lease,' where the lease was for a period of 75 years and was granted for the purpose of erecting, maintaining, and operating a housing project. The lease was surrendered by the lessee after a number of buildings and improvements were erected on the leased property.

In the instant case, a lease was executed in 1952 by the Secretary of the Air Force and a construction company wherein Government land within an Air Force base was leased to the construction company for a period of 75 years (without privilege of renewal) for the purpose of erecting, maintaining, and operating a housing project. The lease provided that the lessee shall pay to the Government rental in the amount of $100 per year; that the buildings and other improvements erected by the lessee, constituting such housing project, shall become, as completed, real estate and part of the leased premises, and property of the United States, leased to the lessee and subject to the terms of the lease; that an application for mortgage insurance under Title VIII of the National Housing Act be made; that the lessee shall lease all units of the housing project to military and civilian personnel of the Armed Forces assigned to duty in the area where the property is located; that the lessee shall not transfer or assign the lease without the written approval of the Secretary of the Air Force; that the lessee shall exercise due diligence in the protection of the leased premises, including the buildings and other improvements constituting the housing projects; and that the lessee shall pay all taxes, assessments, and similar charges which, at any time during the term of the lease, may be assessed or imposed upon the Government or upon the lessee with respect to the leased premises.

Pursuant to the provisions of Public Law 1020, 84th Congress, 70 Stat. 1111, 40 U.S.C. 1954, in 1957 a `Surrender of Lease' and a `Purchase Agreement' were executed on the same date by and between the lessee and the United States Government, acting through the Secretary of the Air Force, wherein the lease was terminated and all of the lessee's interest in the housing project was transferred and sold to the United States Government, which assumed the payments called for by a certain note that was secured by mortgages.

Specifically, the question is whether liability for documentary stamp tax was incurred when the `Surrender of Lease' and the `Purchase Agreement' were delivered and, if so, whether the tax is computed on the basis of the equity interest owned by the lessee or whether it is this amount plus the amount of the mortgage assumed by the Government.

Section 4361 of the Code imposes a tax on each deed, instrument, or writing, whereby any lands, tenements, or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers when the consideration or value of the interest or property conveyed, exclusive of the value of any lien or encumbrance remaining thereon at the time of sale, exceeds $100.

Under the lease executed in 1952, the lessee acquired a leasehold interest in Government lands. Upon completion of the buildings and other improvements erected on such lands which constituted the housing project, they became real estate, a part of the leased premises, and property of the United States, leased to the lessee. Therefore, upon execution of the `Surrender of Lease,' no question arises with regard to a conveyance of buildings and improvements separate and apart from a conveyance of a leasehold interest in land, since such buildings and improvements were an integral part of the leasehold interest surrendered. Therefore, it follows that unless the interest acquired by the lessee under the 1952 lease was sufficient to constitute `realty' within the meaning of the statute, the surrender, under the `Surrender of Lease,' of such interest, augmented as it was by the buildings and improvements erected on the leased land, for valuable consideration could not be said to be a conveyance of `realty sold' and, therefore, taxable.

The 1952 lease being a lease for a fixed period of 75 years and granting no right to extend the term by renewal or otherwise did not convey an interest in land of sufficient duration to constitute `realty' within the meaning of section 4361 of the Code. The lessee's interest in the buildings and improvements erected on the leased land is of no greater duration. Accordingly, it is held that no interest in `realty' was conveyed when the `Surrender of Lease' was delivered. Therefore, liability for the documentary tax stamp imposed by section 4361 of the Code was not incurred upon the delivery of the `Surrender of Lease' or `Purchase Agreement.'