Rev. Rul. 64-295

Advice has been requested whether the documentary stamp tax on conveyances of realty sold, imposed by section 4361 of the Internal Revenue Code of 1954, is applicable to the transfer to an agency of the United States Government of a building constructed on land owned by that agency under the circumstances described below.

Pursuant to Title I of the Public Buildings Contract Act of 1954, Public Law 519, Eighty-third Congress, 40 U.S.C. 356, a Government agency entered into a building contract under which the building contractor agreed to construct a building on land owned by that agency, according to the specifications of that agency and under its supervision.

The agency also entered into a financing contract with an investor. The investor agreed to provide the funds necessary to construct the building and to make those funds available to the building contractor by monthly payments upon certification by the Government agency. This contract also provided that the agency would `lease' the land to the investor under a 55-year `lease' and that the agency would `purchase' the building on an extended term basis, with payments (including stipulated interest) commencing on the building completion date specified in the building contract.

The financing contract further specified that the investor would hold `title' to the building from the beginning of its construction through the term of the contract and that, when the obligations of the contract had been discharged, the investor would `convey' the building to the Government agency by a good and sufficient `instrument of conveyance.' If the `conveyance' of the building to the agency should occur before the end of the 55-year `lease' of the land, the `lease' would automatically be terminated. The specific question presented is whether the documentary stamp tax imposed by section 4361 of the Code applies to this `conveyance' of the building to the agency.

Section 4361 of the Code imposes a tax on each deed, instrument, or writing by which any lands, tenements, or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers, or any other person or persons, by his or their direction, 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.

The Government agency in this case is entitled to possession and use of the building (as well as the land on which the building is constructed) so long as it makes agreed repayment of the amounts advanced for it by the investor to the builder. In the interim, there is only an excumbrance on the building in favor of the investor. Actually, the investor's advance of funds constitutes an interest-bearing loan with security for its repayment.

The investor's position is comparable to that of a lender who has a mortgage on realty as security for his loan. When the loan is repaid and the lender executes and delivers a release or satisfaction of the mortgage, he is not transferring or conveying any `realty sold' within the meaning of section 4361 of the Code; rather, he is merely releasing or surrendering his security title to the mortgaged realty. Such a release is not subject to Federal documentary stamp tax.

Although the contract with the investor in the instant case is couched in terms of `lease' and `purchase,' the investor has no actual leasehold interest, and he actually makes no sale. Correspondingly, upon executing and delivering the `instrument of conveyance' of the building to the Government agency after full payment by it of the `purchase price' and stipulated interest thereon, the investor is not actually transferring any `realty sold' within the meaning of section 4361 of the Code; rather, he is merely releasing his security title.

In view of the foregoing, it is held that the documentary stamp tax imposed by section 4361 of the Code does not apply to the investor's `conveyance' of the building to the Government agency under the circumstances described.