Rev. Rul. 54-505

Advice is requested whether the tax imposed by sections 1800 and 1801 of the Internal Revenue Code of 1939 on the issuance of corporate securities applies to the issuance of mortgage notes, as described below.

The financing in which a mortgage note is used occurs generally in the following types of transactions:

(1) A corporate owner of real property borrows money for the purpose of constructing individual houses. The construction loan is for a short term, running from 6 months to a year, and is advanced by the lender in stipulated percentages as the building project progresses. Since this type of operation relates to the construction of individual houses, the financing is effected in respect to each individual house and lot, the loan being evidenced by individual notes and mortgages on each individual house and lot involved in the building project. Upon sale of the completed individual houses, the purchaser assumes the mortgage obligation, extends the maturity date and otherwise modifies the terms of the mortgage as agreed upon by such individual purchaser and the mortgagee. Some projects, because of their size, involve more than one lending institution. Where this occurs, the loans made by the respective lenders cover specific parts of the whole project and are evidenced by individual notes and mortgages covering the individual houses and lots included in such parts.

(2) A corporation purchases a parcel of real estate and pays a part of the purchase price by giving a purchase money note secured by a mortgage on the property. Here, also, the practice is to give one note secured by a single mortgage.

(3) A corporate owner of real property procures a loan, either to erect a building thereon, further improve buildings already erected on the land, for refinancing of the realty owned, or for other corporate purposes.

Each of the notes issued in the transactions described above is secured by a mortgage and evidences a promise to pay a sum certain in money at a specified date, with interest. In case of default, a note becomes immediately due at the option of the holder. Some of the notes are negotiable while others are nonnegotiable, being payable to the mortgagee or assigns.

Sections 1800 and 1801 of the Code impose a tax on all bonds debentures, or certificates of indebtedness issued by any corporation, and all instruments, however termed, issued by any corporation, with interest coupons or in registered form, known generally as corporate securities. There is no provision of Federal tax law under which an ordinary promissory note is subject to the documentary stamp tax. The stamp tax on promissory notes was repealed in the Revenue Act of 1924 and has not been reenacted.

The conditions to which the notes issued in the above transactions are subject are considered to be common to conditions associated with promissory notes generally. For this reason, and taking into consideration the circumstances under which the notes are used and the fact that the notes are not issued in series but in each instance cover only a single indebtedness secured by a mortgage applying only to that indebtedness, it is held that such notes do not come within the classes of instruments included in section 1801 of the Code. Accordingly, the issuance of such mortgage notes is not subject to tax under sections 1800 and 1801 of the Code.