Rev. Rul. 60-4

Advice is requested as to the proper treatment, for Federal income tax purposes, of the gain upon the sale of a leasehold having 30 years or more to run at the time of its sale, where the taxpayer is not a dealer in leases.

The taxpayer, in 1948, entered into a lease with the M realty corporation, covering certain premises. The term of the lease was for a period of 50 years with an option to renew for an additional term. The taxpayer does not occupy any of the leased premises and is not a dealer in such leases, but has subleased the premises to a number of subtenants for varying terms of occupancy. In thus renting to its many tenants the taxpayer was engaged in a trade or business.

In 1956, the taxpayer executed a contract of sale and assignment of his entire right, title, and interest in the leasehold with a person other than the fee owner of the premises. In 1956, the leasehold still had 42 years to run, exclusive of the term of the renewal option. However, the taxpayer still remained liable to the owner of the property for performance of the terms of the lease on the part of his assignee who agreed to assume performance of the terms of the lease.

The specific question here is whether the leasehold, at the time of its sale, constituted real property used in the taxpayer's trade or business within the meaning of section 1231 of the Internal Revenue Code of 1954.

Section 1231(a) of the Code provides for special treatment of the gain upon the sale by a taxpayer of certain property used in his trade or business. The beneficial provisions of such section are applicable to property, held for more than six months, used in a taxpayer's trade or business of a character which is subject to the allowance for depreciation provided in section 167 of the Code and real property used in the trade or business, held for more than six months.

Section 1031 of the Code provides, generally, for the nonrecognition of gain upon certain exchanges of similar property. Section 1.1031(a)-1(c) of the Income Tax Regulations provides, insofar as pertinent here, as follows:

No gain or loss is recognized if * * * (2) a taxpayer who is not a dealer in real estate exchanges city real estate for a ranch or farm, or exchanges a leasehold of a fee with 30 years or more to run for real estate, or exchanges improved real estate for unimproved real estate, * * *. (Italics supplied)

While the above section of the regulations is concerned with the nonrecognition of gains in certain exchanges of similar property (a) situation not involved in the instant case) nevertheless it does stand for the proposition that a leasehold with 30 years or more to run, at the time of the sale or exchange, constitutes real property. Thus, the leasehold, in the instant case constitutes real property.

It is the opinion of the Internal Revenue Service, that the taxpayer here concerned was completely divested of his right, title, and interest in the leasehold, although he remained liable to the owner for performance of the terms of the lease on the part of the purchaser.

Accordingly, since the leasehold concerned constitutes real property, was used in the taxpayer's trade or business, was held in excess of six months, and the taxpayer is not a dealer in leases, it is held that such leasehold comes within the provisions of section 1231(b)(1) of the Code. Any gain or loss upon its sale must be considered together with other gains or losses of the type described in section 1231(a) of the Code. If the gains exceed the losses, the gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than six months. If such gains do not exceed such losses, such gains and losses shall not be considered as gains and losses from sales or exchanges of capital assets.