Rev. Rul. 59-345

Under a Tri-Party Public Buildings Purchase Contract, GSA 1341, November 23, 1956, entered into by a builder, a long-term investor and the Government, pursuant to the Public Buildings Purchase Contract Act of 1954, Title I, Public Law 519, 83rd Cong., 40 U.S.C. 356, the builder undertakes to erect a building, arranging his own financing. Upon completion of construction, the builder agrees to accept payment for the building from the investor and convey the building to a trustee. The Government agrees to repay the investor over the term of the contract, at the end of which term the trustee conveys the building to the Government. The Government, among other things, (1) supervises construction, (2) pays real estate taxes directly to the taxing authorities during the construction period as well as during the purchase term, (3) occupies the building and assumes full responsibility for maintenance, operation, management and hazard risks, and (4) repays the investor, with interest, in equal quarterly payments. The successful bidder (builder) and the investor are each separate taxable entitles. Held, such contract constitutes a construction contract and any gain realized thereon may not be reported on the installment method of accounting. The builder must reflect ordinary income from the performance of a Tri-Party Public Buildings Purchase Contract in the same manner that he would reflect income on any other construction contract he performs. A taxpayer may not claim depreciation on a building which is the subject of such an agreement. Further, the investor is required to include in his taxable income that portion of each quarterly payment which represents interest on the principal sum or any part thereof. Such interest constitutes ordinary income and is includible in gross income when received or accrued depending upon the investor's method of accounting.