38 T.C. 9">*10 OPINION.

Respondent determined a deficiency in income tax for the calendar year 1956 in the amount of $ 18,375.14.

The only issue remaining is whether petitioners realized ordinary income by operation of section 1239, I.R.C. 1954, or long-term capital gain from the cash sale in 1956 by petitioners to a family-owned corporation of a 10-year lease on farmland commencing January 1, 1957, which lease petitioners as lessees had acquired at no cost in 1955.

Another issue relating to the rental value1962 U.S. Tax Ct. LEXIS 161">*163 of a dwelling house occupied by petitioners has been settled by stipulation and effect will be given thereto in the recomputation to be made under Rule 50.

All the facts were stipulated and are so found.

Petitioners are husband and wife residing in the State of Missouri. Their mailing address is in care of Ward & Reeves, Attorneys at Law, Caruthersville, Missouri.

Petitioners duly filed their joint Federal income tax return for the taxable year ending December 31, 1956, with the director of internal revenue at St. Louis, Missouri.

A lease was executed on April 30, 1955, by W. H. Lindley and Olga J. Lindley, his wife, leasing to petitioners as lessees for a term of 10 years, commencing on January 1, 1957, and expiring on December 31, 1966, approximately 872 acres of farmland located in Stoddard County, Missouri, at an annual cash rental of $ 7,000.

The above-described lease was transferred by petitioners to the Trailback Plantation, Inc., a corporation, for the sum of $ 30,000 paid by the corporation to petitioners on December 31, 1956. Trailback Plantation, Inc., assumed all the obligations of the lessees in the said lease contract, including the obligation to pay the annual cash1962 U.S. Tax Ct. LEXIS 161">*164 rental of $ 7,000.

The ownership of the outstanding shares of Trailback Plantation, Inc., at all times material herein was as follows:

On its Federal income tax return for the fiscal year ended April 30, 1958, Trailback Plantation, Inc., claimed as a deduction from gross 38 T.C. 9">*11 income by reason of the ownership of the Lindley Farm lease the amount of $ 3,000 as lease amortization.

In their joint return for 1956 petitioners reported a long-term capital gain of $ 30,000 from the sale of "Lease for 10 years sold to Trailback Plantation, Inc., sold at fair market value."

In a statement attached to the deficiency notice, respondent "determined that such gain is taxable as ordinary income" by operation of section 1239, I.R.C. 1954. ¹

1962 U.S. Tax Ct. LEXIS 161">*165 Petitioners concede that all the requisite provisions of section 1239 necessary to tax the admitted gain of $ 30,000 as ordinary income are present, except the provision contained in subsection (b). They contend that the "property" here in question, namely, the leasehold, is not "property which in the hands of the transferee is property of a character which is subject to the allowance for depreciation provided in section 167." ² The respondent contends that the leasehold is the kind of property described in subsection (b) and that, therefore, his determination of this question should be sustained.

Petitioners, in contending that the leasehold is not property which in the hands of the transferee (Trailback1962 U.S. Tax Ct. LEXIS 161">*166 Plantation, Inc.) is of a character subject to the allowance for depreciation provided in section 167, argue instead that the leasehold is property subject to an allowance for amortization deductible under section 162, I.R.C. 1954, ³ as interpreted by section 1.162-11, Income Tax Regs.⁴

1962 U.S. Tax Ct. LEXIS 161">*167 38 T.C. 9">*12 On the surface it would appear that petitioners' contention and argument are not without some merit. However, we do not believe it was the intention of Congress in enacting section 1239 to permit the result petitioners now seek. Section 1239 had its counterpart in section 328 of the Revenue Act of 1951 which added subsection (o) to section 117 of the 1939 Code. The "intent" Congress had in enacting section 328 is fully explained in H. Rept. No. 586, 82d Cong., 1st Sess., 1951-2 C.B. 357, 376, which is set out in part in the margin, ⁵ and in the Joint Committee Staff Summary of Provisions of the Revenue Act of 1951 (sec. 328) as agreed to by the conferees, 1951-2 C.B. 287, 314, which is substantially the same as the House report.

1962 U.S. Tax Ct. LEXIS 161">*168 Our solution of this problem necessarily turns on the narrow question whether a leasehold is or is not "property which in the hands of the transferee is property of a character which is subject to the allowance for depreciation provided in section 167." Sec. 1239(b), supra. Respondent argues in the affirmative and petitioners, relying upon the respondent's regulations (footnote 4, supra), argue in the negative.

In an early case, Grosvenor Atterbury, 1 B.T.A. 169">1 B.T.A. 169, we had substantially the same narrow question except that the parties argued in the reverse order. In this case the taxpayer, an individual, on May 1, 1903, acquired a 19-year leasehold of real property at a cost of $ 33,804.80 which, on March 1, 1913, had a conceded value of $ 58,500. In holding that the Commissioner erred in not allowing the taxpayer to deduct as depreciation for each of the taxable years before us an amount based on the March 1, 1913, value of the leasehold, we said in part:

The Commissioner contends that the depreciation claimed by the taxpayer is not a proper deduction * * *. In making this contention, the Commissioner 38 T.C. 9">*13 asserts that he has consistently1962 U.S. Tax Ct. LEXIS 161">*169 held that a lessee is not entitled to an allowance for depreciation * * * but, if a leasehold was acquired for business purposes, the purchaser has been allowed as a deduction in his income tax return an aliquot part of the purchase price each year, based on the number of years the lease has to run. * * * This concession is artificial and does not recognize the right conferred upon the taxpayer by the revenue acts. It does not concede the taxpayer the right of exhaustion which is his under the law. * * * When money is used to purchase a class of property designated as a leasehold, it is nevertheless a capital investment and can not be classified as an advance payment on rent. [Emphasis supplied.]

Notwithstanding our holding in the Atterbury case, the respondent has in all of his subsequent regulations retained the provision regarding leaseholds substantially as set out in our footnote 4, supra. ⁶ As an explanation of this it may be observed that in reality, from a pure deduction standpoint, it makes no difference in tax liability whether a deduction from gross income is called a business expense and allowed under section 162 or depreciation and allowed1962 U.S. Tax Ct. LEXIS 161">*170 under section 167. In fact, the cases show that the term given the allowance has been indiscriminately referred to sometimes as expense or amortization ⁷ and at other times as exhaustion or depreciation.⁸

1962 U.S. Tax Ct. LEXIS 161">*171 Nevertheless, we think when Congress enacted section 1239 of the 1954 Code and its counterpart in section 328 of the Revenue Act of 1951, referred to previously herein, it fully intended to cover situations such as we have here. As stated by the court in Emery v. Commissioner, 166 F.2d 27, 30 (C.A. 2, 1948):

The key concept in construing a statute is, of course, what we call the legislature's intention; and "that intention is to be ascertained, not by taking the word or clause in question from its setting and viewing it apart, but by considering it in connection with the context, the general purposes of the statute in which it is found, the occasion and circumstances of its use, and other appropriate tests for the ascertainment of the legislative will." Helvering v. Stockholms Enskilda Bank, 293 U.S. 84">293 U.S. 84, 293 U.S. 84">93, 293 U.S. 84">94, 55 S. Ct. 50">55 S. Ct. 50, 55 S. Ct. 50">54, 79 L. Ed. 211">79 L. Ed. 211. * * *

Therefore, when Congress, in section 1239(b), footnote 1, supra, referred to "property of a character which is subject to the allowance for depreciation" we think that by using the word "character" it intended to include leasehold1962 U.S. Tax Ct. LEXIS 161">*172 property of the kind we have here. The phrase just quoted has appeared in other parts of our revenue 38 T.C. 9">*14 statutes. In defining the term "capital assets" in section 117(a)(1) of the Revenue Act of 1938, Congress provided that the term did not include "property, used in the trade or business, of a character which is subject to the allowance for depreciation." (Emphasis supplied.) In John D. Fackler, 45 B.T.A. 708">45 B.T.A. 708, affd. 133 F.2d 509, 512 (C.A. 6, 1943), we held that a certain leasehold was not a capital asset because it was "property, used in the trade or business, of a character which is subject to the allowance for depreciation." ⁹ (Emphasis supplied.) If the leasehold involved in the Fackler case was property "of a character which is subject to the allowance for depreciation" as that phrase was used in section 117(a)(1) of the Revenue Act of 1938, we know of no reason why the leasehold here involved should not likewise be considered as property "of a character which is subject to the allowance for depreciation" as that phrase is used in section 1239(b) of the 1954 Code.

1962 U.S. Tax Ct. LEXIS 161">*173 We can see no practical difference in principle between an allowance for the exhaustion of a leasehold and one for the exhaustion of a patent. And yet the Commissioner has seen fit to construe the allowance for exhaustion of a leasehold as amortization under section 162¹⁰ and the exhaustion of a patent as depreciation under section 167. ¹¹ In Royce Kershaw, 34 T.C. 453">34 T.C. 453, we held that the gain from the sale in 1956 of a patent by the taxpayer to a family-owned corporation was taxable as ordinary income by operation of section 1239, supra. We think the same holding should be made as to the gain from the sale of a leasehold, as in the instant case, having previously held that a leasehold is "property of a character which is subject to the allowance for depreciation." 45 B.T.A. 708">John D. Fackler, supra;1 B.T.A. 169">Grosvenor Atterbury, supra.

1962 U.S. Tax Ct. LEXIS 161">*174 We, therefore, hold that the gain of $ 30,000 realized by petitioners in 1956 is taxable to them as ordinary income by operation of section 1239 of the Internal Revenue Code of 1954 rather than as long-term capital gain as reported by them in their income tax return. Because of the stipulated issue,

Decision will be entered under Rule 50.