Hort v. Commissioner case brief

Hort v. Commissioner

FACTS

-P acquired property (lot + 10 floor office building) by devise from his father in 1928.
-When P became the owner, premises was leased to a firm-sublet main floor to Irving Trust Co.
-1927: 5 years before head lease expired, Irving and P's father executed contract in which father agreed to lease the main floor + basement to Irving for term of 15 years at annual rent of $25,000, the term to commence at the expiration of the head lease.
-1933:  Irving found it unprofitable to maintain a branch in P's building.
-Agreement to cancel the lease in consideration of payment of $140,000 to P, P did not include this amount in gross income on income tax return of 1933.
-Instead P reported a loss of $21,494.75 (amount received as consideration for cancellation was $21,494.75 less than difference between present value of unmatured rental payments and fair rental value of the area for the unexpired lease term.)
-Commissioner included the entire $140,000 in gross income.

ISSUE 

1.  Was the amount P received as consideration for cancellation of a lease ordinary gross income as defined in §22(a)?
2.  Did P sustain a loss through cancellation of the lease which is recognized in §23(e)?

HOLDING

1.  Yes, the amount received by P for cancellation of the lease must be included in his gross income in its entirety.
2.  No, the cancellation of the lease involved nothing more than relinquishment of the right to future rental payments in return for a present substitute payment and possession of leased premises.  

RULES

-The amount received by P for cancellation of the lease must be included in gross income in its entirety.
-Consideration received for cancellation of the lease was not a return of capital.
-Gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.'
- ‘The following items shall not be included in gross income and shall be exempt from taxation under this title: ...The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).’ 

DICUSSION

Where lessor's devisee and lessee agreed to cancel lease in consideration of lessee's payment of lump sum to devisee, the amount received by devisee for cancellation of lease did not constitute return of “capital” but was required to be reported as gross “income” without deduction for the claimed disparity between amount received and the difference between present value of unmatured rental payments and the fair rental value of property for unexpired portion of the lease, and it was immaterial that for some purposes the contract creating the right to rental payments might be treated as “property” or “capital”.

Class: Federal Income Taxation
Subjects: Income, Capital Appreciation