Tuesday, May 21, 2013

Metropolitan Bldg. Co. v. Commissioner case brief

Metropolitan Bldg. Co. v. Commissioner case brief
282 F.2d 592, 1960 U.S. App. 60-2 U.S. Tax Cas. (CCH) P9686; 6 A.F.T.R.2d (RIA) 5493

CASE SYNOPSIS: Petitioner lessee appealed from a decision of the United States Tax Court, which affirmed an assessment by respondent Commissioner of Internal Revenue that a sublessee's payment to petitioner was the equivalent of rental and taxable as income to petitioner.

FACTS: Sublessee hotel entered into a desirable arrangement directly with the property owner, seeking to eliminate the intervening interest of petitioner. Sublessee paid a sum of money to petitioner, in consideration of which petitioner released to owner, the lessor, all rights and interests under its lease. Respondent ruled that the payment was the equivalent of rental, taxable as income, and assessed deficiencies against petitioner for the tax year. The tax court affirmed. On further appeal, the court reversed, finding sums paid to petitioner were not simply a discharge of sublessee's obligation to pay rental. They were paid for the purchase of petitioner's entire leasehold interest. The case was not one of a liquidation of a right to future income, but rather one of a disposition of income-producing property itself. The giving up of a lease by petitioner fit the legal requirements of sale or exchange under 117(j) of the Internal Revenue Code of 1939, 26 U.S.C.S. § 117(j), and a gain realized on such a transaction was capital gain. The court reversed and remanded for redetermination of the figures.

CONCLUSION: Finding that the sum received by petitioner for release of its leasehold was taxable as capital gain, and not as ordinary income, the court reversed the judgment and remanded the case for redetermination, in accordance with the opinion, of deficiencies in income and excess profits taxes of petitioner for its taxable year.

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