METROPOLITAN BLDG CO. V. COMMISSIONER
282 F.2d 592 (9th Cir. 1960)
NATURE OF THE CASE: This was a dispute over the characterization of monies. Metropolitan
(P), lessee, appealed the tax court decision affirming that sublessee's payment to P was the
equivalent of rent and taxable as income.
FACTS: P entered into an agreement with the University of Washington for a lease of
downtown property in Seattle. In 1922, P executed a sublease under which a hotel was to be
built with rental of $25,000 per year ending in 1954. Eventually in 1952 when it came close
to expiration of the leases of all the parties involved, the hotel owners offered to take a
new lease directly from the University with rental payments at a new rate prior to the
expiration of the current lease in 1954. This would result in a $725,000 windfall to the
University for the remaining lease time until the current leases would expire. The
University then entered into negotiations with P to buy them out of their current lease. An
agreement was reached on 9-8-1952 in which P quitclaimed their leasehold interest back to
the University for receipt of $137,000 from the hotel owners. The IRS contends that this
payment is taxable to P as ordinary income. P claimed the payments as a capital gain. The
Tax Court affirmed the IRS.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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