Steven Voloudakis and Katherine Voloudakis v. Commissioner of Internal Revenue

Prior to April 8, 1947, the petitioners had possession of a building in Portland, Oregon, under a lease which then had approximately nine years to run. On that date petitioners executed an instrument in which their lessor also joined, transferring the use and occupation of the building for a term of nine years to Pacific Telephone and Telegraph Company. This company, here called Pacific, agreed to pay a “rental” of $50,000 a year. Of this sum, $1,900 per month was to be paid to petitioners’ original lessor, owner of the building. The re mainder of the $50,000 was paid to petitioners in stated installments, monthly, during the full term. The sums thus collected by petitioners were reported on their income tax returns as amounts received on sale of their lease on an installment plan, and taken into account as long-term capital gains. This continued for several years, but in 1956, the Commissioner, holding that the sums thus received were ordinary income from rentals, determined deficiencies accordingly for the years 1949 through 1953. He also assessed penalties for both (a) failure to file declarations of estimated tax and (b) substantial underestimation of estimated tax in each of…