Metropolitan Building Company v. Commissioner of Internal Revenue

The question presented by this case involves the owner of real property, his lessee and a sublessee. The sublessee wished to enter into a desirable arrangement directly with the owner and to this end to eliminate the intervening interest of the lessee-sublessor. He paid a sum of money to the lessee, in consideration of which the lessee released to the owner, his lessor, all his right and interest under his lease.

The question presented is whether the sum so paid to the lessee is to be regarded entirely as the equivalent of rent owed to the lessee and taxable to the lessee as income or whether it is to be regarded entirely as a sale by the lessee of a capital asset and taxable as capital gain. The Commissioner of Internal Revenue ruled that the payment was the equivalent of rental and taxable as income.

At issue is the amount of tax from Metropolitan Building Company, the lessee, for the taxable year ending June 30, 1953. Following the ruling of the Commissioner, this proceeding was instituted in the Tax Court by Metropolitan for re-determination of deficiencies in income and excess profits taxes for that year. The Tax Court affirmed the ruling of the Commissioner. Metropolitan…