Arthur J. Gray and Esther Gray v. Commissioner of Internal Revenue

Arthur J. Gray (taxpayer) received a total of $68,000 at the time certain lease and management contracts were terminated. In 1972 when the payments were made, taxpayer deducted the amounts as ordinary business expenses. In 1973 when taxpayer recovered the amounts, he treated them as long-term capital gains. The Commissioner of Internal Revenue (Commissioner) asserted that the $68,000 received by taxpayer was ordinary income and accordingly determined a deficiency in taxpayer’s 1973 federal income taxes. The Tax Court upheld the Commissioner, 71 T.C. 95 (1978). We affirm.

BACKGROUND

The facts in this case are undisputed. In 1971, the Gray Joint Venture (partnership), in which taxpayer owned a 90 percent interest, entered into separate lease and management contracts with Hertz, Inc. Pursuant to the agreements, the partnership leased an almond orchard from Hertz for an annual rental of $10,000, and Hertz agreed to manage the orchard for an annual management fee of $10,000, or 90 percent of the proceeds from the almond crop, whichever was lesser. The partnership paid Hertz $10,000 advance rent and $10,000 advance management fees in accordance with the terms of the agreements. The…