Taxation – Federal Income Tax – Capital Gain Treatment of Amount Received from Sublessee by Lessee-Sublessor for Surrender of Lease to Lessor

The lessor and the sublessee of a valuable piece of business property sought to remove the intervening interest of petitioner, the lessee-sublessor. Petitioner agreed to release to the lessor all his right and interest in the leasehold and in consideration therefor petitioner received a sum of money from the sublessee. The Tax Court decided in a deficiency proceeding that the entire amount should be taxed as ordinary income on the ground that it was merely a substitute for future rental payments. On appeal, held, reversed. Since the substance of the transaction was the transfer of the leasehold from the lessee to the lessor there was a sale of a capital asset and the sum was taxable as capital gain under the predecessor of section 1231 of the Internal Revenue Code of 1954. Metropolitan Bldg. Co. v. Commissioner, 282 F.2d 592 (9th Cir. 1960).