Metropolitan Bldg. Co. v. Commissioner
United States Court of Appeals for the Ninth Circuit
282 F.2d 592 (1960)
Metropolitan Building Company (plaintiff) held a long-term lease on university property in Seattle. It subleased part of the property to a sublessee that built and operated a hotel, later acquired by Olympic, Inc. As Metropolitan's own lease neared expiration, the university wanted to secure future rental income and negotiated with Olympic and Metropolitan to have Metropolitan transfer its remaining leasehold interest directly to the university. In exchange, Metropolitan received $137,000 from Olympic, representing unpaid rent and taxes. The Commissioner (defendant) treated the $137,000 as ordinary income, and the Tax Court agreed.
Whether proceeds from the bona fide sale of a leasehold interest for a legitimate business purpose are taxable as capital gain rather than ordinary income.