Metropolitan Bldg. Co. v. Commissioner
282 F.2d 592 (9th Cir. 1960)

  • Univ. Washington leased some land to Metropolitan. Metropolitan turned around and subleased it to another company (Olympic) to build a hotel.
  • A few years later, Olympic and Univ. Washington decided to get rid of the middleman. Univ. Washington bought out Metropolitan's lease so they could lease directly to Olympic. Olympic paid Metropolitan $137k to buy out the lease.
  • When they filed their taxes, Metropolitan claimed the $137k as a capital gain. The IRS disagreed.
    • Metropolitan argued that they had sold a capital asset (the lease).
    • The IRS argued that the $137k was payment in lieu of the rental income they would have received had they held onto the lease. Therefore it is taxable as ordinary income.
      • See Hort v. Commissioner (313 U.S. 28 (1941).
  • The Tax Court found for the IRS. Metropolitan appealed.
  • The Appellate Court reversed and found that the $137k was taxable as a capital gain.
    • The Appellate Court found that Hort was inapplicable. In that case, a lessee paid to break their lease with Hort (the property owner), and the US Supreme Court found that the income was the equivalent of rent. In this case, Metropolitan was selling their entire interest.
      • Hort didn't give up anything to get his money, he still owned the building and could lease it to someone else. But Metropolitan gave up their property interest to get their money.
    • The Court found that since Metropolitan had exchanged a property interest (a capital asset), the $137k was taxable as a capital gain.