Golonsky v. Comm'r of Internal Revenue, Docket Nos. 21406
| Decision Date | 29 June 1951 |
| Docket Number | 21407.,Docket Nos. 21406 |
| Citation | 16 T.C. 1450 |
| Parties | ISADORE GOLONSKY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.FRANK GOLD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Edward N. Polisher, Esq., for the petitioners.
Albert J. O'Conner, Esq., for the respondent.
CAPITAL GAIN— CANCELLATION OF LEASE— INCOME TO LESSEE.— The amount received by the lessee from the owner for accelerated cancellation of a lease created a capital gain since use and possession, valuable property rights, are thereby transferred from the lessee to the owner.
The Commissioner determined an income tax deficiency of $1,180.31 against Isadore Golonsky and one of $901.40 against Frank Gold, for 1944. The only issue is whether the Commissioner erred in holding that $3,750, the amount received by each petitioner from Sansom Realty Company, was taxable to him as ordinary income instead of as a long term capital gain. The facts have been stipulated.
The petitioners filed their returns for 1944 with the collector of internal revenue for the first district of Pennsylvania.
Golonsky leased the premises at 1842 Market Street, Philadelphia, for a term of 1 year from October 1, 1938, the term to continue from year to year unless terminated by a written notice given at least 3 months prior to the end of an annual term. Golonsky, with the consent of the lessor, assigned the lease on August 8, 1941, to himself and Gold.
Sansom Realty Company acquired the premises on June 1, 1944, subject to the lease. Notice to terminate the lease on September 30, 1944, had been given by the lessor. Sansom Realty Company entered into a contract with the petitioners dated June 13, 1944, whereby the petitioners agreed to vacate the premises and terminate the lease on or before June 30, 1944, for $7,500. The agreement was carried out in accordance with its terms and the petitioners received the $7,500 in 1944.
The petitioners did not report the transaction on their returns for 1944. The Commissioner, in determining the deficiencies, held that each petitioner had received ordinary income of $3,750 from the transaction.
The Commissioner concedes that if the petitioners had sold their lease to a third party, there would have been a capital gain. Also, a capital gain results from a transaction like the present one if a sublease remains in effect. Walter H. Sutliff, 46 B.T.A. 446. The Commissioner contends, nevertheless, that the transaction between the petitioners and the owner of the property was a cancellation of the lease rather than a sale because ‘the lease contract, as in the case of notes, option, and other contracts, can not be sold to the lessor (obligor) for the reason that an attempted sale to the lessor results in a termination of the lease agreement which, in turn, extinguishes the right of possession.‘
The petitioners, as lessees, had a right under the lease to possession and use of the property for the months of July, August, and September in 1944, a property right. The new owner in the transaction paid the petitioners $7,500 to acquire the right to the use and possession of the property for those three...
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