Metropolitan Building Co. v. Commissioner

The University of Washington (university) owned property consisting of four city blocks in Seattle. In 1907, the Metropolitan Building Company (Metropolitan) (plaintiff) acquired a lease for the property ending on November 1, 1954. In 1922, the Metropolitan subleased one of the blocks. The sublease ended just before the expiration of Metropolitan’s lease with the university. The sublease agreement required the sublessee to construct a hotel on the property and pay an annual rental of $25,000. The sublessee also agreed to pay property taxes assessed against Metropolitan. The Olympic hotel was completed and in 1936, Olympic, Inc. acquired the sublease. In 1952, in anticipation of the expiration of Metropolitan’s lease, the university began negotiating a new lease of the hotel beginning November 1954. Olympic, Inc. proposed to immediately secure the transfer of Metropolitan’s remaining interest in the hotel and property to the university, and to thereupon enter a 22-year lease with the university. Under this scheme, the university would benefit from $725,000 in rental income prior to November 1, 1954, which it would not otherwise have been entitled to. The university accepted Olympic, Inc.’s proposal and entered into negotiations with Metropolitan. On September 8, 1952, Metropolitan agreed to relinquish all its right, title, and interest in the hotel and property to the university in exchange for $137,000 payable by Olympic, Inc. Metropolitan states that $137,000 was the sum of the amount of rent that remained uncollected under the lease and the taxes assessed against Metropolitan. The Commissioner (defendant) ruled that receipt of $137,000 in 1952 was ordinary income to Metropolitan. The Tax Court affirmed.