Hort v. Commissioner
Headline: Payment to end a commercial lease must be reported as ordinary income, not a capital return, so the landlord must include the full $140,000 lease buyout in taxable income and cannot offset it with a claimed loss.
Holding: The Court held that the $140,000 payment to cancel the lease was ordinary gross income and must be reported in full, and the taxpayer could not deduct a claimed loss for the lease cancellation.
- Requires landlords to report lease buyouts as taxable income in full.
- Prevents offsetting a buyout with theoretical lost future rent.
- Property-value loss deductible only after a finalized, closed transaction.
Summary
Background
The taxpayer inherited a lot and a ten‑story office building that included a lease on the main floor and basement. A 1927 agreement arranged occupancy beginning when a head lease expired. In 1933 the tenant, Irving Trust Company, chose to end the lease and paid the owner $140,000 to cancel it. The owner did not report that payment as ordinary income and instead claimed a calculated loss of $21,494.75; the Commissioner treated the full $140,000 as gross income, disallowed the claimed loss, and the tax boards and lower courts affirmed the assessment.
Reasoning
The Court asked whether the buyout was ordinary income or a return of capital and whether a loss under the tax law could offset it. The Court found the payment was essentially a substitute for the future rent the lease would have produced and therefore fell squarely within the tax law’s definition of gross income. Calling the lease “property” did not make the buyout a return of capital. The Court also held that the owner could not reduce actual income received by the amount of income he failed to realize; a loss tied to a property’s diminished value becomes deductible only after its amount is fixed by a completed transaction.
Real world impact
People and businesses that accept cash to end leases must report the full buyout as taxable income. They cannot offset that income by using theoretical lost rental value. If the property’s market value falls because of the cancellation, that loss is deductible only when finally fixed by a closed transaction.
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