P entered into an agreement with the University of Washington for a lease of downtown property in Seattle. In 1922, P executed a sublease under which a hotel was to be built with rental of $25,000 per year ending in 1954. Eventually in 1952 when it came close to expiration of the leases of all the parties involved, the hotel owners offered to take a new lease directly from the University with rental payments at a new rate prior to the expiration of the current lease in 1954. This would result in a $725,000 windfall to the University for the remaining lease time until the current leases would expire. The University then entered into negotiations with P to buy them out of their current lease. An agreement was reached on 9-8-1952 in which P quitclaimed their leasehold interest back to the University for receipt of $137,000 from the hotel owners. The IRS contends that this payment is taxable to P as ordinary income. P claimed the payments as a capital gain. The Tax Court affirmed the IRS.

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