Rev. Rul. 56-531

Advice has been requested whether amounts received for the surrender or release of certain leasehold interests in real properties, or for the relinquishment of simple contract rights, constitute ordinary income or proceeds from the sale or exchange of capital assets.

In view of the decisions in the cases of Commissioner v. Isidore Golonsky et al. , 16 T.C. 1450, affirmed 200 Fed.(2d) 72, certiorari denied, 345 U.S. 939; Commissioner v. McCue Bros. & Drummond, Inc. , 19 T.C. 667, affirmed 210 Fed.(2d) 572, certiorari denied, 348 U.S. 829; and Commissioner v. Louis W. Ray et al. , 18 T.C. 438, affirmed, 210 Fed.(2d) 390, certiorari denied, 348 U.S. 829, nonacquiescences withdrawn, page 6, this Bulletin, the Internal Revenue Service now holds that amounts received in consideration of the surrender or release by the tenant to the landlord of possessory rights in real estate under a lease or under a statute entitling the tenant to continue in possession following expiration of a lease, or amounts received by a tenant from the landlord in consideration of the relinquishment of a lease covenant restricting the use of the real estate by the landlord, constitute proceeds from the sale of a capital asset within the meaning of section 117 of the Internal Revenue Code of 1939.

The above holding does not apply to a situation involving the transfer, for a lump sum, of the right to collect ordinary income. Compare Revenue Ruling 129, C.B. 1953-2, 97, and citations therein holding that payments received by a lessee-sublessor attributable to an assignment of subsisting subleases on leased property in connection with a reassignment of the basic ground lease to lessor are includible in gross income of the lessee-sublessor as ordinary income.

The Service will continue to regard the relinquishment of simple contract rights as not involving the sale or exchange of a capital asset within the meaning of section 117 of the Code and will treat amounts received in consideration of such relinquishment as constituting ordinary income under section 22(a) of the Code. See Joseph Roscoe et al. v. Commissioner, 215 Fed.(2d) 478; General Artists Corp. v. Commissioner, 205 Fed.(2d) 360, certiorari denied, 346 U.S. 866; Commissioner v. Starr Brothers, Inc., 204 Fed.(2d) 673; and Harry P. Bingham et ux. v. Commissioner, 105 Fed.(2d) 971.