Tax Legal Services · Primary-source case analysis

Hort: A Lease-Cancellation Payment Was Ordinary Income, Not Return of Capital

By Aneeta Mishra and Timothy Chan

Published May 16, 2026

Decision: Hort v. Comm’r, 313 U.S. 28 (1941).

Hort v. Commissioner considered the tax treatment of a lump-sum payment received when a tenant terminated a long-term office lease.

The payment replaced future rent

Its character followed the ordinary rental income for which it was paid as a substitute.

A lease cancellation did not create a sale

The landlord did not dispose of a capital asset to the tenant in exchange for the payment.

Decline in property value did not recharacterize the receipt

Economic loss from losing a favorable tenant could not turn the payment into tax-free return of capital.

The claimed loss deduction also failed

The record did not support deducting the difference between the lease’s asserted value and the cancellation payment.

Key takeaways

• Identify what future receipts a termination payment replaces.
• Separate income characterization from any distinct asset-basis issue.
• Do not net an unproven property-value decline against the receipt.
• Review current sections 61 and 1241 for modern lease terminations.