Receipt of one-time payment under property lease is rental income

Tax Court opinion

The U.S. Tax Court today upheld a deficiency determination and accuracy-related penalty concerning the taxpayers’ treatment of a one-time payment received with respect to a property lease.


Related content

The case is: Stough v. Commissioner, 144 T.C. No. 16 (June 2, 2015)

Read the Tax Court’s opinion [PDF 109 KB]


The taxpayers (through wholly owned entities) constructed a commercial building and entered into a 10-year lease with a tenant. The monthly rent was based on the amount of “project costs” incurred in acquiring and developing the property.

Under the lease, the tenant was to pay monthly rent and could, at its option, make a one-time payment to reduce the “project costs.” This one-time payment would affect the calculation of the amount of rent and would reduce the amount owed under the lease.

The tenant in 2008 elected to make a $1 million payment under the terms of the lease. The taxpayers argued that the $1 million payment was not rental income. Alternatively, the taxpayers asserted that the payment was to be reported ratably as rental income over the 10-year life of the lease under section 467.

The Tax Court held that:

  • The $1 million payment was rental income.
  • The taxpayers must report the entire $1 million as rental income in the year of receipt because the lease did not specifically allocate rent.
  • The constant rental accrual and proportional rental accrual methods were not applicable to the lease.
  • The taxpayers were liable for the accuracy-related penalty.

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