Commissioner v. P. G. Lake, Inc. Case Brief Summary | Law Case Explained

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Commissioner v. P. G. Lake, Inc. | 356 U.S. 260 (1958)
Capital gain is income realized from the sale of a capital asset. Capital gains are taxed at a more favorable tax rate than ordinary income. Suppose a taxpayer trades the right to future income payments for a lump sum. Are the proceeds from such a deal classified as capital gains? That’s the question in Commissioner versus P. G. Lake.
P. G. Lake, a company engaged in oil and gas production, owned interests in two oil and gas leases from which Lake received ongoing payments. Lake owed its president $600,000. To satisfy the debt, Lake assigned its president the right to receive payments worth $600,000 plus interest from the oil and gas leases. Lake retained ownership of the leases.
On its federal tax return, Lake reported the assignment as a sale of property resulting in a profit of $600,000 taxable as a long-term capital gain. The Internal Revenue Commissioner determined a deficiency in Lake’s taxes, concluding that the profit from the assignment was taxable as ordinary income. Lake petitioned for review from the Tax Court, which ruled for Lake. The Fifth Circuit affirmed. The Supreme Court granted the commissioner’s petition for cert.
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