Commissioner v. P.G. Lake, Inc. 356 U.S. 260 (1958) Lake was a company that produced oil and gas. They owned some oil and gas leases, which entitled them to a percentage of the profits from selling oil and gas from certain wells. Those profits were taxable as ordinary income. Lake owed their President $600k. Instead of paying him in cash, they gave him their interest in an oil lease, so he'd get the profits from it instead of them. When they filed their taxes, Lake claimed that they had sold a capital asset and therefore reported the $600k as a capital gain. The IRS assessed a deficiency. Lake argued that there was an actual asset sold (the lease), and they were not in the business of buying and selling leases, so it was a capital gain. The IRS argued that the oil leases were nothing more than a contractual agreement to get a stream of income. Therefore by using the leases to pay off a debt, all Lake was doing was collecting the $600k of income they would have normally gotten over the next few years all at once. The Tax Court found for the IRS. Lake appealed. The Appellate Court reversed. The IRS appealed. The US Supreme Court reversed and found for the IRS. The US Supreme Court found that the lease was a transparent device. Collecting income now instead of later is just an acceleration of ordinary income and not eligible to be a capital gain. Basically, the Court said that the lease wasn't a capital asset (like an office building or a piece of machinery) would be. It was just a license to get some money (which would be ordinary income) later. When Lake sold it they weren't selling a capital asset, they were giving up the right to get money later in order to get money now. That's just ordinary income received on a different timetable.