The taxpayer in CRI-Leslie LLC et al. v. Commissioner, 147 T.C. No. 8 reported the forfeiture of $9.7 million deposits it retained when a buyer failed to close on the sale of a hotel property of the taxpayer as a capital gain. The taxpayer argued that this treatment was the one provided for payments received for contract terminations of this sort by IRC §1234A.

Many CPAs may not immediately recognize that particular reference in the Internal Revenue Code, though some readers may recognize that section as the one that created a bit of stir when the Tax Court turned to in its later reversed opinion in the case of Pilgrim’s Pride Corporation v. Commissioner (141 TC No. 17, reversed, CA 5, 115 AFTR 2d ¶ 2015-477).

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In the view of the Tax Court (but not the Fifth Circuit) the taxpayer and the IRS didn’t understand the real issue, but the Tax Court sent them back to look at the issue in a different way, resulting in a potentially significant decision in the case of Pilgrim’s Pride Corporation v. Commissioner, 141 TC No. 17. The case ended up turning on the issue of whether it is possible for a taxpayer to achieve an ordinary loss when abandoning a security under the current version of IRC §1234A.

While the decision has been overturned on appeal (Pilgrim’s Pride v. Commissioner, CA5, 115 AFTR 2d ¶ 2015-477, reversing 141 TC No. 17), it remains to be seen if the Tax Court will continue to apply this view of IRC §1234A outside the confines of the Fifth Circuit.

Income Received from Forfeiture of Deposits on the Sale of a §1231 Asset Does Not Represent Capital Gains Under §1234A

Fifth Circuit Strikes Down Tax Court View that §1234A Eliminates Ordinary Loss on Abandonment of Capital Asset