Tax Court Decision Addresses Tax Treatment of Forfeited Deposits on a Lapsed Sale of Real Estate: Tax Court Holds That Gain Attributable to Forfeited Deposits With Respect to Sale of Hotel Is Ordinary Income

Sullivan & Cromwell LLP - September 8, 2016

In CRI-Leslie, LLC, Donald W. Wallace, Tax Matters Partner v. Commissioner of Internal Revenue, 147 T.C. No. 8 (September 7, 2016), the Tax Court held the taxpayer was required to recognize ordinary income—not capital gain—in respect of forfeited deposits relating to a lapsed contract for the sale of a hotel.  This decision runs contrary to the position generally taken by many taxpayers that gain recognized with respect to forfeited deposits should be treated as capital gain, consistent with the treatment that would have applied had the sale been completed.