## Facts

- CRI-Leslie, LLC bought a Tampa, Florida hotel, restaurant, and related waterfront real estate for about $13.8 million and operated the property through a third party while seeking an eventual profitable disposition.
- CRI-Leslie contracted to sell the property for approximately $39 million (later amended to $39.2 million).
- The buyer paid a nonrefundable $9.7 million deposit, creditable to the purchase price at closing.
- The buyer defaulted in 2008; the sale never closed, and CRI-Leslie kept the $9.7 million deposit.
- CRI-Leslie reported the retained deposit as long-term capital gain; the IRS recharacterized it as ordinary income in an FPAA.
- The parties stipulated the property was “property used in the trade or business” under I.R.C. § 1231 and therefore not a “capital asset” under § 1221.

## Issues

1. Whether I.R.C. § 1234A treats as capital gain a nonrefundable deposit retained when a contract to sell § 1231 trade-or-business real property is terminated by buyer default.

## Decision

- The Eleventh Circuit affirmed the Tax Court.
- Section 1234A applies only when the terminated right or obligation relates to property that is (or would be) a “capital asset” under § 1221.
- Because § 1221 excludes real property used in a trade or business (and depreciable business property) from “capital asset” status, § 1234A did not apply to the hotel property.
- The retained $9.7 million deposit was taxable as ordinary income, not capital gain.

## Legal Principles

- I.R.C. § 1234A recharacterizes gain or loss from the termination of certain rights or obligations as gain or loss from the sale of a capital asset only if the underlying property qualifies as a “capital asset” under I.R.C. § 1221.
- I.R.C. § 1221 excludes from “capital asset” status real property used in a taxpayer’s trade or business and depreciable property used in the trade or business.
- I.R.C. § 1231’s capital-gain treatment generally requires a completed “sale or exchange” of qualifying business property; a failed sale producing a retained deposit does not satisfy § 1231’s trigger.
- Policy arguments about economic similarity between completed sales and terminated sales cannot override unambiguous statutory text.

## Conclusion

A forfeited, nonrefundable deposit from a canceled contract to sell § 1231 trade-or-business real property does not receive capital-gain treatment under § 1234A because the underlying property is not a § 1221 “capital asset,” making the deposit ordinary income.


CRI-Leslie, LLC v. Commissioner, 882 F.3d 1026 (11th Cir. 2018)