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Cri-Leslie, LLC v. Commissioner of Internal Revenue

United States Court of Appeals, Eleventh Circuit

February 15, 2018


         Appeal from the United States Tax Court, Agency No. 1454-14

          Before MARCUS and NEWSOM, Circuit Judges, and BUCKLEW, [*] District Judge.


         More than 40 years ago, Judge Henry Friendly lamented that "[t]he problem with respect to the tax treatment of payments for the termination of contract rights having a property flavor is among the most frustrating in income tax law." Sirbo Holdings, Inc. v. Comm'r, 509 F.2d 1220, 1223 (2d Cir. 1975). Alas, not much has changed. This partnership-tax case, arising in the same sphere, presents what appears to be a question of first impression: Is a taxpayer that contracts to sell property used in its trade or business entitled to treat as capital gain an advance deposit that it rightfully retains when its would-be buyer defaults and cancels the deal? Constrained by the Internal Revenue Code's plain (if somewhat peculiar) language, we hold that it is not.


         The pertinent facts are undisputed. In 2005, CRI-Leslie, LLC paid $13.8 million to buy what was then called the Radisson Bay Harbor Hotel in Tampa, along with the hotel's restaurant-Crabby Bill's-and the prime waterfront property on which both sat. Although CRI-Leslie ultimately hoped to sell the property for a profit, it hired a third party to run the hotel and restaurant in the meantime.

         Just more than a year later, CRI-Leslie reached an agreement to sell the property to another company for $39 million. Over the course of the next two years-during which CRI-Leslie (through its manager) continued to operate the hotel and restaurant-the parties amended the contract several times, eventually settling on a total purchase price of $39.2 million, $9.7 million of which was paid immediately to CRI-Leslie as a nonrefundable deposit and would thereafter be credited toward the purchase price at closing. Unfortunately, in 2008 CRI-Leslie's buyer defaulted on the agreement and forfeited the $9.7 million deposit.

         On its 2008 tax return-at issue here-CRI-Leslie reported the $9.7 million as long-term capital gain. The IRS, though, later sent CRI-Leslie an "adjustment" for the 2008 tax year-rarely a good thing-in which it determined that CRI-Leslie had improperly reported the amount of the forfeited deposits as net long-term capital gain rather than ordinary income.

         CRI-Leslie filed a petition for readjustment in the Tax Court, asserting that the Internal Revenue Code was meant to prescribe the same tax treatment for gains related to the disposition of "trade or business" property regardless of whether the property is successfully sold or (as here) the sale agreement is canceled. The IRS responded that the plain text of the governing Code provisions distinguishes between consummated and terminated sales of trade-or-business property, providing capital-gains treatment only for the former. The parties jointly submitted the case to the Tax Court for decision without trial, and that court agreed with the IRS, holding that under the Code's unambiguous language CRI-Leslie couldn't treat the forfeited deposit as capital gain.

         CRI-Leslie filed this appeal, which presents a pure question of statutory interpretation that we review de novo. Ocmulgee Fields, Inc. v. Comm'r, 613 F.3d 1360, 1364 (11th Cir. 2010).


         We begin with a point of agreement. It is common ground that if the sale of the Radisson Bay Harbor had gone through as planned, the $9.7 million deposit- which per the contract's terms would have gone toward the purchase price-would have been taxed at the lower capital-gains rate. As relevant here, I.R.C. § 1231 states that "any recognized gain on the sale or exchange of property used in the trade or business" shall "be treated as long-term capital gains." I.R.C. § 1231(a)(1)-(3). Section 1231 goes on to specify that "[f]or purposes of this section, " the "term 'property used in the trade or business' means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year …." Id. § 1231(b)(1). Helpfully, the parties have stipulated that the property at issue here is properly classified as "property used in [CRI-Leslie's] trade or business" within the meaning of Section 1231. Accordingly, it is undisputed that if CRI-Leslie had sold the property in 2008, the resulting income, including the $9.7 million at issue here, would have constituted Section 1231 gain and, as such, been taxed as long-term capital gain.

         But of course the deal fell through, and CRI-Leslie didn't sell the Radisson. Accordingly, the tax treatment of CRI-Leslie's $9.7 million deposit isn't governed by Section 1231, but rather falls under a different Code provision titled "Gains or losses from certain terminations." I.R.C. § 1234A. In relevant part, Section 1234A provides as follows:

Gain or loss attributable to the cancellation, lapse, expiration, or other termination of … a right or obligation … with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer … shall ...

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