CRI-LESLIE, LLC, DONALD W. WALLACE, TAX MATTERS PARTNER, Petitioner-Appellant,
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
from the United States Tax Court, Agency No. 1454-14
MARCUS and NEWSOM, Circuit Judges, and BUCKLEW, [*] District Judge.
NEWSOM, CIRCUIT JUDGE.
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.
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.
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.
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
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.
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
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.
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 ...