The commissioner of the Internal Revenue Service IRS responded Feb. 15 to petitioner CRI-Leslie in a dispute over a forfeited deposit of $9.7 million and the question of whether this amount was correctly or incorrectly claimed as a capital asset from a 2008 tax filing.

The Commissioner of the IRS, in an appeal to Marcus and Newsom, Circuit Judges argued in a 15 page memorandum that under the tax code 1234A and 1221 the 9.7 million dollars in question could not be filed as a capital gain because it does not fulfill the requirements to make it a capital asset.

The question as to whether the 9.7 million dollars that CRI-Leslie claimed as a capital gain has been under investigation since 2008. In 2005, CRI-Leslie purchased the Radisson Bay Harbor Hotel and the attached Crabby Bill’s in Tampa. 3 years later they attempted to sell the property for 39.2 million dollar. The seller made a deposit of 9.7 million dollars, with the understanding that this deposit would be used toward the full price of the property. However, in 2008 the buyer defaulted. The buyer did not purchase the property from CRI-Leslie and they forfeited their deposit. In 2008, CRI-Leslie reported the 9.7 million dollars as a capital gain, on their tax filing.

After the 2008 filing, CRI-Leslie received a request by the IRS for, “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.” Since CRI-Leslie believed the 9.7 million to be a capital gain, they filed a petition for readjustment, citing, “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.” CRI-Leslie goes on to argue that the language of the Tax Code is opaque, and the meaning can be interpreted differently than what it meant in the word for word language.

In their appeal from the United States Tax Court, the Commissioner of the IRS defended the straightforward meaning of the language in the Tax Code. Specifically citing Tax Code 1234A and 1221 as evidence barring the forfeited deposit from being a capital asset and claimed as a capital gain. The Commission of the IRS states, “the term ‘capital asset’ means property held by the taxpayer (whether or not connected with his trade or business), but does not include … property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business.”

The Commissioner of the IRS maintains its argument that the language of the Tax Code bars CRI-Leslie from claiming the 9.7 million as a capital asset and “accordingly, CRI-Leslie is not entitled to treat its $9.7 million deposit as capital gain.”

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