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Commissioner, 62 F.2d 648, 649 (4th Cir. 1933), affg. 23 B.T.A.
1287 (1931). If the sale is consummated, it fixes the seller’s
right to retain the deposit, and the earnest money is included as
part of the sales proceeds. Kang v. Commissioner, T.C. Memo.
1993-601; Kellstedt v. Commissioner, T.C. Memo. 1986-435. If the
sale is not consummated, the sales contract fixes the seller’s
right to retain the deposit, and the deposit is included in
income at the time that the contract fixes the seller’s right to
retain the deposit. Baird v. United States, 65 F.2d 911, 912
(5th Cir. 1933). Because earnest money is in the nature of a
payment for an option, it is included in the seller’s ordinary
income when forfeited to him. Sec. 1234; Elrod v. Commissioner,
87 T.C. 1046, 1068-1069 (1986); see Kang v. Commissioner, supra
(taxpayers’ rights to earnest money were not fixed before they
refunded a portion of it; amount they kept was included in
ordinary income in year they made refund, not year they received
earnest money).
At the time the parties entered into the Agreement in 1989,
they anticipated that the sale of Phase II would be consummated
in 1990. At the time petitioners received the Initial Deposit
and the Additional Deposit, they did not have an unconditional
right to retain these deposits. The unconditional right to
retain the deposits was to be fixed only after CDC paid the
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