Ferydoun Ahadpour, A.K.A. F. Ahadpour, and Doris Ahadpour - Page 14

                                       - 14 -                                         

          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                 

Page:  Previous  1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  Next

Last modified: May 25, 2011