Forfeited Deposit Income Ordinary Not Capital Gain
Why Capital Gain?
Code Section 1234A provides that gain or loss attributable to the cancellation, lapse, expiration or other termination of a right or obligation which is or would be a capital asset in the hands of the taxpayer shall be treated as gain or loss from the sale of a capital asset. Well, there you have it. If CRI-Leslie had sold the hotel it would have gotten capital gain treatment on the sale. Nobody questions that. So it should get capital gains treatment on the forfeited deposit it got to keep if you follow along with Code Section 1234A.
Why Not Capital Gain?
There is this subtle nuance, that can be quite important, but is often ignored. CRI-Leslie was not just sitting on the hotel, holding it as an investment. It was operating and they were taking depreciation deductions. That fact throws it out of the definition of a capital asset which is in Code Section 1221. Code Section 1221 defines capital asset negatively. It is pretty much everything except certain things including:
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