Deposit on Purchase of Business

[equinecpa]

I have a client who is selling their business (an LLC filing 1065). They had a prospective buyer who gave them a $25,000 deposit on the purchase. This money was deposited into the LLC bank account.

The purchaser couldn't get financing approved so walked away from the money. The purchaser was going to purchase the entire LLC lock stock and barrel.

How would you report this forfeited deposit in the sellers hands?

Would it be personal income to the sellers? I'm thinking it would be and should be reported on their 1040 as perhaps Schedule D short term gain (I'm thinking the seller sold a contract which gave the buyer a right to purchase?).

[veritas]

My inclination

is short term gain form 4797 at the LLC level.

It appears to me from your post the LLC was the seller, not the individual members.

[Brian EA]

LLC Income. Zero cost
brian

[solomon]

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§ 1.1234-1 Options to buy or sell.

(a) Sale or exchange —(1) Capital assets. Gain or loss from the sale or exchange of an option (or privilege) to buy or sell property which is (or if acquired would be) a capital asset in the hands of the taxpayer holding the option is considered as gain or loss from the sale or exchange of a capital asset (unless, under the provisions of subparagraph (2) of this paragraph, the gain or loss is subject to the provisions of section 1231). The period for which the taxpayer has held the option determines whether the capital gain or loss is short-term or long-term.

(2) Section 1231 transactions. Gain or loss from the sale or exchange of an option to buy or sell property is considered a gain or loss subject to the provisions of section 1231 if, had the sale or exchange been of the property subject to the option, held by the taxpayer for the length of time he held the option, the sale or exchange would have been subject to the provisions of section 1231.

(3) Other property. Gain or loss from the sale or exchange of an option to buy or sell property which is not (or if acquired would not be) a capital asset in the hands of the taxpayer holding the option is considered ordinary income or loss (unless under the provisions of subparagraph (2) of this paragraph, the gain or loss is subject to the provisions of section 1231).

(b) Failure to exercise option. If the holder of an option to buy or sell property incurs a loss on failure to exercise the option, the option is deemed to have been sold or exchanged on the date that it expired. Any such loss to the holder of an option is treated under the general rule provided in paragraph (a) of this section. In general, any gain to the grantor of an option arising from the failure of the holder to exercise it, and any gain or loss realized by the grantor of an option as a result of a closing transaction, such as repurchasing the option from the holder, is considered ordinary income or loss. However, for the treatment of gain or loss from a closing transaction with respect to or gain on the lapse of an option granted in stock, securities, commodities or commodity futures, see section 1234(b) and §1.1234–3. For special rules for grantors of straddles applicable to certain options granted on or before September 1, 1976, see §1.1234–2

[ChEAr$]

It is entirely not clear

I have a client who is selling their business (an LLC filing 1065). They had a prospective buyer who gave them a $25,000 deposit on the purchase. This money was deposited into the LLC bank account.

The purchaser couldn't get financing approved so walked away from the money. The purchaser was going to purchase the entire LLC lock stock and barrel.

How would you report this forfeited deposit in the sellers hands?

Would it be personal income to the sellers? I'm thinking it would be and should be reported on their 1040 as perhaps Schedule D short term gain (I'm thinking the seller sold a contract which gave the buyer a right to purchase?).

without reference to the underlying agreement. Was the buyer purchasing (1) assets of the LLC or (2) the LLC itself? There must have been something in writing.

What's interesting is your use of the term "lock, stock, and barrel" (grin

So then, in the absent of any written agreement, each member gets 12,500 cash to report on his own 1040.
AFter all, an LLC can't sell itself.

[Burke]

II believe this would have the same tax treatment as forfeited earnest money. It is treated as ordinary income. Not on Schedule D. Nothing was sold, the LLC is still in the hands of the same owner(s). Doesn't sound like it was a formal option agreement with rights, but a failed contract for sale. So, maybe SE tax ramifications?

[equinecpa]

Obtained more info from client yesterday...it was a contract to purchase the assets.