The IRS has provided rules regarding the tax treatment of monies received as restitution for canceling a distributor’s agreement by a manufacturer. In general, the transaction is considered a sale or exchange of property, with the potential for Sec. 1231 to gain treatment, if:

-the agreement was for marketing and/or servicing of goods; and

-the distributor made a substantial capital investment in the distributorship; and

-the investment is reflected in physical assets.

Since you are involved in the wholesale trade, this development may provide tax savings for your business. If you have recently received payment due to the cancellation of a distributor’s agreement, you may qualify for favorable long-term capital gain treatment. However, the property’s character impacts this determination, and the gain may be subject to recapture as ordinary income in some instances.

We would be happy to clarify any questions you may have and help you to determine whether your business qualifies for this favorable tax treatment. Please call our office at your earliest convenience to make an appointment.