Field Memo Says Merchant Contract Sale Should Be Treated as Income

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The Internal Revenue Service Office of Chief Counsel, in a field attorney advice memorandum released May 10, said the sale of merchant contracts by a taxpayer must be treated as ordinary income and not capital gain.
The office in FAA 20131901F said that because the merchant contracts themselves “do not constitute a capital asset,” but instead “represent the right to receive ordinary income,” the corresponding “gain recognized by the Taxpayer on the sale of the merchant contracts constitutes ordinary income, not capital gain.”
The FAA was issued in relation to a taxpayer who sold merchant contracts for servicing and clearing operations to third-party purchasers. Though the taxpayer originally reported the contract sales as ordinary income, the taxpayer “recently filed amended federal income tax returns … recharacterizing the gains on the sale of the merchant contracts as capital.”

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