Taxing Lessons Case Summaries

Case — Commission or Purchase Price Reduction?

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TL Case Summ


Is a real estate commission paid to a broker who is purchasing for his own account a purchase price reduction or income?


Taxpayer Says: The commission was not income because he never actually received it, instead applying it to reduce the purchase price of the property.

Internal Revenue Service Says: The commission was income and should have been reported on the taxpayer’s 2003 tax return.


From Internal Revenue Code Section 61(a): Defines gross income as “all income from whatever source derived, including (but not limited to) * * * Compensation for services, including fees, commissions, fringe benefits, and similar items”. The definition is construed broadly and extends to all accessions to wealth, clearly realized, over which the taxpayer has complete control.

From Hamilton Natl. Bank v. Commissioner, 29 B.T.A. 63, 67 (1933): A taxpayer ordinarily cannot avoid recognizing income by refusing to accept a check.

From Lucas v. Earl, 281 U.S. 111, 114-115 (1930): A taxpayer cannot avoid recognizing income of which he is the true earner by attempting to transfer his right to the income to someone else.

From Commissioner v. Daehler, 281 F.2d 823 (5th Cir. 1960), revg. 31 T.C. 722 (1959): The fact that commissions received were derived from transactions in which a taxpayer was purchasing property for his own account does not alter the commissions’ character as income to him.


When you purchase real estate and your agent or broker rebates part of a commission to you, the payment is not taxable income. Instead it’s considered a reduction of your purchase price as a return of capital, and is excludable. (See Revenue Ruling 2006-27 and Private Letter Ruling 200721013.) Your broker, on the other hand, has income to the extent of the commissions earned.

The question in this case arises because the purchaser and the real estate broker are the same person.

The taxpayer, a land developer and licensed real estate broker, operated his real estate brokerage as a sole proprietorship. When he negotiated a purchase of property for his development corporation, the price he paid included a $100,000 broker’s commission. Instead of accepting the commission, he asked that it be applied against the purchase price. To achieve that result, he endorsed the commission check to the closing attorney. Because he never actually received the commission, he believes it was a reduction to the basis in the property instead of income.

The IRS says the commission is income because it was a payment for services even though the taxpayer was acting on his own account.


Make your selection, then see “The Court’s Decision” below for a full explanation

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit and

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.


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For the IRS. The taxpayer was tendered a commission check and signed the closing statement affirming receipt of a $100,000 commission in the transaction. The commission was not subject to any limitations or restrictions, and was income when tendered. The fact that the taxpayer did not deposit the check into his bank account is immaterial. He cannot alter the tax consequences of the transaction by claiming after the fact that he did not want to accept the commission. He earned his commission as a broker by negotiating the purchase of the property, structuring the transaction, and arranging financing. Even if he had not received the $100,000 commission but instead transferred his rights to the money, the transfer would constitute an anticipatory assignment of income.