What becomes of losses in an escrow account?

"john" wrote

Did you take a deduction - a business deduction maybe - on the amount you put into the escrow account?

If so, then yes, it's income to you when you get it back.

What type of income it might be depends on if, how and where you took that deduction.

I think, rather, it was not considered income at the time.

In which case, it would be capital gains when received.

Seth

I didn't put it into the escrow account, the purchasing company did. I don't get it, or have any control over it, until the remediation is over. Then I get what is left. I also didn't pay any income tax on it, as I didn't recognize it as income. I am told I have to pay capital gains on it (with a zero basis) on whatever I eventually get, when I get it.

Assuming the above seems like it might be correct, my current question concerns the loss the escrow account will show for 2008. In 2007 it had a profit, and I entered them (dividends and capital gains) on my income tax return. The accountant told me that I will subtract the 2007 from the amount I am ultimately paid when figuring how much capital gains to pay on it. In 2008 it has a loss. (dividends, but larger capital losses). My question is: do I do pretty much the same as last year. Put it all on my 2008 income tax return, but ADD the loss to the amount I ultimately receive when the account liquidates.

Clear as mud, right?

"john" wrote

By not counting it as part of your sales price, then it's income when received. Capital gains income, as it would have been treated in that manner had you received the whole lump sum at closing.

I've been in some quite muddy waters, and no, you shouldn't get any deduction for the losses in that account.

Why?

You don't own that account and more importantly, you have no basis in the assets that lost value.

If we're talking some large sums here, and the escrow account is some fraction of the total sales price, then you should be running this by your accountant who is more knowledgeable of this transaction.

My accountant, in 2007, included the escrow account's income on my tax return. He told me that the 2007 income would be subtracted from the account balance for the purpose of determining capital gains when it was liquidated. I had previously consulted him, and a tax attorney, when drafting the escrow agreement; so he was well familiar with it.

Unfortunately I no long have any confidence in him, so I have doubts about how he handled my 2007 tax return.

Then why does he have to pay taxes in the income?