Florida LLC owns and operates Bay Hotel in Tampa Florida. In July of year 20X5 Florida LLC entered into a sale agreement with ABC LLC, to sell the property to ABC for $39 million.

ABC paid $9 million at the time the agreement was signed as a deposit and to be applied to the final purchase price. ABC LLC had two years to complete the purchase. In year 20X7 ABC LLC notified Florida LLC that it could not obtain the balance of the financing and it forfeited the total sum of the deposit.

How should Florida LLC treat the $9 million on its tax return. (note in 20X4 Florida had a section 1231 Loss of $1.5 million)

Under section 1231 recapture, 20X4 had a loss of $1,500,000 could that be treated as ordinary income and $7,500,000 could be subject to capital gains tax?