Ignoring capital gains tax, discuss whether any part of the $4m constitutes ordinary income.

Steve runs a business that manufactures a specialised type of extra strong glass. This business has a number of customers. Steve buys the essential raw materials to make the glass from the only known supplier of such materials, Rare Ltd. If Steve was unable to purchase the materials from Rare, the factory would only be able to produce regular glass. Steve’s contract with Rare is of 8 years duration and has 6 years to run.

During February 2020, Rare Ltd informs Steve that it is cancelling the contract. As a result, Steve will not be able to sell the specialised glass to his customers. As compensation, Rare Ltd gives Steve $4 million. Rare Ltd’s internal documents indicate that $3 million of this was calculated on the basis of how much profit Steve’s business will lose due to being unable to sell such specialised glass to its buyers. The remaining $1 million is based on the loss of Steven’s reputation.