Following up on my recent posts:

• IRS Seeks to Treat Nursing Home Entrance Fees as Taxable Pre-Paid Rent, Not Tax-Free Interest-Free Loans (June 4, 2010)
• Tax Court Petition in Nursing Home Entrance Fee Case (June 4, 2010)
• IRS Backs Down on Tax Treatment of Retirement Community Entrance Fees (July 8, 2010)

Wall Street Journal, IRS Erred in High-Stakes Tax Case, by John R. Emshwiller:

The IRS said it made a more than $325 million error in a high-stakes tax battle with Vi, an operator of upscale retirement communities. The company recently changed its name from Classic Residence by Hyatt.

The IRS disclosure, made in a recent federal tax court filing, appears to end the agency's effort to collect more than $128 million in back taxes and penalties from the company. The agency's reversal came even though it continued to defend its underlying position: that so-called "entrance fees" paid by incoming retirement-community residents can be treated as taxable income.

Vi maintains that because a large portion—in some cases over 90%—of many entrance fees is refundable when a resident leaves or dies, the returnable parts of the payments are actually interest-free loans and not taxable.