I have two pass-through entities (cash basis partn. & accrual basis S Corp.) which own interests in the same piece of unimproved & unproductive land (considered as investment property on prior returns). A few years ago, the entities entered an agreement to sell the property, but there were significant contingencies which have now been mostly, but not completely, resolved. In 2007 the contract would have expired, but the "purchaser", not wanting this, has agreed to pay the "sellers" (my entities) money to amend (extend) the contract for several months at a time. There were several payments received in 2007, and all of them are non-refundable & not to be applied to the previously agreed-upon sales price. Although I can see some argument in considering this as ordinary business income (& related expenses) since it technically is not applicable to the sale of the property, I lean towards this "income" as being related to the property & ordinary (other) investment income (along with, unfortunately, investment expenses either capitalizable or 2% itemized deductions). An associate believes that that it is more akin to a series of options, and therefore (short term) capital gains. An IRS agent at the practioner hotline believes that it is also options, but a long string of options that won't expire until the sale is either finalized or expires without amendment. The agent therefore feels that the "options" are not even income in 2007 since the potential sale has been extended into 2008 and possibly beyond.
