Your friend really needs to talk to a RE attorney so that his contracts cover contingencies in future dealings but for the loss of the earnest money ...
No. You cannot deduct lost earnest money deposits. IRS states this on their website:
"Nondeductible payments. You cannot deduct any of the following items.
Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance.
Wages you pay for domestic help.
Depreciation.
The cost of utilities, such as gas, electricity, or water.
Most settlement costs. See Settlement or closing costs under Cost as Basis, later, for more information.
Forfeited deposits, down payments, or earnest money."
