Installment Sales Revision Act of 1980
| Publication year | 1981 |
| Pages | 1 |
| Citation | Vol. 10 No. 1 Pg. 1 |
1981, January, Pg. 1. Installment Sales Revision Act of 1980
After previous attempts, Congress has adopted new rules for tax reporting of installment sale transactions. By and large, the Installment Sales Revision Act of 1980 succeeds in its primary purpose, which is to eliminate many technical rules which were traps for the unwary. The new law is the result of a coordinated effort by the Treasury Department, the tax section of the American Bar Association and the federal tax division of the American Institute of Certified Public Accountants.
Section 453 of the Internal Revenue Code ("Code") concerning installment sale reporting has been completely revised. Section 453 now pertains only to sales of real property and casual sales of personal property. The installment sale provisions for dealer property are contained in new § 453A. Rules for the treatment of the disposition of installment sale obligations are contained in the new § 453B.
The new law is effective for installment sales made after October 19, 1980. The provisions which eliminate the 30-percent limitation and the two or more payments requirement are effective for transactions occurring in taxable years ending after October 19, 1980. Thus, for example, a sale by a calendar year taxpayer in 1980 even prior to October 19, 1980, would not be subject to these two requirements. The related party rules apply to installment sales made after May 14, 1980. The provision relating to the distribution of an installment obligation in connection with a twelve-month corporate liquidation applies to a distribution of an installment obligation after March 31, 1980.
The purpose of this article is to highlight the important provisions of the new law. The installment sale dealer provisions contained in § 453A are not discussed.
Gone at last is the requirement that payments in the year of sale must not exceed 30 percent of the selling price. Simple as the 30 percent limitation sounded, it produced an inordinate amount of confusion and litigation and served no meaningful purpose Section 453(b)(1) now defines an installment sale simply as a disposition of property where at least one payment is to be received after the close of the year in which the sale occurs.
Under prior law, the IRS took the position that installment sale reporting required two or more payments in two or more taxable years, the two-year payment rule, a position that received judicial approval.(fn1) For example,
a taxpayer who made a sale with a small down payment and a large lump sum payment in a later year would qualify for the installment sale reporting; the same sale with no down payment would fail.
Now the taxpayer can structure the sale to fit his own particular tax needs---by taking no down payment or whatever down payment he chooses so long as there is at least one payment after the year of sale. The new law also eliminates the requirement that casual sales of personal property must be for a selling price exceeding $1,000.
While the law makes substantial structural changes to the installment sale provisions, many of the basic concepts of installment sale reporting are still present. Income reporting under the new installment sales method is that proportion of each payment which the gross profit bears to the total contract price.(fn2) Payments do not include the purchaser's evidence of indebtedness unless the obligation is a bond or other evidence of indebtedness payable on demand or has been issued by a corporation or government and is readily tradable.(fn3) One old problem seems to have been resolved. A third party guarantee (including a standby letter of credit) securing the purchaser's obligation will not be considered a payment.(fn4)
Liabilities assumed or to which the property taken is subject constitute payments to the seller only to the extent the liability exceeds the seller's basis in the property.(fn5) The indebtedness in excess of basis problem perhaps fostered unnecessary use of the wraparound mortgage for tax purposes to avoid the old 30 percent limitation. Under a wraparound mortgage, the buyer does not assume or take title subject to the seller's mortgage, but makes payment to the seller who agrees to pay the mortgage. Assuming a seller's mortgage exceeded his basis and would have been a payment to that extent, the 30 percent limitation may have been difficult to satisfy without this arrangement. Since there is no longer a 30 percent limitation on payments in the year of sale, wraparound mortgages are no longer necessary solely for installment sale purposes.
Several areas of confusion still remain, although with the elimination of the 30 percent requirement their significance is considerably diminished. One is the treatment of commissions and selling expenses in determining whether or to what extent the seller's liabilities exceed his basis in the property. At least in the Ninth Circuit, a taxpayer may add selling expenses to his basis in the property, thus reducing the amount of liability in excess of basis and, consequently, the amount of first year payments.(fn6) Under the regulations, however, commissions and selling expenses reduce gross profit,(fn7) but do not reduce the amount of payments, the total contract price, or the selling price.(fn8)
Another area of confusion is where the buyer pays off some of seller's liabilities in the year of sale. The IRS has held that the buyer's payment in the year of sale of seller's liabilities is not a payment in the year of sale if the liabilities are incurred in the ordinary course of business and not for the purpose of avoiding the 30 percent requirement.(fn9) The IRS and the taxpayer may still argue over these matters. However, whereas before an outcome...
To continue reading
Request your trial