Amending returns after reinstatement of installment method for accrual-basis taxpayers.

• Author: Madden, David

On Dec. 28, 2000, the Installment Tax Correction Act of 2000 repealed (retroactively) the 1999 repeal of the installment method of accounting for accrual-basis taxpayers; see Tax Clinic, "Congress Reinstates Installment Method for Accrual-Basis Taxpayers," TTA, March 2001, p. 151. The legislation failed, however, to provide any guidance for taxpayers that fully reported, under an accrual method, income from installment-sale transactions while the prohibition was in place. The IRS filled this void with Notice 2001-22. Generally, the notice allows taxpayers to elect the installment method by filing an amended return(s) before the expiration of the statute of limitations for the applicable tax year(s), to report income from an installment sale under the installment method.

Effect of Retroactive Repeal of Sec. 453(a)(2)

Prior to its repeal, Sec. 453(a)(2) prevented an accrual-method taxpayer from using the installment method for installment sales. It generally provided that "the installment method shall not apply to income from an installment sale if such income would be reported under an accrual method of accounting without regard to this section" The effective date of the amendment made by Sec. 453(a)(2) was generally Dec. 17,1999.

The Installment Tax Correction Act of 2000 repealed Sec. 453(a)(2), thereby permitting an accrual-method taxpayer to again use the installment method for installment sales. Specifically, the legislation provides that Sec. 453 "shall be applied and administered as if" the 1999 change in law "had not been enacted."

Sec. 453(a) requires income from an installment sale to be reported under the installment method unless the taxpayer elects to have such method not apply to a particular disposition. Under Sec. 453(d) and Regs. Sec. 15A.453-1(d), a taxpayer must elect out of the installment method by the due date (including extensions) for filing the tax return for the year of disposition. The taxpayer makes the election by reporting the full amount of the installment-sale income on Schedule D of Form 1040 or on Form 4797, Sales of Business Property (Also Involuntary Conversions and Recapture Amounts Under Sections 179 and 280F(b) (2)). The Service grants a taxpayer that files a return timely without electing out an automatic extension to elect out by filling an amended return within six months of the return's due date (excluding extensions) (Regs. Sec. 301.9100-2(b)). A revocation of the election out of the installment...