IRS Issues Guidance on Application of New Sec. 453(a) (2) to Installment Sales.

• Author: Fiore, Nicholas J.

An installment sale is defined in Sec. 453(b) as a disposition of property in which at least one payment is to be received after the close of the tax year in which the disposition occurs. Sec. 453(a)(1) provides a general rule that installment sale income must be taken into account under the installment method. Sec. 453(a)(2) provides an exception to this rule; the installment method does not apply to installment sale income if the income would be reported under an accrual method of accounting without regard to Sec. 453. Sec. 453(a)(2) was added by the Ticket to Work and Work Incentives Improvement Act of 1999, and is effective for sales or other dispositions occurring after Dec. 16, 1999. Sec. 453(a)(2) does not affect a cash method taxpayer's ability to use the installment method.

Depending on the facts and circumstances of a particular transaction, taxpayers should also consider the applicability of Sec. 453A, which (in certain circumstances) imposes an interest charge on the tax deferred through use of the installment method.

Corporations

For each question and answer, assume the shareholder uses the cash method of accounting and the corporation uses an accrual method. Also assume the corporation's stock is not traded on an established securities market. Except as otherwise indicated, "corporation" refers to either an S or C corporation.

Q-1. Can a shareholder report on the installment method the gain arising from a sale of the shareholder's stock in a corporation in exchange for cash and an installment obligation?

A-1. The shareholder can report the gain from the sale of the stock on the installment method.

Q-2. Can the corporation report on the installment method the gain arising from a sale of the corporation's assets in exchange for cash and an installment obligation?

A-2. The corporation cannot report the gain from the sale of its assets on the installment method; see Sec. 453(a)(2).

Q-3. What is the effect on the transaction described in Q&A-1 if the buyer makes an election under Sec. 338(g)(a Sec. 338 election) for the corporation?

A-3. The shareholder is not affected and can report the gain from the stock sale on the installment method. The corporation cannot report the gain from the deemed asset sale on the installment method.

Q-4. What is the effect on the transaction described in Q&A-1 if the shareholder is a corporation and the buyer and the corporate shareholder join in making a Sec. 338(h)(10) election for a target C...