Installment sales of multiple assets.

• Author: Packard, Pamela
• Position: IRS installment-sale rules

It is not unusual for a group of assets to be sold in which some portion of the purchaser's consideration is an installment obligation. Sec. 453 installment-sale rules apply to dispositions of property when at least one payment will be received in a year after the year of sale. The installment-sale provisions apply unless the seller elects out of the installment method. Assuming the seller intends to report the sale on the installment method, important issues arise when multiple assets are sold.

Determination of Gain and Loss

To determine the character and timing of gain or loss realized on a sale, the sales price must be allocated to the various assets sold. (If the assets constitute a trade or business under Regs. Sec. 1.1060-1(b)(2), see Regs. Sec. 1.338-6.) The allocated sales price is compared to the tax basis of each asset to determine gain or loss on the individual assets. The holding period of Sec. 1231 assets and capital assets sold are then examined to determine the proper classification of gains and losses. Any losses generated from the sale of individual assets are reported in the year of sale (Rev. Rul. 70-430). Any gain allocable to inventory is also recognized in the year of sale under Sec. 453(b)(2)(B). Taxpayers are also required to report certain recapture income in the year of sale under Sec. 453(i).

Calculation of Installment-Sale Income

Once the amount and character of gain and loss from individual assets is determined, the installment-sale gain and gross profit ratio can be computed. That portion of the sales price allocable to inventory or to loss assets sold is ignored. Similarly, the tax basis related to those assets is excluded from the calculation. Unless specifically agreed to by the parties, both the down payment and the installment receivable must be allocated among inventory, loss assets and assets eligible for installment treatment. This allocation is based on the relative fair market values (FMVs) of the respective assets or pursuant to Regs. Sec. 1.338-6 (if the assets constitute a trade or business). However, sales agreements may specifically allocate the down payment to certain assets that are sold (such as inventory); see, e.g., Monaghan, 40 TC 680 (1963), and Rev. Rul. 68-13. Although there appears to be no direct authority, presumably, for tax purposes, the down payment also can be allocated to specific assets in the case of a deemed asset acquisition under Sec. 338.

Example: A sells assets to B in...