Congress reinstates installment method for accrual-basis taxpayers.

• Author: Sair, Edward A.

On Dec. 28, 2000, President Clinton signed legislation that retroactively reinstates the installment method for certain accrual-basis taxpayers. The Installment Tax Correction Act of 2000 (2000 Act) repeals provisions in the Ticket to Work and Work Incentives Improvement Act of 1999 (1999 Act).

The 1999 Act

The 1999 Act repealed the installment method for most accrual-basis taxpayers by adding Sec. 453(a)(2), which stated "[t]he installment method shall not apply to income from an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 law did not change prior law on the availability of the installment method for dispositions of farm property, timeshares or residential lots. The repeal of the installment method was effective for sales or other dispositions occurring on or after Dec. 17, 1999 (the date of enactment).

The 1999 Act did not change the availability of the installment method for cash-basis taxpayers. Accordingly, it remained available to a cash-basis individual selling stock of a closely held corporation, regardless of whether the corporation was a cash- or accrual-method taxpayer. However, if a purchaser wished to make a Sec. 338(h)(10) election to recharacterize a sale of stock by a cash-basis taxpayer into a sale of assets by an accrual-basis corporation, the installment method was not available.

The 1999 Act also provided that the right to satisfy a loan with an installment obligation was to be treated as a pledge of the installment obligation, effective for dispositions occurring after Dec. 16, 1999. As a result, gain from the installment sale would be accelerated to the same extent that it would have been recognized had the installment obligation been pledged to secure the loan.

The 2000 Act

The 2000 Act reversed the 1999 Act, in part, by stating:

In general, subsection (a) of section 536 of the Ticket to Work and Work Incentives Improvement Act of 1999 (relating to modification of installment method and repeal of installment...