Congress repeals installment reporting for accrual taxpayers.

• Author: Abrams, Howard E.

Without remorse or repentance, Congress repealed installment-sale reporting for accrual taxpayers. Sweeping aside 70 years of history, the President signed into law the Ticket to Work and Work Incentive Improvement Act (HR 1180). Now, almost all C corporations (and many other taxpayers) must include in current income all gain realized (and to be realized) from the disposition of property, even though some or all of the sales proceeds will be received in a future tax year. This repeal is effective for sales and other dispositions entered into after Dec. 16, 1999.

Under the new law, accrual-method taxpayers who sell property for an installment obligation must treat as part of the amount realized the gross value of all payments to be received on the obligation (excluding stated and unstated interest, as well as original issue discount) (Regs. Sec. 15a.453-1(d)(2)(ii)). If the installment obligation includes a contingent payment, the fair market value (FMV) of the contingent payment must also be treated as part of the amount realized. Restrictions on transferability are ignored in computing the FMV of the contingent payment (Regs. Sec. 15a.453-1(d)(2)(iii)).

For large corporations, this change in the law is unlikely to work a substantial hardship. To be sure, most C corporations must report their income on the accrual method (Sec. 448(a)(1)). But even with installment reporting available, taxpayers have had to pay an interest charge on installment tax deferral if the taxpayer's total installment obligations exceed $5 million (Sec. 453A). For small businesses that survive on their cashflow, though, repeal of installment reporting may present an impassable hurdle.

Consider a group of individuals who together own all the stock of a successful S corporation, and assume the corporation is an accrual-method taxpayer. If the shareholders wish to dispose of some corporate assets in exchange for an installment note, an asset sale by the corporation will preclude installment reporting. As a result, a sale of appreciated assets will force the shareholders to report the entire gain realized on the transaction, even though neither they nor their corporation currently have the cash with which to pay the resulting tax liability.

If the shareholders intend to sell the entire business venture, an alternative is for them to sell their shares, a route that will permit installment reporting, because the sellers now would be the cash-method individuals rather than...