Sale of unrealized receivables not eligible for installment method.

Position::2013 Tax Court memorandum decision in Mingo v. Commissioner

The Tax Court held that the taxpayers could not report the portion of a sale of a partnership interest that was attributable to unrealized receivables using the installment method.


Lori Mingo joined Pricewaterhouse-Coopers LLP (PwC) sometime before tax year 2002. Mingo was a partner in PwC's management consulting and technology services business (consulting business) until tax year 2002, when PwC sold its consulting business to IBM.

As an initial step in the transaction, PwCC LP (PwCC), a partnership, was formed in April or May 2002. As part of the transaction, PwC transferred its consulting business to PwCC. Among the assets PwC transferred to PwCC were its consulting business's uncollected accounts receivable for services it had previously rendered (unrealized receivables). PwC then transferred to each of the 417 consulting partners an interest in PwCC and cash in exchange for the partner's interest in PwC. Mingo received a partnership interest in PwCC and cash from PwC in exchange for her partnership interest in PwC.

On Oct. 31, 2002, PwCC was sold to IBM. The value of Mingo's partnership interest in PwCC as of Oct. 1, 2002, was $832,090, of which $126,240 was attributable to her interest in partnership unrealized receivables. Mingo received a convertible promissory note (note) for $832,090 in exchange for her interest in PwCC. The $126,240 attributable to her interest in partnership unrealized receivables was included in that face value.

On their joint federal income tax return and on an attached Form 6252, Installment Sale Income, Mingo and her husband reported the sale of her interest in PwCC as an installment sale. They listed the selling price, gross profit, and contract price as $832,090. The Mingos did not recognize any income relating to the note other than interest income on their 2002 federal income tax return.

The Mingos did not convert any portion of the note during tax years 2002, 2003, 2004, 2005, and 2006 and did not report any income other than interest income from the note for any of those years. During 2007, the Mingos converted the entirety of the note in a series of transactions. On Feb. 26, 2007, the Mingos converted a portion of the note into shares of IBM stock worth $929,765. On Oct. 1, 2007, they converted the remainder of the note into shares of IBM stock worth $283,494.

In connection with the conversion of the note, the Mingos reported on their Schedule D, Capital Gains and Losses, for 2007 the full...

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