Category: Sales & Exchanges; Accounting Periods
& Methods
Subject: Installment Sales
Title: Installment Sale Reporting
IRC Sections: 453
Filename: 1254.html
Date Produced: 07/95 Copyright 1998, The Tax Resource Group. All rights reserved. Telephone
800-578-3498. Internet: www.taxresourcegroup.com Facts
Taxpayer (TP), an S corporation, sold its assets and took back an installment
note. TP did not receive any cash in the year of sale. Some of the assets
sold are subject to depreciation recapture. As part of the sale, the purchaser
assumed a loan and some accounts payable. Issue 1:
Is it necessary to report the recapture income in the year of sale even
though there was no cash received? Answer 1:
Recapture income (assuming there is income) must be recognized in the year
of sale irrespective of whether cash is received. Section 453(i)(A) provides
the recapture income must be reported in the year of sale. Section 453(i)(B)
provides that installment reporting applies only to gain not subject to
recapture. Caveat: If this is a basket sale of assets, is it clear that sufficient
purchase price has been (or must be) allocated to the recapture-type assets
such that gain is really produced with respect to these assets? It is frequently
the case that recapture assets consist of equipment, and the actual value
of that equipment is similar to its depreciated value. If that is the case,
astute allocation of the purchase price can reduce or eliminate the recapture
problem. Clearly the value of the equipment is a question of fact and the
taxpayer has the burden of proving the position taken. Also, if the value
of the equipment has already been fixed in the purchase contract, the taxpayer
is obligated to follow the contractual allocation. Issue 2:
Does the assumption of the loan and accounts payable constitute a payment
in the year of sale? Answer 2:
Provided the debts assumed constitute qualified indebtedness and do not
in the aggregate exceed the basis of the property sold, the assumption is
not a payment in the year of sale. Discussion: Issue 2
In general, seller debts assumed by the purchaser do not constitute payments
in the year of sale. The contract price is simply reduced by the amount
of debt assumed. -The aggregate amount of debt assumed cannot exceed the basis of the
assets sold. Any debt in excess of basis is treated as a payment in the
year of sale. Temp. Reg. Section 15A.453-1(b)(iii). -The debt must be qualified indebtedness. Qualified indebtedness is
debt secured by the property such as a mortgage or lien for taxes. Qualified
indebtedness also includes debts not secured by the property if such debts
were incurred with respect to the acquisition of the property (by the seller)
or the holding or operation of the property in the normal course of business
or investment. Temp. Reg. Section 15A.453-1(b)(iv). -The debt must not have been incurred in anticipation of the transaction.
Temp. Reg. Section 15A.453-1(b)(iv). -The debt must not have been incurred in connection with the disposition
of the property, for example legal fees in connection with the sale. Temp.
Reg. Section 15A.453-1(b)(iv).
Collateral Issue
You mentioned that the taxpayer is an S corporation which sold its assets
(I assume all its assets). I assume that you are aware of the special rule
which allows an S corporation to liquidate pursuant to a plan carried out
over no more than 12 months with the result that the S corporation does
not recognize gain on distribution of the installment obligation. This special
rule does not apply with respect to the S corporation built in gains tax.
See Section 453B(h). | 
