The following article is adapted and reprinted from the M&A Tax Report, Vol. 8, No. 11, June 2000, Panel Publishers, New York, NY.
INSTALLMENT REPEAL GUIDANCE PROVIDED
by Robert W. Wood
We have previously covered the surprise year-end installment sale
repeal affecting primarily small deals. See Wood, "Small Deals Suffer Under
New Provisions," Vol. 8, No. 9, The M&A Tax Report (April 2000), p. 5.
Section 453(a)(2) of the Code, added by — and we love this name — The Ticket
to Work and Work Improvement Act of 1999, prohibits accrual-basis taxpayers
from using the installment method to report income from an installment
sale. Now, Notice 2000-26 address the application of this provision to
installment sales involving closely held S and C corporations, as well
as partnerships.
Q&A Format
Notice 2000-26 was released in Q&A format, and is roughly divided
into questions dealing with corporations, and those dealing with partnerships.
The corporate Q&As assume a cash basis shareholder and an accrual basis
corporation. They consider the shareholder's sale of stock in exchange
for cash and an installment obligation, or the corporation's sale of its
assets for cash and an installment note. Some of the issues addressed include:
the shareholder's ability to use the installment method for the stock
sale; the corporation's ability to use the installment method for the assets
sale; the effect of a Section 338 election on the shareholder's stock sale;
and the shareholder's continued use of installment reporting under Section
453(h) following the corporation's asset sale and liquidation. The partnership Q&As deal with a cash basis partner and an accrual
basis partnership. These Q&As consider:
the partner's ability to use the installment method following the sale
of a partnership interest; and the partnership's ability to use the installment method following the
sale of assets. Bad News
Lest there be any doubt about the overall impact of Notice 2000-26,
it hardly suggests that a fix is on the way. Indeed, consider this one
question:
Q: How does a taxpayer take into account an installment obligation
received in an installment sale transaction that is not eligible for the
installment method for any reason, including Section 453(a)(2)?
A: The taxpayer generally must recognize the entire amount of the
gain from the installment sale in the year of the sale. See Section 1001(c).
Section 1.1001-1(a) or Section 1.1001-1(g), whichever is applicable, will
determine the amount of gain that is realized by the taxpayer attributable
to an installment obligation issued in exchange for property when the income
from the exchange is not eligible to be reported on the installment method.
See also Sections 483 and 1271 through 1275, and the underlying regulations,
to determine if the installment obligation has either unstated interest
or original issue discount.
(Notice 2000-26, 2000-17 I.R.B. 1 (April 10, 2000), Q&A 10.) All of this suggests, as we've said before, that legislative attention
is needed.
Installment Repeal Guidance Provided, Vol. 8, No. 11, M&A
Tax Report (June 2000), p. 6