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 partnership Q&As deal with a cash basis partner and an accrual basis partnership. These Q&As consider:

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