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Business Tax

Error in Return did not Constitute Election out of Installment Method

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

In a Private Letter Ruling, IRS determined that errors in an S corporation’s return did not constitute an election by the taxpayer not to use the installment method.

Background

Unless he elects otherwise, a taxpayer must report income from an installment sale under the installment method. (Code Sec. 453(a)) An installment sale is a disposition of property for which at least one payment is to be received after the close of the tax year of the disposition. (Code Sec. 453(b)(1)) The “installment method” is a method under which income that is recognized for a tax year from a disposition is the proportion of the payments received in that year which the gross profit bears to the total contract price. (Code Sec. 453(c)) The installment method will not apply if the taxpayer elects to not have that method apply to the disposition. (Code Sec. 453(d)(1)) An election out of the installment method can be made only on or before the due date for filing the taxpayer’s return for the tax year in which the disposition occurs. (Code Sec. 453(d)(2)) If the taxpayer reports on its return an amount realized that equals the selling price, including the full face amount of any installment obligation, that taxpayer will be considered to have elected out of the installment method. (Reg. §15a.453-1(d)(3)(i))

Facts

The taxpayer, an S corporation using the accrual method of accounting, entered into an agreement to sell all of its assets to an unrelated party. The sale price was to be paid to the taxpayer in the form of a down payment in the tax year at issue and 12 quarterly payments paid over four years. The taxpayer received the downpayment, but none of the quarterly payments. The taxpayer’s Form 1120S for the tax year, prepared by a return preparer retained by the taxpayer, contained errors. That is, the Form 1120S did not properly report the installment sale, nor did it report the full amount realized by the taxpayer in the tax year. Both the taxpayer’s individual owner and the return preparer represented that the owner did not intend to elect out of the installment method.

IRS determines no election out of installment method was made

IRS determined, based on the facts and representations made, that the taxpayer did not elect out of the installment method. The taxpayer was directed to file an amended return for the tax year properly reporting the gain from the installment method.

To continue your research on discussion of election out of installment method, see FTC 2d/FIN ¶G-6350; United States Tax Reporter Estate & Gift ¶4534.05.

 

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