The term "contingent payment sale" does not include transactions with respect to which the installment obligation represents, under applicable principles of tax law, a retained interest in the property which is the subject of the transaction, an interest in a joint venture or a partnership, an equity interest in a corporation or similar transactions, regardless of the existence of a stated maximum selling price or a fixed payment term. See paragraph (c)(8) of this section, describing the extent to which the regulations under section 385 apply to the determination of whether an installment obligation represents an equity interest in a corporation.
This paragraph prescribes the rules to be applied in allocating the taxpayer's basis (including selling expenses except for selling expenses of dealers in real estate) to payments received and to be received in a contingent payment sale. The rules are designed appropriately to distinguish contingent payment sales for which a maximum selling price is determinable, sales for which a maximum selling price is not determinable but the time over which payments will be received is determinable, and sales for which neither a maximum selling price nor a definite payment term is determinable. In addition, rules are prescribed under which, in appropriate circumstances, the taxpayer will be permitted to recover basis under an income forecast computation.
"Any payment made more than one year after the (July 1, 1981) date of sale shall be composed of an interest element and a principal element, the interest element being computed on the principal element at an interest rate of 9% per annum computed from the date of sale to the date of payment."
The results reached in example (2), with respect to the $3 million initial cash payment received by A in 1981 remain the same because, under the payment recharacterization formula, no amount received or assumed to be received prior to July 1, 1982 is treated as interest. The 1982 tax computation method described in example (2) is equally applicable to the $6 million payment received in 1982. However, the adjusted gross profit ratio determined in this example (4) will differ from the ratio determined in example (2). The difference is attributable to the difference between a 9% stated interest rate calculation (in this example (4)) and the compound rate of unstated interest required under section 483 and used in calculating the results in example (2).
Total selling price | $24,000,000 |
Interest component of the $17,600,000 payment which C must assume will be made April 1, 1983 | -2,396,416 |
Adjusted selling price to be used when reporting the 1981 payment | 21,603,584 |
Total selling price | $24,000,000 |
Interest component of the $1,500,000 payment made April 1, 1983 | -204,240 |
Interest component of the $16,100,000 payment which C must assume will be made April 1, 1984 | -4,085,858 |
Payment made in 1981 | -5,000,000 |
Adjusted selling price for calculations for reporting the 1982 payment | 14,709,902 |
Year | Payment | Basis recovered | Gain attributable to the sale |
1 | $1,300,000 | $1,000,000 | $300,000 |
2 | 1,500,000 | 1,000,000 | 500,000 |
3 | 1,400,000 | 1,000,000 | 400,000 |
4 | 1,800,000 | 1,000,000 | 800,000 |
5 | 2,100,000 | 1,000,000 | 1,100,000 |
Year | Payment | Basis recovered | Gain attributable to the sale |
1 | $900,000 | $900,000 | |
2 | 1,500,000 | 1,100,000 | $400,000 |
3 | 1,400,000 | 1,000,000 | 400,000 |
4 | 1,800,000 | 1,000,000 | 800,000 |
5 | 2,100,000 | 1,000,000 | 1,100,000 |
Example. A sells Blackacre to B for 4 million Swiss francs payable 1 million in year 2 and 3 million in year 3, together with adequate stated interest. A's basis (including selling expenses) in Blackacre is $100,000. Twenty five thousand dollars of A's basis (1/4 of total basis) is allocable to the year 2 payment of 1 million Swiss francs and $75,000 of A's basis is allocable to the year 3 payment of 3 million Swiss francs.
Year | Percentage | Basis |
1 | 50.00 | $50,000 |
2 | 12.50 | 12,500 |
3 | 25.00 | 25,000 |
4 | 8.33 | 8,333 |
5 | 4.17 | 4,167 |
Payments are received and A reports the sale under the installment method as follows:
Year | Payment received | Basis recovered | Gain on sale |
1 | $600,000 | $50,000 | $550,000 |
2 | 150,000 | 12,500 | 137,500 |
3 | 300,000 | 25,000 | 275,000 |
4 | 100,000 | 8,333 | 91,667 |
5 | 50,000 | 4,167 | 45,833 |
The facts are the same as in example (1), except that in year 2 A receives no payment. In year 3 A receives a payment of $300,000 and reasonably estimates that in subsequent years he will receive total additional payments of only $100,000. In year 2 A will be allowed no loss. At the beginning of year 3 A's unrecovered basis is $50,000. In year 3 A must recompute the applicable basis recovery fraction based upon facts known and forecast as at the end of year 3: year 3 payment of $300,000 divided by estimated current and future payments of $400,000, equaling 75%. Thus, in year 3 A recovers $37,500 (75% of $50,000) of A's previously unrecovered basis.
The request for a ruling shall be made in accordance with all applicable procedural rules set forth in the Statement of Procedural Rules ( 26 CFR part 601 ) and any applicable revenue procedures relating to submission of ruling requests. The request shall be submitted to the Commissioner of Internal Revenue, Attention: Assistant Commissioner (Technical), Washington, DC 20224. The taxpayer must file a request for a ruling prior to the due date for the return including extensions. In demonstrating that application of the normal basis recovery rule would substantially and inappropriately defer recovery of the taxpayer's basis, the taxpayer in appropriate circumstances may rely upon contemporaneous or immediate past relevant sales, profit, or other factual data that are subject to verification. The taxpayer ordinarily is not permitted to rely upon projections of future productivity, receipts, profits, or the like. However, in special circumstances a reasonable projection may be acceptable if the projection is based upon a specific event that already has occurred (e.g., corporate stock has been sold for future payments contingent on profits and an inadequately insured major plant facility of the corporation has been destroyed).
shall be treated as a payment in the year received, not as an installment obligation payable in future years. For purposes of this paragraph, an obligation is to be considered in registered form if it is registered as to principal, interest, or both and if its transfer must be effected by the surrender of the old instrument and either the reissuance by the corporation of the old instrument to the new holder or the issuance by the corporation of a new instrument to the new holder.
26 C.F.R. §15a.453-1