CCA 201203017: Advice favors installment-method basis calculation

Plain-English summary

Chief Counsel advice addressed how to calculate gain attributable to an installment sale. The advice recommends using the installment method under IRC section 453(c), including the gross profits ratio under Treas. Reg. § 15A.453-1, and incorporating the taxpayer’s adjusted basis under section 1011. It says section 453B, which concerns disposition of an installment note, may be included as an analogy but is less direct for the issue presented.

Ruling snapshot

• Question: Which provisions should govern gain recognition attributable to an installment sale?
• Outcome: Advice
• Key authorities: IRC §§ 453(c), 453B, and 1011; Treas. Reg. § 15A.453-1

Full text (IRS public release)

ID: CCA-110211-11 Number: 201203017
Release Date: 1/20/2012
Office: ----------------------------
UILC: 453.16-00

From: -----------------
Sent: Wednesday, November 02, 2011 3:20:12 PM
To: ------------------------
Cc: ---------------------------
Subject: Basis in installment sale contract / ----------------------

To summarize our phone conversations yesterday, Tuesday, November 1, 2011, the National Office is suggesting that a more direct approach in this case may be to follow section 453(c) and the underlying regulations and examples. Section 453(c) defines the term “installment method” and provides that income recognition is based on a proportion of the payments received which the gross profit bears to the contract price. Section 453(c) is the statutory authority for the “gross profits ratio” that is defined under section 15A.453-1(b)(2)(i). Section 15A.453-1(b)(2)(v) defines “gross profit” as the selling price less the adjusted basis as defined in section 1011. See Example (1) in section 15A.453- 1(b)(5). The gross profit ratio incorporates the taxpayer’s adjusted basis in the installment note for purposes of gain recognition attributable to the sale. This code section and underlying regulation must be used by the taxpayer in our case to determine gain attributable to the sale.

Although we have no objection to including the analogy under section 453B, which deals with the disposition of the installment note, we think that section 453(c) and the underlying regulations and examples offer a more direct approach.

Thanks,
-----------------