Couple may revoke mistaken election out of installment method

Plain-English summary

A married couple sold an asset for 30 percent cash and a promissory note payable over 12 years. Their accountant miscalculated the first year's taxable income and reported the entire gain immediately, which elected out of the installment method. The couple did not know about or participate in that choice and promptly sought relief after the accountant discovered the mistake. The IRS found that the request arose from the accountant's oversight rather than hindsight or tax avoidance. It granted 75 days to revoke the election by filing amended returns using the installment method.

Ruling snapshot

• Question: Could the taxpayers revoke their election out of installment-sale reporting?
• Outcome: Approved, with 75 days to file amended returns
• Key authorities: IRC § 453; Temp. Treas. Reg. § 15A.453-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201503005 Third Party Communication: None
Release Date: 1/16/2015 Date of Communication: Not Applicable
Index Number: 453.00-00, 453.08-00
Person To Contact:
------------------------------------------ -------------------------, ID No. -----------------
------------------------- -----------------------------------------------------
---------------------------- Telephone Number:
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Refer Reply To:
CC:ITA:B05
PLR-118950-14
Date:
October 01, 2014

LEGEND

Taxpayers = --------------------------------------------
----------------------------------------------
Year 1 = -------
Year 2 = -------
Asset = ---------------------------------------------------------------------------------

Dear ------------------------------------------:

This letter responds to your request for a private letter ruling requesting consent to
revoke an election out of the installment method, pursuant to § 453(d)(3) of the Internal
Revenue Code and § 15A.453-1(d)(4) of the Temporary Income Tax Regulations,
associated with Taxpayer husband’s sale of Asset.

FACTS

Taxpayers are husband and wife, and use the calendar year and the cash method of
accounting. Taxpayer husband owned Asset but sold Asset in Year 1. In return for his
sale of Asset, Taxpayer husband received a cash payment of thirty percent of the
selling price, along with a promissory note for the remaining seventy percent of the
selling price to be paid to Taxpayer husband over twelve years.

In Year 2, Taxpayers’ accountant completed Taxpayers’ Year 1 federal return. The
accountant, however, erroneously computed Taxpayers’ taxable income for Year 1.
Based on this faulty computation, Taxpayers’ accountant erroneously concluded that
PLR-118950-14 2

use of the installment method under § 453 would not be beneficial to Taxpayers.
Accordingly, on Taxpayers’ Year 1 federal return, they reported all the gain from the
sale of Asset in Year 1, effectively electing out of the installment method under § 453.

Taxpayers’ accountant provided an affidavit indicating that the accountant’s erroneous
computation and subsequent decision to not elect the installment method under § 453
was made solely by the accountant, and that Taxpayers were unaware that the return
for Year 1 elected out of the installment method. Taxpayers also provided affidavits
indicating that they did not plan or participate in the decision to elect out of the
installment method under § 453, and that their accountant’s action was the sole reason
the installment method was not used.

Subsequently, Taxpayers’ accountant realized his mistake when preparing Taxpayers’
Year 2 federal return. Taxpayers and their accountant immediately took action to
request consent from the Internal Revenue Service to revoke their election not to use
the installment method.

LAW AND ANALYSIS

Section 453(a) provides that, generally, a taxpayer shall report income from an
installment sale under the installment method. Section 453(b) defines an installment
sale as a disposition of property for which at least one payment is to be received after
the close of the taxable year of the disposition.

Section 15A.453-1(b)(3)(i) defines “payment” to include amounts actually or
constructively received in the taxable year under an installment obligation.

Section 453(d)(1) and section 15A.453-1(d)(1) provide that a taxpayer may elect out of
the installment method in the manner prescribed by the regulations. Section 15A.453-
1(d)(3) provides that a taxpayer who reports an amount realized equal to the selling
price including the full face amount of an installment obligation on a timely filed tax
return for the taxable year in which the installment sale occurs is considered to have
elected out of the installment method.

Except as otherwise provided in the regulations, section 453(d)(2) requires a taxpayer
who desires to elect out of the installment method to do so on or before the due date
(including extensions) of the taxpayer's federal income tax return for the taxable year of
the sale. Section 15A.453-1(d)(4) provides that an election under section 453(d)(1) is
generally irrevocable. An election may be revoked only with the consent of the Internal
Revenue Service. Section 15A.453-1(d)(4) provides that revocation of an election out of
the installment method is retroactive and will not be permitted when one of its purposes
is the avoidance of federal income taxes.
PLR-118950-14 3

In the instant case, Taxpayers’ accountant erroneous computation when preparing
Taxpayers’ Year 1 federal return lead the accountant to elect out of the installment
method under § 453. Taxpayers were not aware of the accountant’s action. When the
accountant realized his erroneous computation, he and Taxpayers filed a request for
consent to revoke the election out of the installment method. The information submitted
indicates that Taxpayers’ desire to revoke the election is due to the accountant’s
oversight rather than hindsight by Taxpayers or a purpose of avoiding federal income
taxes.

CONCLUSION

Based on careful consideration of all of the information submitted and the
representations made, Taxpayers are granted permission to revoke the election out of
the installment method for the Year 1 sale of Asset. Permission is granted for the
period that ends 75 days after the date of this letter. In order to revoke their election out
of the installment method, Taxpayers must file an amended federal income tax return
for Year 1 and any other previously filed returns on which a portion of the gain from the
sale is reportable under the installment method. A copy of this letter ruling must be
attached to each of the amended returns.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter, including the computation of gain to be reported under the installment
method.

This ruling is directed only to Taxpayers requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
PLR-118950-14 4

The rulings contained in this letter are based upon information and representations
submitted by Taxpayers and their accountant and accompanied by a penalty of perjury
statement executed by appropriate parties. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

                                  Sincerely,



                                  Seoyeon Sharon Park
                                  Assistant to the Branch Chief, Branch 5
                                  (Income Tax & Accounting)