Reporting errors did not elect an asset sale out of the installment method

Plain-English summary

An S corporation sold all its assets for a closing payment and 12 later quarterly installments, but the buyer defaulted after closing. The corporation's return preparer did not correctly report the installment sale and included neither the full selling price nor the full face amount of the installment obligation. The owner and preparer said they never intended to elect out of installment reporting, and the owner's return disclosed the errors and used the installment method. The IRS ruled that the corporation had not elected out because its return did not report the full amount realized in the manner required for such an election. The corporation and possibly its owner had to file any affected amended returns within 75 days, while the IRS left open whether the sale and any particular gain actually qualified for installment treatment.

Ruling snapshot

• Question: Did the corporation's incorrect sale reporting constitute an election out of the section 453 installment method?
• Outcome: approved, no election out occurred, subject to filing any required amended returns within 75 days
• Key authorities: IRC § 453(a), (b), (c), and (d); Temp. Treas. Reg. § 15a.453-1(d)(3)

Full text (IRS public release)

Internal Revenue Service                            Department of the Treasury
                                                    Washington, DC 20224

Number: 201943004                                   Third Party Communication: None
Release Date: 10/25/2019                            Date of Communication: Not Applicable
Index Number: 453.00-00, 453.08-00
                                                    Person To Contact:
---------------------------.                        --------------------, ID No. ------------------
------------------------------------                Telephone Number:
--------------------------                          ----------------------
-------------------------------                     Refer Reply To:
                                                    CC:ITA:B04
                                                    PLR-101724-19
                                                    Date:
                                                    July 31, 2019


LEGEND

Taxpayer                               =   -----------------------------------------------------
Individual                             =   ------------------------------------------------
Purchaser                              =   -------------------------
Date 1                                 =   -----------------
Date 2                                 =   ---------------------
Date 3                                 =   -----------------------
Date 4                                 =   ----------------------------
Year 1                                 =   -------
Year 4                                 =   -------
$u                                     =   -------------------
$v                                     =   --------------
$w                                     =   ------------
$x                                     =   --------------
Certified Public Accountant            =   ---------------------------
Accounting Firm                        =   ----------------------
Return Preparer                        =   ------------------------------
Representative                         =   ------------------------------


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

This is in reply to a letter dated January 28, 2019, submitted by your authorized
representative requesting a ruling on Taxpayer’s behalf under § 453 of the Internal
Revenue Code that it did not elect out of the installment method pursuant to § 15a.453-
1(d)(3) of the Temporary Income Tax Regulations.

FACTS

Taxpayer is an S corporation, wholly owned by Individual, that uses an accrual method
of accounting and whose taxable year is a calendar year. On Date 1, Taxpayer entered
PLR-101724-19                                2

into an Asset Purchase Agreement (Agreement) to sell all of its assets to Purchaser, an
unrelated third party. The selling price for the assets was $u payable to Taxpayer as
follows: $v due at closing and the balance in 12 equal quarterly payments of $w
commencing on Date 2 in Year 1 and concluding in Year 4. Taxpayer received the sum
of $v at closing. However, the Purchaser defaulted on the Agreement and has not
made any of the quarterly payments to date. On Date 3, Taxpayer and Individual
commenced a legal action against Purchaser for the unpaid amounts. As of the date of
this letter, this legal action is still pending.

Taxpayer engaged Certified Public Accountant, who retained Return Preparer to
prepare Form 1120S for the tax year prior to the year of sale. Certified Public
Accountant died prior to filing Taxpayer’s final return Form 1120S for Year 1, the year of
sale. Taxpayer retained Return Preparer to prepare its final return Form 1120S for Year
1, which was filed on Date 4. When it came time to prepare Individual’s Year 1 Form
1040, Return Preparer could not be located and Individual retained Accounting Firm to
prepare the return.

Accounting Firm noticed that there were errors on Taxpayer’s final return Form 1120S
for Year 1 and on the related Form K-1. Taxpayer’s Form 1120S did not properly report
the installment sale on Form 6252, however, Return Preparer did not report the full
amount realized of $u, nor the full face amount of the installment obligation, reporting
only $x on the tax return for Year 1. Additionally, there were posting errors incidental to
the reporting of the installment sale.

Taxpayer and Individual are concerned that the errors on the Form 1120S could be
misconstrued as an election out of the installment method. On Form 1040 for Year 1,
Individual attached Form 8275 Disclosure Statement informing the Internal Revenue
Service of the reporting and computational errors on Form 1120S and Individual’s use
of the installment method on Form 1040.

Individual represents that she intended to report the gain realized from the sale using
the installment method under § 453. Return Preparer has represented that there was
no intention to elect out of the installment method under § 453 and that he was under
the impression that he reported only the proceeds received in Year 1 on the Form
1120S. Shortly after Individual was informed of the reporting errors, Individual hired
Representative to submit this request that Taxpayer had not elected out of the
installment method for its sale in Year 1.

LAW AND ANALYSIS

Section 453(a) of the Code provides that a taxpayer shall report income from an
installment sale under the installment method. Section 453(b)(1) 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.
PLR-101724-19                                   3


Section 453(c) provides that, for the purposes of § 453, the term “installment method”
means a method under which the income recognized for any taxable year from a
disposition is that proportion of the payments received in that year which the gross profit
(realized or to be realized when payment is completed) bears to the total contract price.

Section 453(d)(1) provides, however, that the installment method will not apply to a
disposition if the taxpayer elects to not have the installment method apply to such
disposition. Under § 453(d)(2), except as otherwise provided by regulations, an election
out of the installment method with respect to a disposition may be made only on or
before the due date prescribed by law (including extensions) for filing the taxpayer's
return of tax for the taxable year in which the disposition occurs.

Section 15a.453-1(d)(3)(i) of the regulations provides that an election out of the
installment method must be made in the manner prescribed by the appropriate forms for
the taxpayer's return for the taxable year of the sale. A taxpayer who reports an amount
realized equal to the selling price including the full face amount of any installment
obligation on the tax return filed for the taxable year in which an installment sale occurs
will be considered to have made an effective election out of the installment method of
accounting.

In this case, Individual and Return Preparer represent that they did not intend to elect
out of the installment method, and Taxpayer did not report an amount realized equal to
the selling price including the full face amount of the installment obligation on the tax
return filed for Year 1. Soon after Individual was informed of Return Preparer’s error,
Individual submitted this request for a ruling that Taxpayer did not elect out of the
installment method. In addition, as of the date of this letter, the periods of limitation
applicable to Taxpayer's and Individual’s Year 1 returns has not closed.

CONCLUSION

Based on the information submitted and the representations made, Taxpayer did not
elect out of the installment method with respect to its sale of assets in Year 1.

Accordingly, based on the information submitted and the representations made,
Taxpayer and possibly Individual must file amended Federal income tax returns for Year
1 to properly report the gain from the installment method.

If the ruling granted in this letter would have any effect on any amounts reported on
Taxpayer's previously filed Federal income tax return or Individual’s previously filed
Federal income tax return, Taxpayer and Individual must file amended returns for such
years to reflect the effect of this ruling within 75 days after the date of this letter. If any
amended returns are required, a copy of this letter ruling must be attached to each of
the amended returns.
PLR-101724-19                                  4


CAVEATS

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 allocation of the selling price among the assets sold and the
computation of gain to be reported under the installment method. Thus, we do not
express any opinions except that Taxpayer has not elected out of the installment
method for Year 1. We further express no opinion regarding whether and to what extent
the gain resulting from the sale is eligible for the installment method under § 453.
We do not express any opinion on the amount of gain reportable under § 453.

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

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. 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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to Representative.

                                       Sincerely,



                                       Angella L. Warren
                                       Branch Chief, Branch 4
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)



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