S corporation may revoke its election out of installment reporting

Plain-English summary

An S corporation sold most of one operating division for an initial payment plus monthly installments beginning two years later. Its preparer reported the full gain on the sale-year return, which constituted an election out of the installment method, without explaining that treatment to the corporation. The IRS found that all years in which payments were received remained open and that the request was not made to avoid federal income tax. It therefore allowed the corporation to revoke the election under section 453 and the temporary regulations. The corporation must amend the sale-year return and the later return for the year installments began, and attach the ruling to each amended return.

Ruling snapshot

• Question: May the S corporation revoke its election out of the installment method after its preparer reported the full selling price in the year of sale?
• Outcome: approved, with amended returns required for the sale year and the later payment year
• Key authorities: IRC § 453(a), (b), and (d); Temp. Treas. Reg. § 15a.453-1(d)(3) and (4)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202020017 Third Party Communication: None
Release Date: 5/15/2020 Date of Communication: Not Applicable
Index Number: 453.06-06
Person To Contact:
---------------------------------- ----------------------, ID No. ------------
----------------------- Telephone Number:
------------------------ --------------------
------------------------------------------ Refer Reply To:
CC:ITA:B05
PLR-125242-19
Date: February 6, 2020

LEGEND

Taxpayer = ----------------------------------
-----------------------

S1 = --------------------

S2 = ------------------

P1 = ------------------

Year 1 = -------

Year 2 = -------

Year 3 = -------

Year 4 = -------

Date 1 = ------------------

Date 2 = -------------

Date 3 = -------------------

$X = -------------

$Y = -------------
PLR-125242-19 2

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

This is in reply to the letter submitted by your authorized representative requesting a
ruling on your behalf under § 453(d)(3) of the Internal Revenue Code and § 15a,453-
1(d)(4) of the Temporary Income Tax Regulations to revoke an election out of the
installment method.

FACTS

Taxpayer, an S corporation owned by S1 and S2, provides --------------------------------------
services to residential and commercial customers. Taxpayer also leases residential
property.

On Date 1, Year 1 Taxpayer sold a majority of its operating assets that were used in the
-------------------------------------------- services division for $X. Under the agreement of sale
the purchaser was obligated to pay a stipulated sum at settlement and the remainder of
the purchase price, $Y, is payable in monthly installments beginning two years after the
date of sale, amortized over ten years and subject to 6% per annum. The purchaser
was not related to Taxpayer.

Taxpayer filed a return for Year 1 on or about Date 2, Year 2 and reported the full
amount of gain in connection with the sale of the operating assets. The letter sent on
your behalf also states “The taxpayer did not realize that the entire sale was reported as
a lump sum sale on the tax return filed and prepared by a preparer. The preparer did
not explain the tax treatment of the sale to the taxpayer. The taxpayer filed the return
timely and paid all the tax due with the return.” The Taxpayer’s request to revoke the
election out of the installment method was received by this office on Date 3, Year 4.

P1, the preparer, furnished an affidavit indicating that when the original Year 1 return
was prepared, consideration of the installment method was inadvertently overlooked.
S1, a shareholder and President of Taxpayer, also provided an affidavit stating that
when the Taxpayer’s return was filed he did not understand the tax law, including
availability of the installment sale method for reporting gain associated with sales
proceeds that will be received over several years. S1’s affidavit further indicates that he
retained a different return preparer to review the original return and that the lapse of
time between the filing of the original return for Year 1 and submission of this ruling
request is attributable to a “busy filing season” and the time necessary for the new
preparer to complete the letter ruling request and submit it with the user fee.

LAW AND ANALYSIS

Section 453(a) provides, generally, that a taxpayer shall report income from an
installment sale under the installment method. An installment sale “. . . means a
disposition of property where at least 1 payment is to be received after the close of the
taxable year in which the disposition occurs.” I.R.C. § 453(b)(1).
PLR-125242-19 3

Section 453(d)(1) provides, however, that the installment sale method will not apply to a
disposition of property if the taxpayer elects not to 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 respecting 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. 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 return for the taxable year in which the sale
occurred is considered to have elected out of the installment method. Temp. Treas.
Reg. § 15a.453-1(d)(3).

An election not to report under the installment method is generally irrevocable, except
that such election may be revoked with the consent of the Internal Revenue Service
(IRS). Temp. Treas. Reg. § 15a.453-1(d)(4). A revocation of an election out of the
installment method will not be permitted if a purpose is the avoidance of federal income
tax, or when the taxable year when a payment was received is closed. Id.

In this case the preparer of the Taxpayer’s Year 1 return did not explain to Taxpayer the
tax treatment of the sale of the operating assets and that the Code allows for the
payment of federal income tax on the transaction over time using the installment
method. The Taxpayer did not realize that the Year 1 return reported the “. . . entire
sale as a lump sum sale . . .” Taxpayer’s representative filed a request for the IRS’s
consent to revoke the election out of the installment method. All taxable years in which
payments were received are open and the request to revoke the election does not have
a purpose of avoiding federal income tax.

CONCLUSION

Based on the information submitted and representations made, Taxpayer is granted
permission to revoke the election out of the installment method for Year 1. Taxpayer
must file an amended federal income tax return for Year 1 to report the gain except for
the portion of the purchase price payable in monthly installments beginning two years
after Date 1, Year 1. Taxpayer must also file an amended tax return for Year 3 and
include the portion of the gain attributable to the monthly installments received in such
year. A copy of this letter ruling must be attached to any amended return.

CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
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.
Likewise, no opinion is expressed or implied concerning the tax consequences of any
aspect of either shareholder’s return for any year.
PLR-125242-19 4

This ruling is directed only to Taxpayer, who requested it. Section 6110(k)(3) of the
Code 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.

The ruling contained in this letter is based upon information and representations
submitted by Taxpayer’s representative, S1, P1 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 a ruling, it is subject to
verification on examination.

                                   Sincerely,




                                   William A. Jackson
                                   Branch Chief, Branch 5
                                   (Income Tax & Accounting)

cc: ----------------------