For a multistate business reporting an asset-sale gain on the installment method, when did the sale enter the receipts factor and which year's apportionment factors applied to later gain?

Plain-English summary

California Legal Ruling 413 separated the timing of the business activity from the timing of installment gain recognition.

The sale was placed in the receipts factor for the year the asset was sold, regardless of when payments were received, subject to the regulation excluding certain asset-sale proceeds from that factor.

When gain or loss was recognized in later installment years, it was apportioned using the factors from the year of sale. FTB reasoned that those factors reflected the activities that created the income, while later-year factors could reflect unrelated business activity.

Year the sale entered the receipts factor

The ruling relied on the State Board of Equalization's completed-contract reasoning: an accounting method determines when profit is recognized, but it does not erase the receipts and expenses arising from business activity in the earlier year.

All activities producing the installment-sale gain occurred or concluded in the year of sale. The sale therefore belonged fully in that year's factor computation.

If the proceeds would have been excluded under former Regulation section 25137(c)(1)(A), electing installment reporting did not put them back into the receipts factor.

Factors used for later installment gain

Using factors from the years payments were received could apportion the gain according to activities having no connection with earning it.

The ruling treated that mismatch as distortion under section 25137 and used the year-of-sale factors for every later installment payment.

The ruling's example

X operated in States A, B, and C and sold a plant at the end of year 1 for a $500,000 gain. The plant-sale proceeds were excluded from the sales factor under the cited regulation. X elected to recognize the gain in equal $250,000 amounts in years 2 and 3.

After excluding the plant proceeds, year 1's factors were 11% for State A, 33% for State B, and 56% for State C.

Those same year-1 percentages were applied to each $250,000 installment reported in years 2 and 3:

• State A: $27,500
• State B: $82,500
• State C: $140,000

The actual sales mix in years 2 and 3 did not change the installment-gain allocation.

Dealer exception described by FTB

The ruling said a dealer that regularly made installment sales of tangible personal property could normally use the factors from the year gain was received.

FTB's reason was that an ordinary-course dealer's factors generally would not vary significantly from year to year, reducing the distortion concern that drove the main rule.

What this means for you

Multistate businesses selling major assets

Under the historical ruling, preserve the complete apportionment workpapers from the year of sale. Those factors could control gain recognized years later.

Business sellers using installment reporting

Deferring recognition did not shift the underlying sale activity into later years. The factor treatment and the income-recognition schedule were separate.

Accountants and tax professionals

Determine whether the sale proceeds enter the current factor at all, whether later-year factors would distort the source of the gain, and whether any dealer or current statutory rule changes the result.

Common questions

Q: Was the sale spread through the receipts factor as payments arrived?

A: No. The ruling placed the sale in the year-of-sale factor computation.

Q: Did installment reporting override the asset-sale exclusion?

A: No. Proceeds excluded by former Regulation 25137(c)(1)(A) remained excluded.

Q: Which factors applied to gain reported in years 2 and 3?

A: The year-1 factors, because year 1 contained the activities producing the gain.

Q: Why not use each payment year's factors?

A: FTB said that could apportion income using activities unrelated to earning the installment gain and therefore distort the result.

Q: Did the ruling recognize an exception for dealers?

A: Yes. An ordinary-course dealer in tangible personal property could normally use receipt-year factors when its factors did not vary significantly year to year.

Citations and references

• Cal. Rev. & Tax. Code § 25137
• Former 18 Cal. Code Regs. § 25137(c)(1)(A)
• Appeal of Donald M. Drake Company (Cal. St. Bd. of Equal., March 2, 1977)

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 413

Original ruling text

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Legal ruling 413

STATE OF CALIFORNIA
Franchise Tax Board - Legal Division

October 15, 1979

Allocation and Apportionment Treatment of Installment Sales

Facts

A taxpayer doing business in States A, B, and C sells a substantial portion of its business assets located in State B. An election is made to report the gain on the sale on the installment basis.

Questions

In what year is the sale included in the receipt's factor?

What year's factors are used to apportion the gain as it is reported?

Decisions

The sale should be included in the year of sale regardless of the date of receipt subject to Regulation § 25137(c) (1) (A).

The factors of the year of sale should be used in apportioning the gain or loss regardless of the installment sale election.

Discussion

Question 1

In the Appeal of Donald M. Drake Company, March 2, 1977, the State Board of Equalization stated:

"The general rule of the Uniform Act, is that a taxpayer’s apportionment factors for any income year will reflect the items of property, payroll, and sales which relate to its business activity in that particular year."

"A taxpayer’s use of completed-contract accounting does not require an exception to the general rule for determining its apportionment factors. Completed-contract accounting is no more than a device for determining in what year profit or loss will be recognized, and items of receipt and expense are generally not ignored in pre-completion years simply because the profit or loss they produce is deferred."

This reasoning applies with equal force to installment reporting. It is the taxpayer’s business activities within and without California, not the taxpayer’s accounting method, which should determine the taxpayer’s apportionment percentage for each income year. All the activities which give rise to the gain realized on the installment sale occur or are concluded in the year of sale. Therefore, the sale should be included in full in the year of the sale.

Proceeds from the sale of assets which would not otherwise be included in the receipts factor under Regulation § 25137(c) (1) (A) are not to be included even though installment reporting is elected.

Quesion 2

Income from installment sales is reported at least in substantial part in a year other than the year in which the sale took place. Apportionment of installment sale income on the basis of the factors in the year the income is reported or received would result in such income being apportioned by activities which had no connection with the earning of the income. The Board of Equalization held in Drake, supra, that the use of an apportionment factor which does not fully reflect the activities which give rise to the income was a distortion and that therefore a variance from the standard formula under § 25137 is authorized.

The Board of Equalization in Drake, supra, approved the use of a method which reflected all the activities which give rise to the income. Based upon the Board of Equalization's reasoning in Drake, supra, the gain or loss from an installment sale should be apportioned on the basis of the factors of the year of sale regardless of the year in which such gain or loss is actually reported.

A taxpayer which in the regular course of business makes installment sales as a dealer in tangible personal property may normally apportion the gain on the basis of the factors of the year the gain is received since its apportionment factors will not normally vary significantly on a year-to-year basis.

The application of this memorandum is illustrated by the following example:

X is doing business in States A, B, and C. During Year 1, X has sales of $2,000,000 (including $1,000,000 from the sale of a plant at year end excluded from the sales factor under Regulation § 25137(c)(1)(A)) in State A, $3,000,000 in State B, and $5,000,000 in State C. X realized a gain of $500,000 on the sale of the plant. X elects to report the $500,000 gain on the installment basis with equal payments received in Years 2 and 3. X has sales of $100,000 in State A; $4,900,000 in State B; and $5,000,000 in State C in Year 2; and sales of $200,000 in State A; $3,000,000 in State B; and $6,800,000 in State C in Year 3. Assume the property and payroll factors are equivalent to the sales factors for each year X would report income from the installment sale to States A, B, and C, in the following manner:

Year 1 -- Gain from Installment Sales 0

A

B

C

Sales Factor
1,000,000

3,000,000

5,000,000

9,000,000

9,000,000

9,000,000

Apportionment Factor
11

33

56

Installment Sale Gain
0

0

0

Year 2 -- Gain from Installment Sale $250,000

A

B

C

Sales Factor
100,000

4,900,000

5,000,000

10,000,000

10,000,000

10,000,000

Apportionment Factor
1%

49%

50%

Installment Sale Gain
(Year 1 Factor X Gain)
27,500

82,500

140,000

Year 3 -- Gain from Installment Sale $250,000

A

B

C

Sales Factor
200,000

3,000,000

6,800,000

10,000,000

10,000,000

10,000,000

Apportionment Factor
2%

30%

68%

Installment Sale Gain
(Year 1 Factor X Gain)
27,500

82,500

140,000

Last updated: 09/24/2025