26 USC 453 - Installment method

View all text of Subpart B [§ 451 - § 460]

§ 453. Installment method

(a) General rule

(b) Installment sale definedFor purposes of this section—

(1) In general

(2) ExceptionsThe term “installment sale” does not include—

(A) Dealer dispositions

(B) Inventories of personal property

(d) Election out

(1) In general

(2) Time and manner for making election

(3) Election revocable only with consent

(e) Second dispositions by related persons

(1) In generalIf—

(A) any person disposes of property to a related person (hereinafter in this subsection referred to as the “first disposition”), and

(B) before the person making the first disposition receives all payments with respect to such disposition, the related person disposes of the property (hereinafter in this subsection referred to as the “second disposition”),

then, for purposes of this section, the amount realized with respect to such second disposition shall be treated as received at the time of the second disposition by the person making the first disposition.

(2) 2-year cutoff for property other than marketable securities

(A) In general

(B) Substantial diminishing of risk of ownershipThe running of the 2-year period set forth in subparagraph (A) shall be suspended with respect to any property for any period during which the related person’s risk of loss with respect to the property is substantially diminished by—

(i) the holding of a put with respect to such property (or similar property),

(ii) the holding by another person of a right to acquire the property, or

(iii) a short sale or any other transaction.

(3) Limitation on amount treated as receivedThe amount treated for any taxable year as received by the person making the first disposition by reason of paragraph (1) shall not exceed the excess of—

(A) the lesser of—

(i) the total amount realized with respect to any second disposition of the property occurring before the close of the taxable year, or

(ii) the total contract price for the first disposition, over

(B) the sum of—

(i) the aggregate amount of payments received with respect to the first disposition before the close of such year, plus

(ii) the aggregate amount treated as received with respect to the first disposition for prior taxable years by reason of this subsection.

(4) Fair market value where disposition is not sale or exchange

(5) Later payments treated as receipt of tax paid amounts

(6) Exception for certain dispositionsFor purposes of this subsection—

(A) Reacquisitions of stock by issuing corporation not treated as first dispositions

(B) Involuntary conversions not treated as second dispositions

(i) the death of the person making the first disposition, or

(ii) the death of the person acquiring the property in the first disposition,

and any transfer thereafter shall not be treated as a second disposition.

(7) Exception where tax avoidance not a principal purpose

(8) Extension of statute of limitations

(f) Definitions and special rulesFor purposes of this section—

(1) Related personExcept for purposes of subsections (g) and (h), the term “related person” means—

(A) a person whose stock would be attributed under section 318(a) (other than paragraph (4) thereof) to the person first disposing of the property, or

(B) a person who bears a relationship described in section 267(b) to the person first disposing of the property.

(2) Marketable securities

(3) Payment

(4) Purchaser evidences of indebtedness payable on demand or readily tradableReceipt of a bond or other evidence of indebtedness which—

(A) is payable on demand, or

(B) is readily tradable,

shall be treated as receipt of payment.

(5) Readily tradable definedFor purposes of paragraph (4), the term “readily tradable” means a bond or other evidence of indebtedness which is issued—

(A) with interest coupons attached or in registered form (other than one in registered form which the taxpayer establishes will not be readily tradable in an established securities market), or

(B) in any other form designed to render such bond or other evidence of indebtedness readily tradable in an established securities market.

(6) Like-kind exchangesIn the case of any exchange described in section 1031(b)—

(A) the total contract price shall be reduced to take into account the amount of any property permitted to be received in such exchange without recognition of gain,

(B) the gross profit from such exchange shall be reduced to take into account any amount not recognized by reason of section 1031(b), and

(C) the term “payment”, when used in any provision of this section other than subsection (b)(1), shall not include any property permitted to be received in such exchange without recognition of gain.

Similar rules shall apply in the case of an exchange which is described in section 356(a) and is not treated as a dividend.

(7) Depreciable property

(8) Payments to be received definedThe term “payments to be received” includes—

(A) the aggregate amount of all payments which are not contingent as to amount, and

(B) the fair market value of any payments which are contingent as to amount.

(g) Sale of depreciable property to controlled entity

(1) In generalIn the case of an installment sale of depreciable property between related persons—

(A) subsection (a) shall not apply,

(B) for purposes of this title—

(i) except as provided in clause (ii), all payments to be received shall be treated as received in the year of the disposition, and

(ii) in the case of any payments which are contingent as to the amount but with respect to which the fair market value may not be reasonably ascertained, the basis shall be recovered ratably, and

(C) the purchaser may not increase the basis of any property acquired in such sale by any amount before the time such amount is includible in the gross income of the seller.

(2) Exception where tax avoidance not a principal purpose

(3) Related persons

(h) Use of installment method by shareholders in certain liquidations

(1) Receipt of obligations not treated as receipt of payment

(A) In general

(B) Obligations attributable to sale of inventory must result from bulk saleSubparagraph (A) shall not apply to an installment obligation acquired in respect of a sale or exchange of—

(i) stock in trade of the corporation,

(ii) other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year, and

(iii) property held by the corporation primarily for sale to customers in the ordinary course of its trade or business,

unless such sale or exchange is to 1 person in 1 transaction and involves substantially all of such property attributable to a trade or business of the corporation.

(C) Special rule where obligor and shareholder are related personsIf the obligor of any installment obligation and the shareholder are married to each other or are related persons (within the meaning of section 1239(b)), to the extent such installment obligation is attributable to the disposition by the corporation of depreciable property—

(i) subparagraph (A) shall not apply to such obligation, and

(ii) for purposes of this title, all payments to be received by the shareholder shall be deemed received in the year the shareholder receives the obligation.

(D) Coordination with subsection (e)(1)(A)

(E) Sales by liquidating subsidiaries

(2) Distributions received in more than 1 taxable year of shareholderIf—

(A) paragraph (1) applies with respect to any installment obligation received by a shareholder from a corporation, and

(B) by reason of the liquidation such shareholder receives property in more than 1 taxable year,

then, on completion of the liquidation, basis previously allocated to property so received shall be reallocated for all such taxable years so that the shareholder’s basis in the stock of the corporation is properly allocated among all property received by such shareholder in such liquidation.

(i) Recognition of recapture income in year of disposition

(1) In generalIn the case of any installment sale of property to which subsection (a) applies—

(A) notwithstanding subsection (a), any recapture income shall be recognized in the year of the disposition, and

(B) any gain in excess of the recapture income shall be taken into account under the installment method.

(2) Recapture income

(j) Regulations

(1) In general

(2) Selling price not readily ascertainable

(k) Current inclusion in case of revolving credit plans, etc.In the case of—

(1) any disposition of personal property under a revolving credit plan, or

(2) any installment obligation arising out of a sale of—

(A) stock or securities which are traded on an established securities market, or

(B) to the extent provided in regulations, property (other than stock or securities) of a kind regularly traded on an established market,

subsection (a) shall not apply, and, for purposes of this title, all payments to be received shall be treated as received in the year of disposition. The Secretary may provide for the application of this subsection in whole or in part for transactions in which the rules of this subsection otherwise would be avoided through the use of related parties, pass-thru entities, or intermediaries.

(l) Dealer dispositionsFor purposes of subsection (b)(2)(A)—

(1) In generalThe term “dealer disposition” means any of the following dispositions:

(A) Personal property

(B) Real property

(2) ExceptionsThe term “dealer disposition” does not include—

(A) Farm property

(B) Timeshares and residential lots

(i) In general

(ii) Dispositions to which subparagraph appliesA disposition is described in this clause if it is a disposition in the ordinary course of the taxpayer’s trade or business to an individual of—(I) a timeshare right to use or a timeshare ownership interest in residential real property for not more than 6 weeks per year, or a right to use specified campgrounds for recreational purposes, or(II) any residential lot, but only if the taxpayer (or any related person) is not to make any improvements with respect to such lot.

For purposes of subclause (I), a timeshare right to use (or timeshare ownership interest in) property held by the spouse, children, grandchildren, or parents of an individual shall be treated as held by such individual.

(3) Payment of interest on timeshares and residential lots

(A) In general

(B) Computation of interest

(i) In generalThe amount of interest referred to in subparagraph (A) for any taxable year shall be determined—(I) on the amount of the tax for such taxable year which is attributable to the payments received during such taxable year on installment obligations to which this subsection applies,(II) for the period beginning on the date of sale, and ending on the date such payment is received, and(III) by using the applicable Federal rate under section 1274 (without regard to subsection (d)(2) thereof) in effect at the time of the sale compounded semiannually.

(ii) Interest not taken into account

(iii) Taxable year of sale

(Added Pub. L. 96–471, § 2(a), Oct. 19, 1980, 94 Stat. 2247; amended Pub. L. 97–34, title II, § 202(c), Aug. 13, 1981, 95 Stat. 221; Pub. L. 97–448, title III, § 303, Jan. 12, 1983, 96 Stat. 2398; Pub. L. 98–369, div. A, title I, § 112(a), title IV, § 421(b)(6)(B), (C), July 18, 1984, 98 Stat. 635, 794; Pub. L. 99–514, title VI, §§ 631(e)(8), 642(a)(1)(D), (3), (b), title VIII, § 812(a), title XVIII, § 1809(c), Oct. 22, 1986, 100 Stat. 2274, 2284, 2371, 2821; Pub. L. 100–203, title X, § 10202(b), Dec. 22, 1987, 101 Stat. 1330–388; Pub. L. 100–647, title I, §§ 1006(e)(7), (i)(1), (2), 1008(g)(1), 1018(u)(25), (26), title II, § 2004(d)(1), (5), Nov. 10, 1988, 102 Stat. 3401, 3410, 3442, 3591, 3599; Pub. L. 106–170, title V, § 536(a), Dec. 17, 1999, 113 Stat. 1936; Pub. L. 106–573, § 2(a), Dec. 28, 2000, 114 Stat. 3061; Pub. L. 108–357, title VIII, § 897(a), Oct. 22, 2004, 118 Stat. 1649.)