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E-DIRT
Fall 2000
(Volume I, Issue 4)
Newsletter
of the Real Property Probate and Trust Law Section
of the American Bar Association
Installment Sales – New Prohibitions and Relief
by Steven B. Gorin, Esq.*
Thompson Coburn LLP
One Firstar Plaza
Suite 3300
St. Louis, Missouri 63101-1693
Telephone: 314-552-6151
Facsimile: 314-552-7151
sgorin@thompsoncoburn.com
Subject to a number of exceptions and
restrictions, the "installment method" of recognizing gain for
tax purposes (as described at I. R. C. § 453) permits a taxpayer to defer
paying capital gains tax on an "installment sale" (also described
at I. R. C. § 453). Using the installment method, a taxpayer given a promissory
note in exchange for the sale of assets, reports a portion of the gain
based on the portion of sales proceeds collected. However, for sales occurring
on or after December 17, 1999, new I. R. C. § 453(a)(2) provides that
a taxpayer using the accrual method of tax accounting for income tax purposes
cannot use the installment method.
IRS Notice 2000-26, <http://ftp.fedworld.gov/pub/irs-irbs/irb00-17.pdf>,
provides guidance in applying new § 453(a)(2). According to this Rule,
even if an S corporation uses the accrual method of accounting for income
tax purposes, its shareholders using the cash receipts and disbursements
method of accounting for income tax purposes (the "cash method"),
may sell stock in the S corporation using the installment method.
Small businesses seeking relief from the
operation of § 453 may wish to take advantage of some creative relief
recently afforded by the IRS. IRS Revenue Procedure 2000-22 <http://ftp.fedworld.gov/pub/irs-irbs/irb00-20.pdf>,
allows businesses with no more than $1 million in average annual receipts
to switch to the cash method of accounting. This opportunity to switch
is available whether or not a taxpayer wants to do an installment sale-----a
favorable development, since the cash method of accounting is generally
more favorable to the taxpayer than is the accrual method due to stringent
timing limitations for taking deductions under the tax laws. The operation
of the limitations on the accrual method generally results in deductions
being deferred for years, with the net effect that some deductions may
not be available until the taxpayer terminates business. Meanwhile, although
ability to take deductions may be deferred applying the accrual method,
income must be recognized as soon as it is billed. These rules do not
apply to taxpayers who use the cash method.
*Steven B. Gorin
is a partner of Thompson Coburn LLP in St. Louis, Missouri and is
a member of the Firm’s Trust and Estate Planning Practice Group. Prior
to practicing law, Mr. Gorin was a partner in a local CPA firm. Mr. Gorin
has substantial experience in organizational, tax and succession planning
for privately held business, insurance and charitable giving, Mr. Gorin’s
particular specialty is use of innovative strategies (including limited
partnerships) to obtain valuation discounts, to defer or avoid capital
gains tax on the sale of highly appreciated assets, and to transfer rapidly
growing assets at minimal tax cost. For further information regarding
Thompson Coburn LLP or Mr. Gorin, visit http://www.thompsoncoburn.com.
The views expressed herein are those of
the author only, and constitute neither the opinion of Thompson Coburn
LLP nor necessarily the position of Thompson Coburn LLP. The options discussed
herein are not appropriate in every situation, as each client’s situation
is unique. The tax analysis presented herein is not intended to be thorough
coverage but merely an attempt to raise some of the issues that apply
in many situations. The reader should not rely on this outline but rather
should do thorough independent research if the reader is a qualified professional,
otherwise the reader should consult a qualified professional.
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E-DIRT
Fall 2000
(Volume 1, Issue 4)
Newsletter of the Real Property Probate and Trust Law Section
of the American Bar Association
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