§ 453. Installment method
(a)
General rule
Except as otherwise provided in this section, income from an installment sale shall be taken into account for purposes of this title under the installment method.
(b)
Installment sale defined
For purposes of this section—
(1)
In general
The term “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.
(c)
Installment method defined
For purposes of this section, 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.
(d)
Election out
(1)
In general
Subsection (a) shall not apply to any disposition if the taxpayer elects to have subsection (a) not apply to such disposition.
(2)
Time and manner for making election
Except as otherwise provided by regulations, an election under paragraph (1) 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 the tax imposed by this chapter for the taxable year in which the disposition occurs. Such an election shall be made in the manner prescribed by regulations.
(e)
Second dispositions by related persons
(1)
In general
If—
(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
Except in the case of marketable securities, paragraph (1) shall apply only if the date of the second disposition is not more than 2 years after the date of the first disposition.
(3)
Limitation on amount treated as received
The 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—
(4)
Fair market value where disposition is not sale or exchange
For purposes of this subsection, if the second disposition is not a sale or exchange, an amount equal to the fair market value of the property disposed of shall be substituted for the amount realized.
(5)
Later payments treated as receipt of tax paid amounts
If paragraph (1) applies for any taxable year, payments received in subsequent taxable years by the person making the first disposition shall not be treated as the receipt of payments with respect to the first disposition to the extent that the aggregate of such payments does not exceed the amount treated as received by reason of paragraph (1).
(6)
Exception for certain dispositions
For purposes of this subsection—
(A)
Reacquisitions of stock by issuing corporation not treated as first dispositions
Any sale or exchange of stock to the issuing corporation shall not be treated as a first disposition.
(B)
Involuntary conversions not treated as second dispositions
A compulsory or involuntary conversion (within the meaning of section
1033) and any transfer thereafter shall not be treated as a second disposition if the first disposition occurred before the threat or imminence of the conversion.
(7)
Exception where tax avoidance not a principal purpose
This subsection shall not apply to a second disposition (and any transfer thereafter) if it is established to the satisfaction of the Secretary that neither the first disposition nor the second disposition had as one of its principal purposes the avoidance of Federal income tax.
(8)
Extension of statute of limitations
The period for assessing a deficiency with respect to a first disposition (to the extent such deficiency is attributable to the application of this subsection) shall not expire before the day which is 2 years after the date on which the person making the first disposition furnishes (in such manner as the Secretary may by regulations prescribe) a notice that there was a second disposition of the property to which this subsection may have applied. Such deficiency may be assessed notwithstanding the provisions of any law or rule of law which would otherwise prevent such assessment.
(f)
Definitions and special rules
For purposes of this section—
(1)
Related person
Except for purposes of subsections (g) and (h), the term “related person” means—
(2)
Marketable securities
The term “marketable securities” means any security for which, as of the date of the disposition, there was a market on an established securities market or otherwise.
(3)
Payment
Except as provided in paragraph (4), the term “payment” does not include the receipt of evidences of indebtedness of the person acquiring the property (whether or not payment of such indebtedness is guaranteed by another person).
(4)
Purchaser evidences of indebtedness payable on demand or readily tradable
Receipt of a bond or other evidence of indebtedness which—
shall be treated as receipt of payment.
(5)
Readily tradable defined
For purposes of paragraph (4), the term “readily tradable” means a bond or other evidence of indebtedness which is issued—
(6)
Like-kind exchanges
(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
(7)
Depreciable property
The term “depreciable property” means property of a character which (in the hands of the transferee) is subject to the allowance for depreciation provided in section
167.
(g)
Sale of depreciable property to controlled entity
(1)
In general
In the case of an installment sale of depreciable property between 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
If, in a liquidation to which section
331 applies, the shareholder receives (in exchange for the shareholder’s stock) an installment obligation acquired in respect of a sale or exchange by the corporation during the 12-month period beginning on the date a plan of complete liquidation is adopted and the liquidation is completed during such 12-month period, then, for purposes of this section, the receipt of payments under such obligation (but not the receipt of such obligation) by the shareholder shall be treated as the receipt of payment for the stock.
(B)
Obligations attributable to sale of inventory must result from bulk sale
Subparagraph (A) shall not apply to an installment obligation acquired in respect of a sale or exchange of—
(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 persons
(D)
Coordination with subsection (e)(1)(A)
For purposes of subsection (e)(1)(A), disposition of property by the corporation shall be treated also as disposition of such property by the shareholder.
(E)
Sales by liquidating subsidiaries
For purposes of subparagraph (A), in the case of a controlling corporate shareholder (within the meaning of section 368(c)) of a selling corporation, an obligation acquired in respect of a sale or exchange by the selling corporation shall be treated as so acquired by such controlling corporate shareholder. The preceding sentence shall be applied successively to each controlling corporate shareholder above such controlling corporate shareholder.
(2)
Distributions received in more than 1 taxable year of shareholder
If—
(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.
(1)
In general
In the case of any installment sale of property to which subsection (a) applies—
(2)
Recapture income
For purposes of paragraph (1), the term “recapture income” means, with respect to any installment sale, the aggregate amount which would be treated as ordinary income under (or so much of section
751 as relates to section
1245 or
1250) for the taxable year of the disposition if all payments to be received were received in the taxable year of disposition.
(j)
Regulations
(k)
Current inclusion in case of revolving credit plans, etc.
In the case of—
(2)
any installment obligation arising out of a sale of—
(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 dispositions
For purposes of subsection (b)(2)(A)—
(1)
In general
The term “dealer disposition” means any of the following dispositions:
(2)
Exceptions
The term “dealer disposition” does not include—
(B)
Timeshares and residential lots
(i)
In general
Any dispositions described in clause (ii) on the installment plan if the taxpayer elects to have paragraph (3) apply to any installment obligations which arise from such dispositions. An election under this paragraph shall not apply with respect to an installment obligation which is guaranteed by any person other than an individual.
(ii)
Dispositions to which subparagraph applies
A 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.
(C)
Carrying charges or interest
Any carrying charges or interest with respect to a disposition described in subparagraph (A) or (B) which are added on the books of account of the seller to the established cash selling price of the property shall be included in the total contract price of the property and, if such charges or interest are not so included, any payments received shall be treated as applying first against such carrying charges or interest.
(3)
Payment of interest on timeshares and residential lots
(A)
In general
In the case of any installment obligation to which paragraph (2)(B) applies, the tax imposed by this chapter for any taxable year for which payment is received on such obligation shall be increased by the amount of interest determined in the manner provided under subparagraph (B).
(B)
Computation of interest
(i)
In general
The 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.