Congress Reinstates Installment Method for Accrual-Basis Taxpayers

In Dec. 28, 2000, President Clinton signed legislation that retroactively reinstates the installment method for certain accrual-basis taxpayers. The Installment Tax Correction Act of 2000 (2000 Act) repeals provisions in the Ticket to Work and Work Incentives Improvement Act of 1999 (1999 Act).

The 1999 Act

The 1999 Act repealed the installment method for most accrual-basis taxpayers by adding Sec. 453(a)(2), which stated "[t]he installment method shall not apply to income from an installment sale if such income would be reported under an accrual method of accounting without regard to this section." The law did not change prior law on the availability of the installment method for dispositions of farm property, timeshares or residential lots. The repeal of the installment method was effective for sales or other dispositions occurring on or after Dec. 17, 1999 (the date of enactment).

The 1999 Act did not change the availability of the installment method for cash-basis taxpayers. Accordingly, it remained available to a cash-basis individual selling stock of a closely held corporation, regardless of whether the corporation was a cash- or accrual-method taxpayer. However, if a purchaser wished to make a Sec. 338(h)(10) election to recharacterize a sale of stock by a cash-basis taxpayer into a sale of assets by an accrual-basis corporation, the installment method was not available.

The 1999 Act also provided that the right to satisfy a loan with an installment obligation was to be treated as a pledge of the installment obligation, effective for dispositions occurring after Dec. 16, 1999. As a result, gain from the installment sale would be accelerated to the same extent that it would have been recognized had the installment obligation been pledged to secure the loan.

The 2000 Act

The 2000 Act reversed the 1999 Act, in part, by stating:

In general, subsection (a) of section 536 of the Ticket to Work and Work Incentives Improvement Act of 1999 (relating to modification of installment method and repeal of installment method for accrual method taxpayers) is repealed effective with respect to sales and other dispositions occurring on or after the date of the enactment of such Act. The Internal Revenue Code of 1986 shall be applied and administered as if that subsection (and the amendments made by that subsection) had not been enacted.

The 2000 Act did not repeal the modification of the pledge rules mentioned above.

If a taxpayer was involved in an installment-sale transaction in a year for which a return has not yet been filed, the taxpayer can use the installment method on such return. Taxpayers who went forward with their transactions, filed their returns and paid the tax for the year of sale should amend them to claim refunds by restating their gain on disposition under the installment method. However, this approach may need additional IRS guidance.

Sec. 453(d) states that the installment method does not apply to any disposition if a taxpayer elects not to apply it. Further, such election may be revoked only with IRS consent. Temp. Regs. Sec. 15A.453-1(d)(3) provides that an election is considered made if a taxpayer reports an amount realized on a sale equal to the selling price (including the full face amount of any installment obligation) on the return filed for the tax year in which the installment sale occurs. Once a taxpayer elects not to use the installment method, the election is irrevocable, absent the Service's consent. Undoubtedly, the IRS will either ignore this technicality or issue guidance consenting to such revocation for all accrual-basis taxpayers originally unable to use the installment method.

From Judi V. Bruce, CPA, Washington, DC