INTERNAL REVENUE CODE
1--NORMAL TAXES AND SURTAXES
E--ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
II--METHODS OF ACCOUNTING
B--TAXABLE YEAR FOR WHICH ITEMS OF GROSS INCOME INCLUDED
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.
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.
(2) Exceptions.--The term "installment sale" does not include--
(A) Dealer dispositions.--Any dealer disposition (as defined in subsection (l)).
(B) Inventories of personal property.--A disposition of personal property of a kind
which is required to be included in the inventory of the taxpayer if on hand at
the close of the taxable year.
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.
(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.
(3) Election revocable only with consent.--An election under paragraph (1) with
respect to any disposition may be revoked only with the consent of the
Second dispositions by related persons.--
(1) In general.--If--
person disposes of property to a related person (hereinafter in this subsection
referred to as the "first disposition"), and
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"),
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.
(B) Substantial diminishing of risk of ownership.--The 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--
holding of a put with respect to such property (or similar property),
holding by another person of a right to acquire the property, or
short sale or any other transaction.
(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--
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--
aggregate amount of payments received with respect to the first disposition
before the close of such year, plus
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.--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
(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
sale or exchange of stock to the issuing corporation shall not be treated as a
(B) Involuntary conversions not treated as
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.
(C) Dispositions after death.--Any transfer after the earlier of--
death of the person making the first disposition, or
death of the person acquiring the property in the first disposition,
and any transfer thereafter shall not be treated as a
(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
(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.
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--
(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.--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.
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
payable on demand, or
issued by a corporation or a government or political subdivision thereof and is
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--
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 exchanges.--In the case of any exchange described in section 1031(b)--
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,
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.--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.
(8) Payments to be received defined.--The term "payments to be
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.
Sale of depreciable property to controlled entity.--
(1) In general.--In the case of an installment sale of depreciable property
between related persons--
subsection (a) shall not apply,
(B) for purposes of this title--
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
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
(2) Exception where tax avoidance not a principal purpose.--Paragraph (1) shall not apply if it is
established to the satisfaction of the Secretary that the disposition did not
have as one of its principal purposes the avoidance of Federal income tax.
(3) Related persons.--For purposes of this subsection, the term "related
persons" has the meaning given to such term by section 1239(b), except
that such term shall include 2 or more partnerships having a relationship to
each other described in section 707(b)(1)(B).
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--
(i) stock in
trade of the corporation,
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
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.--If 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
subparagraph (A) shall not apply to such obligation, and
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).--For purposes of subsection (e)(1)(A), disposition of property by the
corporation shall be treated also as disposition of such property by the
(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
(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
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
Recognition of recapture income in year of disposition.--
(1) In general.--In the case of any installment sale of property to which
subsection (a) applies--
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
(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 section 1245 or 1250 (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.
(1) In general.--The Secretary shall prescribe such regulations as may be necessary
or appropriate to carry out the provisions of this section.
(2) Selling price not readily ascertainable.--The regulations prescribed under
paragraph (1) shall include regulations providing for ratable basis recovery in
transactions where the gross profit or the total contract price (or both)
cannot be readily ascertained.
Current inclusion in case of revolving credit plans, etc.--In the case of--
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,
(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.
purposes of subsection (b)(2)(A)--
(1) In general.--The term "dealer disposition" means any of the
(A) Personal property.--Any disposition of personal property by a person who regularly
sells or otherwise disposes of personal property of the same type on the
(B) Real property.--Any disposition of real property which is held by the taxpayer
for sale to customers in the ordinary course of the taxpayer's trade or business.
(2) Exceptions.--The term "dealer disposition" does not include--
(A) Farm property.--The disposition on the installment plan of any property used or
produced in the trade or business of farming (within the meaning of section
2032A(e)(4) or (5)).
(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
(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--
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
any residential lot, but only if the taxpayer (or any related person) is not to
make any improvements with respect to such lot.
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
(II) for the period beginning on the date of sale, and ending
on the date such payment is received, and
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
(ii) Interest not taken into account.--For purposes of clause (i), the portion
of any tax attributable to the receipt of any payment shall be determined
without regard to any interest imposed under subparagraph (A).
(iii) Taxable year of sale.--No interest shall be determined for any payment received in the taxable
year of the disposition from which the installment obligation arises.
(C) Treatment as interest.--Any amount payable under this paragraph shall be taken into
account in computing the amount of any deduction allowable to the taxpayer for interest
paid or accrued during such taxable year.
"In the case of the: The applicable percentage is:
1st taxable year ................... 15
2nd taxable year ................... 25
3rd taxable year ................... 30
4th taxable year ................... 30.