26 U.S.C. § 453: Installment method

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. 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. Any dealer disposition (as defined in subsection ( l )). 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. 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. Subsection (a) shall not apply to any disposition if the taxpayer elects to have subsection (a) not apply to such disposition. 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. An election under paragraph (1) with respect to any disposition may be revoked only with the consent of the Secretary. any person disposes of property to a related person (hereinafter in this subsection referred to as the “first disposition”), and 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”), 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. the holding of a put with respect to such property (or similar property), the holding by another person of a right to acquire the property, or a short sale or any other transaction. the total amount realized with respect to any second disposition of the property occurring before the close of the taxable year, or the total contract price for the first disposition, over the aggregate amount of payments received with respect to the first disposition before the close of such year, plus the aggregate amount treated as received with respect to the first disposition for prior taxable years by reason of this subsection. 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. 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). Any sale or exchange of stock to the issuing corporation shall not be treated as a first disposition. 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. the death of the person making the first disposition, or the death of the person acquiring the property in the first disposition, 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. 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. 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 a person who bears a relationship described in section 267(b) to the person first disposing of the property. 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. 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). is payable on demand, or is readily tradable, 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 in any other form designed to render such bond or other evidence of indebtedness readily tradable in an established securities market. 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, the gross profit from such exchange shall be reduced to take into account any amount not recognized by reason of section 1031(b), and 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. 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. the aggregate amount of all payments which are not contingent as to amount, and the fair market value of any payments which are contingent as to amount. subsection (a) shall not apply, except as provided in clause (ii), all payments to be received shall be treated as received in the year of the disposition, and 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 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. 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. 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). 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. stock in trade of the corporation, 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 property held by the corporation primarily for sale to customers in the ordinary course of its trade or business, subparagraph (A) shall not apply to such obligation, and 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. 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. 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. paragraph (1) applies with respect to any installment obligation received by a shareholder from a corporation, and by reason of the liquidation such shareholder receives property in more than 1 taxable year, notwithstanding subsection (a), any recapture income shall be recognized in the year of the disposition, and any gain in excess of the recapture income shall be taken into account under the installment method. 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. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the provisions of this section. 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. any disposition of personal property under a revolving credit plan, or stock or securities which are traded on an established securities market, or to the extent provided in regulations, property (other than stock or securities) of a kind regularly traded on an established market, Any disposition of personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan. 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. 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)). 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. 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 any residential lot, but only if the taxpayer (or any related person) is not to make any improvements with respect to such lot. 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. 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). 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, 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 semiannually. 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). No interest shall be determined for any payment received in the taxable year of the disposition from which the installment obligation arises. 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. 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) [ Pub. L. 106–170 , amending this section] is repealed effective with respect to sales and other dispositions occurring on or after the date of the enactment of such Act [ Dec. 17, 1999 ]. 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.” Except as provided in this subsection, the amendments made by this section [amending this section and sections 56, 381, 453A, and 691 of this title and repealing section 453C of this title ] shall apply to dispositions in taxable years beginning after December 31, 1987 . In the case of dealer dispositions (within the meaning of section 453( l )(1) of the Internal Revenue Code of 1986 as added by this section), the amendments made by subsections (a) and (b) [amending this section and repealing section 453C of this title ] shall apply to installment obligations arising from dispositions after December 31, 1987 . In the case of an applicable installment obligation arising from a disposition described in subclause (I) or (II) of section 453C(e)(1)(A)(i) of the Internal Revenue Code of 1986 (as in effect before the amendments made by this section) before January 1, 1988 , the amendments made by subsections (a) and (b) shall apply to taxable years beginning after December 31, 1987 . such change shall be treated as initiated by the taxpayer, such change shall be treated as made with the consent of the Secretary of the Treasury or his delegate, and the net amount of adjustments required by section 481 of the Internal Revenue Code of 1986 shall be taken into account over a period not longer than 4 taxable years. For purposes of this paragraph, rules similar to the rules of paragraphs (4) and (5) of section 812(c) of the Tax Reform Act of 1986 [ Pub. L. 99–514 , set out as an Effective Date of 1986 Amendment note below] (as added by the Technical and Miscellaneous Revenue Act of 1988 [ Pub. L. 100–647 ]) shall apply. A taxpayer may elect, at such time and in such manner as the Secretary of the Treasury or his delegate may prescribe, to have the amendments made by subsections (a) and (c) [amending sections 381, 453A, and 691 of this title and repealing section 453C of this title ] apply to taxable years ending after December 31, 1986 , with respect to dispositions and pledges occurring after August 16, 1986 . Section 453A(d) of the Internal Revenue Code of 1986 shall apply to any installment obligation which is pledged to secure any secured indebtedness (within the meaning of section 453A(d)(4) of such Code) after December 17, 1987 , in taxable years ending after such date. For purposes of section 453C of such Code (as in effect before its repeal), the face amount of any obligation to which section 453A(d) of such Code applies shall be reduced by the amount treated as payments on such obligation under section 453A(d) of such Code and the amount of any indebtedness secured by it shall not be taken into account. dispositions after August 16, 1986 , and before the 1st day of such taxable year shall be treated as made on such 1st day, and subsections (b)(2)(B) and (c)(4) of section 453A of such Code shall be applied separately with respect to such dispositions by substituting for ‘$5,000,000’ the amount which bears the same ratio to $5,000,000 as the number of days after August 16, 1986 , and before such 1st day bears to 365. The amendment made by subsection (d) [amending section 56 of this title ] shall apply to dispositions in taxable years beginning after December 31, 1986 . The amendments made by this section shall not apply to any installment obligation or to any taxpayer during any period to the extent the amendments made by section 811 of the Tax Reform Act of 1986 [ section 811 of Pub. L. 99–514 , amending former section 453C of this title and enacting provisions set out as a note under former section 453C of this title ] do not apply to such obligation or during such period.” Except as provided in paragraphs (2) and (3), the amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after December 31, 1986 . Section 453(k)(2) of the Internal Revenue Code of 1986, as added by subsection (a), shall apply to sales after December 31, 1986 , in taxable years ending after such date. such change shall be treated as initiated by the taxpayer, such change shall be treated as having been made with the consent of the Secretary, the period for taking into account adjustments under section 481 of such Code by reason of such change shall be equal to 4 years, and except as provided in paragraph (4), the amount taken into account in each of such 4 years shall be the applicable percentage (determined in accordance with the following table) of the net adjustment: “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. the percentage determined under subparagraph (B) shall be substituted for the applicable percentage which would otherwise apply under paragraph (3)(D), and any increase in the applicable percentage by reason of clause (i) shall be applied to reduce the applicable percentage determined under paragraph (3)(D) for subsequent taxable years in the adjustment period (beginning with the 1st of such subsequent taxable years). the percentage determined by dividing the aggregate contraction in revolving installment obligations by the aggregate face amount of such obligations outstanding as of the close of the taxpayer’s last taxable year beginning before January 1, 1987 , over the sum of the applicable percentages under paragraph (3)(D) (as modified by this paragraph) for prior taxable years in the adjustment period. the aggregate face amount of the revolving installment obligations outstanding as of the close of the taxpayer’s last taxable year beginning before January 1, 1987 , exceeds the aggregate face amount of the revolving installment obligations outstanding as of the close of the taxable year involved. For purposes of this paragraph, the term ‘revolving installment obligations’ means installment obligations arising under a revolving credit plan. which was disposed of to an unrelated person on or before October 26, 1987 , or was disposed of to an unrelated person on or after such date pursuant to a binding written contract in effect on October 26, 1987 , and at all times thereafter before such disposition. no losses from such dispositions shall be recognized, and the aggregate amount of the adjustment for taxable years in the adjustment period (in reverse order of time) shall be reduced by the amount of such losses. For purposes of paragraphs (4) and (5), the adjustment period is the 4-year period under paragraph (3).” Except as otherwise provided in this subsection, the amendments made by this section [amending this section] shall apply with respect to dispositions made after June 6, 1984 . The amendments made by this section shall not apply with respect to any disposition conducted pursuant to a contract which was binding on March 22, 1984 , and at all times thereafter. The amendments made by this section shall not apply to any disposition before October 1, 1984 , of all or substantially all of the personal property of a cable television business pursuant to a written offer delivered by the seller on June 20, 1984 , but only if the last payment under the installment contract is due no later than October 1, 1989 .” Except as otherwise provided in this subsection, the amendments made by sections 2 [enacting this section and sections 453A and 453B of this title and amending sections 311, 336, 337, 381, former section 453, and sections 453B, 481, 644, 691, and 1255 of this title] and 5 [amending section 1239 of this title ] shall apply to dispositions made after the date of the enactment of this Act [ Oct. 19, 1980 ] in taxable years ending after such date. Section 453(e) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as amended by section 2) shall apply to first dispositions made after May 14, 1980 . Paragraphs (1) and (2) of section 453(h) of such Code (as amended by section 2) shall apply in the case of distributions of installment obligations after March 31, 1980 . Section 453A of the Internal Revenue Code of 1986 (as amended by section 2) shall apply to taxable years ending after the date of enactment of this Act [ Oct. 19, 1980 ]. Section 453B(f) of the Internal Revenue Code of 1986 (as amended by section 2) shall apply to installment obligations becoming unenforceable after the date of the enactment of this Act [ Oct. 19, 1980 ]. The amendments made by section 2(c) [amending sections 336, 337, 453B, and former section 453 of this title ] shall take effect as if included in the amendments made by section 403(b) of the Crude Oil Windfall Profit Tax Act of 1980 [see section 403(b)(3) of Pub. L. 96–223 , set out as an Effective Date of 1980 Amendments note under section 337 of this title ]. paragraph (2) of such section 453(b), and any requirement that more than 1 payment be received.”