The IRS recently issued Private Letter Ruling 202645014, approving an alternative method of recovering tax basis in a contingent payment sale of S corporation stock. The ruling allows the taxpayer to recover its basis more quickly by allocating basis proportionately to anticipated payments rather than equally over the five-year payment period.
Under Section 453 of the Internal Revenue Code, taxpayers generally recognize gain from installment sales as payments are received. For contingent payment sales with no determinable maximum selling price but a fixed payment period, Treasury Regulation § 15A.453-1(c)(3)(i) generally requires taxpayers to allocate their basis equally across the payment period.
In this case, a trust sold its S corporation stock for an initial payment and four additional payments based on the company’s earnings. Because the trust anticipated little or no payments in the second and third years, the standard allocation method would have resulted in a disproportionately large gain in the first year and a large loss in the final year.
The trust requested permission to recover more of its tax basis in years when it expected to receive larger payments, rather than dividing its basis equally over the five-year period. Under Treasury Regulation § 15A.453-1(c)(7)(ii), taxpayers may request IRS approval to use an alternative basis recovery method if the standard rules would delay basis recovery and the proposed method is reasonable and would allow recovery at least twice as quickly.
The IRS approved the request, finding that the alternative method satisfied these requirements and would allow basis recovery more than twice as fast as the standard method.
Although private letter rulings cannot be cited as precedent, this ruling highlights how taxpayers involved in contingent payment sales may benefit from alternative basis recovery methods when the standard rules produce unfavorable tax consequences. For additional information, contact Liskow Transactional and Tax attorneys Leon Rittenberg III, Caroline Lafourcade, Abby Strohmeyer, or visit our Tax Practice page.