Taxpayers receive relief to elect out of installment method

Plain-English summary

Shareholders sold all of their company stock in an installment sale and instructed their return preparer to elect out of installment reporting. The preparer accidentally transmitted a different draft return that used the installment method, even though the taxpayers had paid the additional tax associated with immediate gain recognition. The IRS found good cause for the missed election under Treas. Reg. § 15A.453-1(d)(3)(ii). It gave the taxpayers 75 days to file an amended return reporting the full amount realized in the sale year.

Ruling snapshot

• Question: May the taxpayers make a late election to report the full stock-sale gain instead of using the installment method?
• Outcome: Approved, with a 75-day filing period
• Key authorities: IRC § 453(d); Treas. Reg. § 15A.453-1(d)(3)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201616004                                              Third Party Communication: None
Release Date: 4/15/2016                                        Date of Communication: Not Applicable
Index Number: 453.06-00
                                                               Person To Contact:
------------------------------------                           -----------------------, ID No. -------------------
----------------------------                                   ---------------------------------------------------
----------------------------------------                       Telephone Number:
                                                               ----------------------
                                                               Refer Reply To:
                                                               CC:ITA:B05
                                                               PLR-131427-15
                                                               Date:
                                                               January 15, 2016


Taxpayers:        ------------------------------------
Company:          ------------------------------------------------------
Year 1:           -------

Dear ------------------------------------:

This ruling is in reference to Taxpayers’ request to make a late election under §
453(d)(1) of the Internal Revenue Code to apply to a disposition of shares in Company
made in Year 1, under the authority in § 15A.453-1(d)(3)(ii) of the Income Tax
Regulations.

FACTS

Taxpayers were shareholders in Company until December of Year 1, when they sold all
shares in an installment sale. Under the sale agreement for the shares, Taxpayers were
to receive a portion of the payment after the end of Year 1. Therefore, the sale was an
installment sale under § 453.

Taxpayers directed their tax preparer to make two draft returns for Year 1, one draft
using the installment method and the other electing out as per § 453(d)(1). After
consideration of both drafts, Taxpayers decided to file a return electing out of the
installment method. As a result of a clerical error on the part of the tax preparer and
through no fault of Taxpayers, the draft return using the installment method was
transmitted to the Internal Revenue Service. Taxpayers, therefore, failed to make a §
453(d) election on their Year 1 return as originally filed.

Affidavits provided by Taxpayers indicated that they intended to file a return electing out
of the installment method, and had included payment for additional taxes owed in that
year as a result. Taxpayers also attested that they had been unaware of the error until
they received a refund for overpayment. An affidavit provided by the tax preparer for

PLR-131427-15                                  2

Taxpayers states that he mistakenly filed the wrong version of the return, and that he
was likewise not aware of the error until Taxpayers received a refund.


LAW AND ANALYSIS

Section 453 states that income from installments sales is to be reported under the
installment method, with income recognized simultaneously and in proportion to
payments received on the sale. Section 453(b) defines an installment sale as a
disposition of property for which at least one payment is to be received after the close of
the taxable year of the disposition.

Section 453(d) allows taxpayers to elect out of the installment method, and instead
immediately recognize all gains from the sale as income. Per § 453(d)(2), this election is
to be made on or before the due date for the taxpayer’s return for the tax year in which
the disposition is made. Under § 15A.453-1(d)(3)(i) of the Income Tax Regulations,
such elections are made by reporting an amount realized equal to the sale price on the
tax return for the taxable year in which the sale occurs.

Section 15A.453-1(d)(3)(ii) provides the standard under which such requests for late §
453(d) elections are to be made. Requests for relief under that section are granted
when the Internal Revenue Service concludes that the taxpayer had good cause for
failing to make a timely election.

In the instant case, the information submitted indicates that Taxpayers intended to
timely file a return properly electing out of the installment method, and their failure to do
so was the result of clerical errors on the part of their tax preparer.

CONCLUSION

Based on the facts and information submitted and the representations made, we
conclude that Taxpayers had good cause for failing to make a timely election under §
453(d). Accordingly, Taxpayers have satisfied the requirements of the regulations for
granting of relief.

Permission to make a late election out of the installment method for the Year 1 sale of
Taxpayers is granted for the period that ends 75 days after the date of this letter. In
order to elect out of the installment method, Taxpayers must file an amended federal
income tax return for Year 1 at the Internal Revenue Service Center where Taxpayers
file annual Federal income tax returns, and report the full amount realized on the sale in
Year 1. A copy of this letter ruling must be attached to the amended return. If you file
the amended return electronically, you may satisfy this requirement by attaching a
statement to each of the amended returns that provides the date and control number of
this letter ruling.

PLR-131427-15                                  3


The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent. Enclosed is a copy of the letter
ruling showing the deletions proposed to be made when it is disclosed under § 6110.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                       Sincerely,



                                       William A. Jackson
                                       Branch Chief, Branch 5
                                       (Income Tax & Accounting)

Enclosures:
Copy of letter for section 6110 purposes

cc: