Partnership allowed to revoke an accidental election out of the installment method

Plain-English summary

A partnership sold property and took back promissory notes payable over several years, so the gain qualified to be reported under the "installment method," which spreads the taxable gain over the years the payments are received. The partners intended to use the installment method and even based their estimated tax payments on it, but their tax advisors made an inadvertent error on the partnership's Form 1065 and reported all the gain in the year of sale. Under section 453, reporting all the gain up front counts as an election out of the installment method, and that election can be revoked only with IRS consent, which the IRS will not grant if a purpose is tax avoidance or if the sale year is already closed. The IRS found the election out was inadvertent, was not made with hindsight or to avoid taxes, and the sale year was still open. It granted permission to revoke the election out, so the partnership may report the gain using the installment method. The IRS ruled only on the revocation; it expressed no view on the amount of gain.

Ruling snapshot

• Question: May a partnership revoke an inadvertent election out of the installment method under section 453(d)(3)?
• Outcome: Approved (consent to revoke the election granted)
• Key authorities: IRC § 453(a), § 453(d)(1)-(3); Treas. Reg. § 15a.453-1(d)(4)

Full text (IRS public release)

Internal Revenue Service                                   Department of the Treasury
                                                           Washington, DC 20224

Number: 202319010                                          Third Party Communication: None
Release Date: 5/12/2023                                    Date of Communication: Not Applicable
Index Number: 453.00-00
                                                           Person To Contact:
---------------                                            --------------------------, ID No. ----------------
-------------------------------------                      -----------------
-----------------------------                              Telephone Number:
---------                                                  --------------------
-----------------------------                              Refer Reply To:
                                                           CC:ITA:B04
                                                           PLR-116495-22
                                                           Date:
                                                           February 13, 2023




                                             LEGEND
Taxpayer      = -----------------------------------------
Advisors      = -------------------------------------------------------------------------------------------
                ----------------------
Date 1        = -------------------------
Date 2        = --------------------------
Date 3        = -------------------
Date 4        = -------------------------
Date 5        = ---------------------
Month 1       = ------------------
Month 2       = ---------------------
Month 3       = --------------------
Year 1        = -------
Partners      = -------------------------------------------------------------------------------------------
                -----------------------------------------
Property      = --------------------------------------------------------------
Corporation = --------------------------------------------
Buyer Sub     = ------------------------
Buyer           -------------------------------------------------------
$A            = ---------------------
$B            = -------------------
C             = ---
Interest Rate = --------------------------------------------------------


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

This letter refers to Taxpayer’s request for a private letter ruling, submitted on -------------
------------, requesting permission to revoke its election out of the installment method for
the sale of certain property under section 453 of the Internal Revenue Code (Code) and
section 15a.453-1(d)(4) of the Income Tax Regulations (Regulations).

This letter ruling is being issued electronically in accordance with Rev. Proc. 2022-1,
2022-1 I.R.B. 1. A paper copy will not be mailed to Taxpayer.

                                         FACTS

Taxpayer was a partnership for federal income tax purposes, which was owned by
Partners. On Date 1, Taxpayer sold Property to Buyer Sub, a limited liability company
which was wholly owned by Buyer. In consideration for Property, Taxpayer received
from Buyer $A in cash and four promissory notes in the aggregate principal amount of
$B. The promissory notes each obligated Buyer to make C equal annual payments of
principal and interest at Interest Rate.

Taxpayer subsequently liquidated and distributed the promissory notes to Partners, via
four separate assignments executed on Date 2. On Date 3, the interest rate on the
promissory notes was modified and the payments frequency was changed from annual
to quarterly.

Taxpayer’s advisors on tax matters, Advisors, provided Taxpayer with tax advice
relating to the sale of Property before and after the close of the transaction. Advisors
also supervised the preparation and filing, on Date 4, of Taxpayer’s Year 1 Form 1065,
U.S. Return of Partnership Income. Partners periodically consulted with Advisors
regarding tax matters relating to the sale, including the expected use of long-term
promissory notes as part of the consideration.

At least one year prior to the close of the transaction, Advisors advised Taxpayer
regarding the benefits of reporting the gain on the sale of Property using the installment
method under section 453 of the Code. During Month 1, Advisors provided Taxpayer
with computations comparing the estimated gain on the sale of Property with and
without the installment method. After reviewing the computations, Partners
communicated to Advisors that they wished to use the installment method with respect
to the promissory note consideration.

In Month 2, Partners were presented with updated computations and confirmed their
desire to use the installment method for the promissory note consideration. Partners
used the installment sale computations to calculate and remit their fourth quarter
estimated tax payments for Year 1. In Month 3, Advisors prepared Taxpayer’s Form
1065, but erroneously reported all of the gain from the sale of Property in Year 1 due to
an inadvertent error. On Date 5, this error was discovered by Advisors while working on
one of the Partners’ Year 1 Form 1040, U.S. Individual Income Tax Return.

                                  LAW AND ANALYSIS

Section 453(a) of the Code provides that income from an installment sale shall be taken
into account under the installment method. Section 453(d)(1) provides that section
453(a) shall not apply to any sale if the taxpayer elects not to have section 453(a) apply
to the sale.

Section 453(d)(2) of the Code provides that, except as otherwise provided by
regulations, an election under section 453(d)(1) with respect to a sale may be made
only on or before the due date prescribed by law (including extensions) for filing the
taxpayer's return for the taxable year in which the sale occurs. Such an election shall be
made in the manner prescribed by the regulations.

Section 453(d)(3) of the Code provides that an election under section 453(d)(1) with
respect to any sale may be revoked only with consent of the Secretary.

Section 15a.453-1(d)(4) of the Regulations states that an election out of the installment
method may be revoked only with consent of the Internal Revenue Service. A
revocation will not be permitted when one of its purposes is the avoidance of federal
taxes, or when the taxable year in which any payment was received is closed.

In this case, the information submitted indicates that Taxpayer inadvertently elected out
of the installment method. Additionally, Taxpayer did not use hindsight in requesting
relief, and this request is not motivated by an intent to avoid federal taxes. Further, the
Taxpayer’s taxable year in which the sale took place is not closed.

                                      CONCLUSION

Based on the facts and information submitted and the representations made, we
conclude that Taxpayer may revoke its election out of the installment method of
reporting under section 453(d)(3) of the Code and report the gain on the sale of
business using the installment method.

This ruling is based upon facts and representations submitted by Taxpayer and
accompanied by a penalty of perjury statement executed by an appropriate party. This
office has not verified any of the material submitted in support of the request for a ruling.
However, as part of an examination process, the Service may verify the factual
information, representations, and other data submitted

This ruling addresses the granting of permission to revoke an election out of the
installment method under sections 453(d)(3) of the Code and 15a.453-1(d)(4) of the
Regulations. 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, including the amount of gain from the sale of Property.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

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.

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



                                                   Sincerely,



                                                   Mon L. Lam
                                                   Senior Counsel, Branch 4
                                                   (Income Tax & Accounting)



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