NE 22-88-3 Individual Income Tax 1988-05-24

If a portion of my deferred installment-sale income is deemed received under the federal proportionate disallowance rule, can I spread the resulting Nebraska tax over several years the way federal law lets me?

Short answer: No -- the Nebraska tax is due all at once. Under Revenue Ruling 22-88-3, the amount of income that federal law deems received under the proportionate disallowance rule for installment sales (Internal Revenue Code section 453C) is a payment included in federal adjusted gross income, and because federal AGI is the base for the Nebraska individual income tax, that income is fully taxable in Nebraska in the year it is disallowed. Federal transition rules let a taxpayer pay the *increase in federal tax* from the proportionate disallowance over more than one year, but Nebraska law has no comparable provision. So the entire Nebraska individual income tax on the proportionate-disallowance amount is due with the return for the year for which the disallowance was computed.

Apply this to your situation

This page answers the general question as of 1988. Ezel answers yours, under current Nebraska tax law, with citations.

Disclaimer: This is an official Revenue Ruling of the Nebraska Department of Revenue, a guidance document stating the Department's interpretation of how Nebraska tax law applies. Each Nebraska guidance document carries the notice that it 'is advisory in nature but is binding on the Nebraska Department of Revenue until amended.' Unlike a private letter ruling, a Revenue Ruling is a general statement of Department policy rather than advice to a single taxpayer, but it can be amended, superseded, or made obsolete by a later ruling or a change in statute or regulation, many rulings in this series have been rescinded or superseded, so confirm it is still in effect before relying on it. Nebraska's local option sales and use taxes are administered by the Department, not self-collected by home-rule cities. This summary is informational only and is not legal or tax advice. Consult a licensed Nebraska tax professional about your situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.

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Plain-English summary

When a business sells property and collects the price over time, the installment method normally lets it report the gain as payments come in, instead of all at once. In the 1980s, federal law (the proportionate disallowance rule in Internal Revenue Code section 453C, added by the Tax Reform Act of 1986) forced certain installment sellers to treat a portion of that deferred income as if it had been received at the end of the taxable year -- pulling it into income early. This ruling answers whether a taxpayer can soften the Nebraska hit the way federal law allowed.

The core holding: the amount of income deferred under the installment method that is deemed a payment received under the proportionate disallowance rule is included in federal adjusted gross income under the Internal Revenue Code, and it is fully taxable in Nebraska in the year it is disallowed.

The reasoning is a straight follow-through from the tax base. The deemed payment is recognized and "properly included in federal adjusted gross income, which is the base for the Nebraska individual income tax." So once the amount lands in federal AGI, it automatically flows into the Nebraska base for that same year.

Why you can't stretch out the Nebraska tax. Federal law contained transition rules letting a taxpayer pay the increase in federal tax caused by the proportionate disallowance over more than one year. Nebraska has no similar provision. As a result, "[t]he entire amount of the Nebraska individual income tax on the amount of the proportionate disallowance is due with the return for the year for which the disallowance was computed." The federal installment-payment relief simply does not carry over to Nebraska.

What this means for you

An installment seller who had income pulled forward under section 453C

For the year the proportionate disallowance was computed, the extra income is in your federal AGI and therefore fully in your Nebraska income base for that year. You owe the full Nebraska tax on it with that year's return.

Anyone counting on federal installment relief for state purposes

The federal option to pay the added tax over several years is a federal-only benefit. Nebraska did not adopt it, so budget for the whole Nebraska tax up front in the disallowance year. This is a good example of a federal timing break that does not automatically flow through to a state that piggybacks on federal AGI.

Common questions

Q: Is the deemed installment-sale income taxable in Nebraska?
A: Yes. Because it is included in federal adjusted gross income and federal AGI is the base for the Nebraska individual income tax, it is fully taxable in Nebraska in the year the disallowance is computed.

Q: Can I spread the Nebraska tax over several years like the federal transition rules allow?
A: No. The ruling says Nebraska has no provision comparable to the federal transition rules, so the entire Nebraska tax on the proportionate-disallowance amount is due with the return for that year.

Q: Does this ruling still control today?
A: It reflects the Department's interpretation of the installment-sale rules as they stood, and the underlying federal proportionate disallowance rule has since changed. Treat this as historical guidance, confirm current law, and consult a Nebraska tax professional before relying on it.

Citations and references

Nebraska Revenue Ruling 22-88-3, "Individual Income Tax -- Income from Installment Sales" (Nebraska Department of Revenue, issued May 24, 1988; approved by State Tax Commissioner John M. Boehm).
Internal Revenue Code of 1986, section 453C (proportionate disallowance rule for installment-method income), as referenced in the ruling.

Source

Original ruling text

Revenue P.uling 22-88-3

lndivicJual Income Tax--lncome frorn lnstallrnent Sales,

THE F.MCUI'lT

DfffnmfR-eri-Ã5-THË-pRcp-õR-1'ïC,-¡iÄ-r-r"l-ñT5Ã-l-tÕ+iÃ.-r'ieË-ör rFrcol\,iE DEFERRED
UNDER TI-IE INSTALLMENT SALES METHOD CF ACCCUNTIÌ'¡C IS DËËfuIËD A
PAYMENT RECEIVED A.ND INCLUDED IN FEDERA-L A.DJUSTEE CRCSS INCOIIIE

UNDER THE INTERNAL REVENUE CODE, AND IS FULLY TAXABLE IN
NEBRASKA IN THE YEAR IT IS DISALLOWED.

Advice has been requested as to whether a taxpayer who has been using the
installment method of accounting rnay defer a porticn of the tax ciue to
Nebraska on the income from the proportionate disallowance that is cÍeemeC a
payment under section 453C of the lnternal Revenue Code of 1986.

The IRC deems that a portion of the income cieferred unCer the instellnent
methocl of accounting is a payment receiveci at the end of tlre taxable year

uncier the propcrtionate Cisaltowance rule. The income on the cieen'eC pa1'n:ent
is recognizecl and is properly inclucjed in federal acljusted gross incorne, which
is the base for the l,iebraska inclividual income tax.

The federal transition rules allow the increase in the federal tax Cue to the
proportionate disallowance to be paici in more than one year. There is no
similar provision in Nebraska law allowing a cJelay in the payment of the tax.
The entire amount of the lliebraska individual income tax on the amount of the
proportionate, disallowance is due with th.e return for the year for which the
disallowance was computed.
APPROVED:

72/-/3"h
John M. Boehm
State Tax Commissioner
lulay 1¿/ 14, I 988

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