Discussion:Installment Sale of Patent
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> Installment Sale of Patent
| 13 February 2007 | |
| I am working on an S-corp return that entered into an installment sale of several related patents. The patent was contributed to the S-corp by two founding shareholders. The corporation now has twelve shareholders most of whom were material participants in developing the patent into a mass-producible product.
The terms of the asset sale where 500k down with 10% of the patented products sales quarterly for the next five years. The sale agreement did not stipulate a maximum consideration. Main questions: 1. How is a GP% arrived at in a contingent installment sale when there is not a maximum considerations? I have not been able to find an example of one. 2. Publication 537 leads you to and the most comprehensive rules I have been able to find are Reg. 15a.453-1 . I have not relied on a temporary regulation before that I recall. Is this the most authoritative section on the matter or am I in the wrong spot? Additionally, I have not recorded this type of sale before so I am open to any pointers you may have regarding these transactions. I realize this is not a simple matter, any thoughts/time you spend on this is appreciated. | |
| 13 February 2007 | |
After re-reading Reg. 15a.453-1 finally found the GP% methodology for contingent installment sales that lack maximum considerations in that regs section 3 which I will post below for those that come after me...
(3) Fixed period—(i) In general. When a stated maximum selling price cannot be determined as of the close of the taxable year in which the sale or other disposition occurs, but the maximum period over which payments may be received under the contingent sale price agreement is fixed, the taxpayer's basis (inclusive of selling expenses) shall be allocated to the taxable years in which payment may be received under the agreement in equal annual increments. In making the allocation it is not relevant whether the buyer is required to pay adequate stated interest. However, if the terms of the agreement incorporate an arithmetic component that is not identical for all taxable years, basis shall be allocated among the taxable years to accord with that component unless, taking into account all of the payment terms of the agreement, it is inappropriate to presume that payments under the contract are likely to accord with the variable component. If in any taxable year no payment is received or the amount of payment received (exclusive of interest) is less than the basis allocated to that taxable year, no loss shall be allowed unless the taxable year is the final payment year under the agreement or unless it is otherwise determined in accordance with the rules generally applicable to worthless debts that the future payment obligation under the agreement has become worthless. When no loss is allowed, the unrecovered portion of basis allocated to the taxable year shall be carried forward to the next succeeding taxable year. If application of the foregoing rules to a particular case would substantially and inappropriately defer or accelerate recovery of the taxpayer's basis, a special rule will apply. See paragraph (c)(7) of this section
Relevant pubs: Publication 544 Sales and Other Dispositions of Assets Publication 537 Installment Sales | |
