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Monday, February 26, 2007

INSTALLMENT SALES OF PARTNERSHIP INTERESTS

When a seller of property receives payments in more than one year, the seller may be eligible to report any gain arising on the sale using the installment method of accounting under Code Section 453. This allows a portion of the gain to be allocated to multiple tax years, as payments are received in those years.

The application of Code Section 453 to an installment sale of a partnership interest (or aninterest in a limited liability company taxable as a partnership) raises numerous issues, not all of which have been fully resolved. Richard Harris, in an article in Business Entities journal entitled Installment Sales of a Partnership Interest, discusses several of these issues which practitioners need to be concerned about.

The first issue he discusses is the potential disallowance of installment sale treatment to the portion of partnership/LLC assets made up of "hot assets" under Code Section 751 – namely, unrealized receivables and inventory items. Mr. Harris notes that Rev. Rul. 89-108 disallows these items. However, he notes that not everyone agrees that the ruling is a correct interpretation of the law, and that it did not directly apply to unrealized receivables and to all inventory (since at the time, Section 751 only applied to substantially appreciated inventory) so perhaps it does not provide precedent for those items.

The other principal issues discussed by Mr. Harris relate to the effect that partnership liabilities will have on installment sale treatment. He notes that a partnership's qualifying liabilities under Section 453 may affect the partner's computation of installment sale gain by reducing the contract price. Further, the partnership's liabilities may also be treated at times as payment received in the initial year of sale, thus accelerating the gain recognition.

Harris, Richard, Installment Sales of a Partnership Interest, Business Entities, Jan/Feb 2007.

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