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IRS issues proposed regulations on disposition of installment obligations

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Tax Hot TopicsThe IRS has issued proposed regulations under Section 453B relating to the nonrecognition of gain or loss on certain dispositions of an installment obligation. The proposed regulations, via codification in a regulation, would generally republish existing guidance that existed under a prior code section and would expand the holding of Rev. Rul. 73-423.

The Installment Sales Revision Act of 1980 added Section 453B, which replaces and provides generally the same rules as former Section 453(d). In general, under Section 453B(a), gain or loss is recognized upon the satisfaction of an installment obligation at other than its face value, or upon the distribution, transmission, sale or other disposition of the installment obligation.

Treas. Reg. Sec. 1.453-9(c)(2), issued under former Section 453(d), provides an exception to the general rule. Under that regulation, if the code provides an exception to the recognition of gain or loss for certain dispositions, then gain or loss is not recognized under former Section 453(d) on the disposition of an installment obligation within that exception. The exceptions identified in Treas. Reg. Sec. 1.453-9(c)(2) include certain transfers to corporations under Sections 351 and 361, contributions to partnerships under Section 721 and distributions by partnerships to partners under Section 731 (except as provided by Sections 736 and 751).

According to the IRS, under Rev. Rul. 73-423, the exceptions in Treas. Reg. Sec. 1.453-9(c)(2) to recognition of gain or loss under the installment sale rules do not apply to the transfer of an installment obligation that results in a satisfaction of the obligation. Accordingly, the transfer of a corporation's installment obligation to the issuing corporation in exchange for stock of the issuing corporation results in a satisfaction of the obligation. In that case, the transferor must recognize gain or loss on the satisfaction of the obligation to the extent of the difference between the transferor's basis in the obligation and the fair market value of the stock received, even though gain or loss generally is not recognized on Section 351 transfers.

The proposed regulations republish under Treas. Reg. Sec.  1.453B-1(c) the general rule contained in Treas. Reg. Sec. 1.453-9(c)(2), under which gain or loss is not recognized upon certain dispositions. The proposed regulations also incorporate and expand the holding of Rev. Rul. 73-423 to provide that a transferor recognizes gain or loss under Section 453B(a) when the transferor disposes of an installment obligation in a transaction that results in the satisfaction of the installment obligation, including, for example, when an installment obligation of a corporation or of a partnership is contributed to the corporation or the partnership in exchange for an equity interest in the corporation or the partnership.

Finally, the proposed regulations amend regulations under Sections 351, 361 and 721 to include a cross-reference to the regulations under Section 453B regarding recognition of any gain or loss upon the satisfaction of an installment obligation.

The receipt of an equity interest in satisfaction of an installment obligation may have consequences beyond the installment sale rules, so additional analysis may be necessary in such a transaction.

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Sharon Kay
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E sharon.kay@us.gt.com

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