Transfers of installment obligations would trigger gain or loss under proposed rules

By Sally P. Schreiber, J.D.

The IRS issued proposed regulations relating to the nonrecognition of gain or loss on certain dispositions of an installment obligation. The regulations would require transferors that transfer installment obligations for equity interests in corporations or partnerships in nonrecognition transactions in satisfaction of those obligations to recognize gain or loss on the transfers (REG-109187-11).

Under Sec. 453B(a), gain or loss is recognized when an installment obligation is satisfied at other than its face value, or if it is distributed, transmitted, sold, or otherwise disposed of. Under Regs. Sec. 1.453-9(c)(2) (which was issued under the old installment sale rules that were replaced by Sec. 453B in 1980), if the Code has an exception to these rules for certain dispositions, then gain was not recognized. Those exceptions included transfers to corporations under Sec. 351 or 361, certain transfers to partnerships under Sec. 721, and distributions from partnerships to partners under Sec. 731.

However, under Rev. Rul. 73-423, the installment sale rules do not apply to the transfer of an installment obligation that results in a satisfaction of the obligation. Thus, 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. The transferor must recognize gain or loss on the transaction to the extent of the difference in the transferor’s basis in the obligation and the fair market value of the stock.   

According to the IRS, these proposed regulations “republish” in Prop. Regs. Sec. 1.453B-1(c) the general rule of Regs. Sec. 1.453-9(c)(2) to the extent that it provides for nonrecognition of gain or loss in certain dispositions. The regulations also expand upon Rev. Rul. 73-423 by providing that a transferor recognizes gain or loss when it disposes of the installment obligation in a transaction that results in the satisfaction of the obligation, including when an installment obligation of a corporation or partnership is contributed to the corporation or partnership in exchange for an equity interest in the corporation or partnership.

The regulations would apply to transactions occurring after they are published as final in the Federal Register. Comments must be received by March 23.

Sally P. Schreiber ( sshreiber@aicpa.org ) is a JofA senior editor.

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