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The rise of the limited liability company as the entity of choice for many real estate and operating businesses has resulted in tax practitioners dealing with more and more sales of such interests by clients. Such transactions often include some element of seller take-back financing. Thus, practitioners are increasingly called upon to apply the installment sale rules of Section 453 to the sale of an interest in a partnership or an LLC. The interplay of these rules can be cumbersome in view of the complexities of the partnership rules involving liabilities under Section 752 and the recognition of ordinary income attributable to hot assets under Section 751. This article discusses, with illustrative examples, the application of the installment method to the sale of a partnership (or an LLC) interest. * Section 453 Installment Sales Generally * A disposition of property where at least one payment is to be received after the close of the year of disposition is normally treated as an installment sale under Section 453.1 Generally, the seller reports gain on the disposition only with respect to the proportionate share of gain attributable to the amount of payment received each year.2 The installment method applies whether or not the seller receives an installment note or any collateral for the deferred payments, but does not apply to dispositions (1) by a "dealer,"3 (2) involving inventory of personal property,4 (3) where the seller elects out of the installment method,5 or (4) where a loss on the disposition occurs - in which case, the seller reports the amount of the loss in the year of sale.6
Under the installment method, the seller recognizes gain each year equal to the amount of payment received that year (including the year of disposition) multiplied by the gross profit ratio - the gross profit on the transaction divided by the total contract price. Any installment sale requires computations for the following key terms:
Selling Price. The selling price is the gross selling price including all mortgages and other encumbrances whether assumed or taken subject to by the buyer, and (after 10/19/80) without reduction for selling expenses.7
Contract Price. The contract price is equal to the selling price less qualifying indebtedness (defined hereafter) which is either assumed or taken subject...