Internal Revenue Service
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 Rev. Rul. 68-13

1968-1 C.B. 195

Sec. 453

IRS Headnote

In determining whether any of the gain on the sale of a business (including several assets) may be reported on the installment method under section 453(b) of the Internal Revenue Code of 1954, the total selling price and the payments received in the year of sale must be allocated to (1) property properly includible in inventory, (2) assets sold at a loss, and (3) real property.

Revenue Ruling 57-434, C.B. 1957-2, 300, amplified.

Full Text

Rev. Rul. 68-13

The Internal Revenue Service has been asked to explain further its position contained in Revenue Ruling 57-434, C.B. 1957-2, 300, relating to the extent to which several assets sold in the sale of a business must be separately considered in the application of section 453(b) of the Internal Revenue Code of 1954.

Section 453(b) of the Code provides that income from a sale or other disposition of real property, or from a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in inventory if on hand at the close of the taxable year) for a price exceeding one thousand dollars ($1,000), may be returned on the installment method if, in the taxable year of sale, (1) there are no payments, or (2) the payments received (exclusive of evidences of indebtedness of the purchaser) do not exceed 30 percent of the selling price.

This statutory provision is related to the reporting of income from a transaction on the installment method and does not deal with the question whether or not the transaction as a whole may be reported in this manner. It was recognized in  Revenue Ruling 57-434 that Revenue Ruling 55-79, C.B. 1955-1, 370, had set forth the position of the Service that the sale of a going business operated as a sole proprietorship constitutes a sale of the individual assets comprising the business. Hence, for purposes of reporting the income thereon, the sale should not necessarily be considered as a single, whole transaction.

Revenue Ruling 57-434 also recognized that in the case of an installment sale, allocation of the down payment for purposes of determining income which may be reported on the installment method, ordinarily presents no problem since it usually represents a fixed percentage of the selling price of all the assets included in the sale, although the conditions of a particular case may require a separate allocation of the down payment. As a result, the 30 percent rule of section 453(b) of the Code is usually clearly satisfied where the ratio of the stated down payment to the total selling price does not exceed that limit. However, the satisfaction of the rule only relates to the reporting of income on an installment method with respect to property other than property of a kind which would properly be included in inventory if on hand at the close of the taxable year.

In the case Andrew A. Monaghan, et ux. v. Commissioner , 40 T.C. 680 (1963), acquiescence, C.B. 1964-2, 6, the Tax Court of the United States held that the same principles apply when the installment sales provisions are being considered as where the sale of a business is being considered for purposes of ascertaining whether profit results in capital gain or ordinary income, in which case the sale is considered as a sale of the separate business assets, as evidenced by the cases of Aaron F. Williams v. McGowan , 152 F.2d 570 (1945), reversing 58 F.Supp. 692 (1944) and Ernest A. Watson v. Commissioner , 345 U.S. 544 (1953), Ct. D. 1760, C.B. 1953-1, 179, and by Revenue Ruling 55-79. The court in Monaghan further held, in part, as follows:

An allocation is material, however, when there is a sale of a going proprietorship with an explicit amount received for property excluded by the terms in parentheticals of section 453(b)(1)(B), such as in the instant case since only the payment for the business was to be made in installments, while the separate agreement for the remaining inventory provided for payment in cash. In such cases it is our conclusion that the sale of the inventory for a separate price will not be included in determining whether the 30 percent limitation will prevent installment reporting for the sale of the other assets.

The sale of inventory assets, such as those under consideration in the Monaghan case, like the assets in  Revenue Ruling 57-434, which were required to be sold at a down payment in excess of 30 percent of the selling price, cannot result in income which may be reported on the installment method under section 453(b) of the Code. In the sale of a business as a whole, the sale of inventory at a separate price, and the sale of other assets with a down payment specifically allocated to them in excess of 30 percent of the selling price, should be set to one side in determining whether the 30 percent limitation will prevent the installment reporting of gain from the sale of the remaining assets. It follows that the sale of a business must be `comminuted into its fragments' where either the selling price or the down payment, or both of them, is separately stated with respect to different assets or types of assets in the agreement of sale. In this connection, it also should be noted that losses, where separately determinable, must be reported in the year of sale. Darwin D. Martin v. Commissioner , 24 B.T.A. 528 (1931), affirmed, 61 F.2d 942 (1932), Ct. D. 686, C.B. XII-I, 226 (1933), certiorari denied, 289 U.S. 737 (1933), and George P. Sacks v. Commissioner , 23 B.T.A. 307 (1931), affirmed, 66 F.2d 223 (1933), Ct. D. 766, C.B. XII-2, 194 (1933).

Accordingly, in determining whether any of the gain on the sale of several assets in the sale of a business may be reported on the installment method under section 453(b) of the Code, there must be an allocation of the selling price and the payments received in the year of sale to (1) property properly includible in inventory, the gain on which may not be reported on the installment method under section 453(b) of the Code, (2) assets sold at a loss, the loss on which must be reported in full in the year of sale, and (3) real property, any gain on which may be reported on the installment method if payments allocable thereto in the year of sale do not exceed 30 percent of the selling price thereof. If the selling price allocable to the remaining personal property exceeds one thousand dollars ($1,000) and the payments in the year of sale allocable to such property do not exceed 30 percent of the selling price, the gain on such personal property may be reported on the installment method, except to the extent that the agreement of sale requires that a portion of the down payment in excess of 30 percent of the selling price of some of the remaining property is to be considered a down payment with respect to it. Since some of the gains which may be reported on the installment method may be ordinary income and others capital gains, separate computations must be made to the extent necessary with respect to each asset in order that the gains in such cases may be properly reported, as, for instance, in the case of the disposition of section 1245 property.

The following examples illustrate the principles to be used in determining whether any of the gain on the sale of several assets in the sale of a business may be reported on the installment method.

(1) The total selling price of a business is $3,500 and the entire down payment is $1,000. Based upon relative values and arm's-length bargaining, the selling price of the inventory included in the sale is two-fifths of the total selling price, or $1,400, leaving $2,100 attributable to non-inventory property. In the absence of a bona fide allocation of the down payment, it will be ratably allocated to the inventory and non-inventory property. Thus, in the facts of this case, two-fifths of the down payment, or $400, is allocable to inventory property and three-fifths, or $600, to non-inventory property. Since the portion of the down payment allocable to non-inventory property ($600) is an amount less than 30 percent of the $2,100 selling price, income from the sale of such property qualifies for treatment under section 453(b) of the Code.

(2) The selling price is $3,500 and the entire down payment is $1,400. Based upon relative values and arm's-length bargaining the $3,500 selling price is made up of $2,000 for inventory and $1,500 for non-inventory property, with no specified allocation of the down payment. Thus, the amount of the down payment allocable to the non-inventory property is $600, or three-sevenths ($1,500/$3,500) of the total. Since this is in excess of 30 percent of the $1,500 selling price for non-inventory property, any income from the sale of such property may not be returned on the installment method.

(3) The total selling price of a business is $8,000. The down payment on the sale is $4,000, $3,000 of which, based upon relative values and arm's-length bargaining, is to pay for the inventory transferred. Since the amount attributable to the inventory has been fairly bargained for an allocation need not be made. Thus, the ratio of down payment to selling price of the non-inventory property is $1,000/$5,000, or 20 percent. Since this is less than 30 percent, the income from the sale of the non-inventory property qualifies for treatment on the installment method.

(4) The total selling price of a business is $120,000. The down payment is $40,000, $20,000 of which, based upon relative value and arm's-length bargaining, is to pay for the inventory transferred. The sales price includes, in addition to inventory, $70,000 for real property, $10,000 attributable to personal property assets sold at a loss, and $20,000 for the remaining personal property. In determining the applicability of section 453(b) of the Code the $10,000 attributable to assets sold at a loss must be excluded. The portion of the down payment attributable to this amount must also be excluded from the determination. Since the $10,000 applicable to assets sold at a loss is one-tenth of the remaining selling price ($120,000 less $20,000 applicable to inventory, or $100,000) one-tenth of the down payment, after deducting the amount attributable to inventory, must also be excluded from the determination. In this case the amount excluded is $2,000 ($40,000 less $20,000 attributable to inventory multiplied by ten percent).

The selling price then attributable to the real property and to the remaining personal property is $90,000, of which $70,000 or seven-ninths is attributable to the real property. Seven-ninths of the remaining down payment of $18,000 ($40,000 less $20,000 paid for inventory and $2,000 attributable to property sold at a loss), or $14,000, is allocable to the real property. Since this amount is less than 30 percent of the selling price ($70,000), the income from the real property may be reported on the installment method. The ratio of down payment to the remaining personal property is $4,000/$20,000, or 20 percent. Since this is less than 30 percent, the income from the sale of this remaining personal property also qualifies for treatment on the installment method.

Revenue Ruling 57-434, C.B. 1957-2, 300, is amplified.