Open Transactions and Installment Sales

1
Open Transactions and Installment Sales
Burnet v. Logan
Mrs. Logan
Youngstown Corp.
sale of stock basis 180,000
cash - 120,000 future payments
from mineral rights
2
IRS Approach
TPs Approach CLOSED
OPEN amt.
realized 220,000 ??? less
basis 180,000 180,000
40,000 0
capital gain from sale of stock

120,000 cash 100,000 discounted PV of mineral
rights
cash ???
3
Tax-free recovery of
180,000 stock basis IRS
Approach
TPs Approach basis offset
at time of sale none
recovered at time of sale (cash and PV future
payments included nothing
included in amount realized)
Receipt of regular future payments 9,000
per year IRS Approach
TPs Approach future
payment stream 100,000 basis
no basis in future payments
9,000 payment each year less no tax on yearly
payments 4,000 tax-free basis
5,000/yr. until
180,000 received tax free
ordinary income capital gain
straight-line amortization 100,000/25 years
4,000 per year
4
Installment Sale
453 sale of property basis
100,00 contract price 300,000
5 installments
60,000 per year
seller
buyer
5
Total Profit 300,000 contract price less
100,000 basis 200,000 profit
(taxable gain if all payments were received at
time of sale) Gross Profit
Ratio 200,000 gross
profit 300,000 contract price
2/3
6
Tax Consequences of Yearly
Installment Payments 2/3
1/3 Year Payment Taxable Amount Tax-Free
Basis Recovery 1 60,000
40,000 20,000 2 60,000
40,000 20,000 3 60,000
40,000 20,000 4 60,000
40,000 20,000 5 60,000
40,000 20,000 Total 300,000
200,000 100,000
(payments) (total taxable amount)
(total tax-free amount)