Imputed interest on installment sales

Publication 537 also says that a sale of an entire business under a single contract is not the sale of a single asset. It goes on to say that an allocation must be made, and some of the business sale may qualify for installment sale treatment, other might not.

Sounds like your escrow pertains to a type of asset of the business which would not qualify for installment sale treatment.

Reply to
Wallace
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I'll repeat what I said in an earlier post.

You set up an escrow account as a contingency against future legal expenses that you are on the hook for. You own the account. You control the account. You make the investment decisions. You report the gains or losses. You don't have an installment sale.

Reply to
Alan

I wasn't calling you a price gouging ambulance chaser. If you recall, I promised not to do that again. ;)

It would make a lot of sense to know the bottom line before spenging time discussing this further.

To repeat myself (which I like to do), I still do not see why he would report imputed interest unless he is an accrual basis taxpayer.

Dick

Reply to
Dick Adams

Oh, but I wish I could get away with being a price gouging ambulance chaser.

I agree.

As I like to say, double your pleasure! ;-)

As I recall, the IRS imputes interest even on cash basis taxpayers when the actual interest rate is less than the minimums they come up with each month as the Applicable Federal Rate.

Reply to
Stuart A. Bronstein

I don't control the account in any way. I don't make any investment decisions. I will never get some of the money for certain; perhaps none of it. I cannot do anything regarding the account except demand that it be liquidated when it is no longer needed. In our agreement, the buyer granted me the benefit of the investments instead of paying me interest; as is his right. The tax code says I can treat it as an installment sale. If I don't treat it as an installment sale, I have to pay tax on money I will never get. That seems bad. Sadly my accountant screwed up; apparently getting the benefit of the investments does not prevent imputed interest; I should have gotten interest instead and let the buyer keep the benefit of the investments.

Reply to
kevin

Again, you haven't told us how much (what percentage) interest you are getting, or how long you expect it to take before you can get your money.

I haven't researched the issue extensively, so I'm assuming that your professionals are correct that installment sale treatment is proper. Even then, imputed interest is minimum interest, and would only be applicable to the extent you don't get enough. And the applicable federal rate, the last time I checked, was fairly low.

Reply to
Stuart A. Bronstein

snip

Now, after all these posts, we finally get some more information. But you still leave out facts. What did you actually sell? You say a business but give no other details. Did you sell stock or just the assets?

According to you, you received a large amount of money, you are still due a large amount of money, and you are so tight you will not hire another professional so you come for free advice. Intentionally or unintentionally you withhold facts and expect a good answer.

investment manager and invested in equities. I pay income tax on the income and get it at the end, if there is any money left in the escrow account at the end." Sounds like you own the escrow and it is not an installment sale. The buyer has to pay the tax annually on the investment gain or it is not an installment sale. Even if the buyer pays the tax, it doesn't mean it is an installment sale.

Now if all you mean is that you owe tax on the balance in the escrow account, gains and all, when it is disbursed, then it could qualify as an installment sale. But each year the buyer needs to report the escrow account activity and pay any taxes due. In this case, you would have imputed interest. Whatever you pay tax on as imputed interest is not again taxed when you get the escrow money.

Drew Edmundson, CPA Cary, NC

Reply to
Drew Edmundson

Way way back at the top, I said it was invested in equities and managed by an investment manager. Just about no interest. (though I am not certain it would matter) The imputed interest effectively converts capital gains into interest; so I have to pay the difference.

There is no way of knowing how long it will take. The last lawsuit I was in took 9 years. I suppose this one will be 3 to 20 years. If 3, the interest won't be too bad, but 20 will pretty much convert it all; assuming anything is left.

Reply to
kevin

yes, I found what I think is the relevant code section pertaining to Contingent Payment Sales - Regulations section 15a.453-1(c). (the examples all seem to deal with contingent paymetns based on sales or profits of the business over a number of years after the sale of the business). Not sure this applies to your situation, but it sounds like your tax advisors are taking this approach.

I suppose so, but when you determine you don't get the money, you should have a loss that (or those) taxable year(s).

perhaps, but perhaps the seller would have adjusted the sales price of your business to reflect this difference.

So, what are the investments? will they appreciate over time, in addition to the annual earnings? It seems that the imputed interest will be the current rate set by the IRS less your actual earnings.

Reply to
Wallace

I am filling out my 2008 tax return now (plenty of time!) and that is the the section he cites in a footnote.

Losses can be nebulous; if you don't have the income to offset them they aren't worth much. It is better to not have the gains in the first place.

I doubt it; turns out they can't use the imputed interest deduction anyhow. My accountant just screwed up.

That's the funny part. I am actually down on the investments; so it is a double whammy. My accountant and lawyer are certain there would be no offset; only thing that matters is interest paid by the buyer, and there isn't any.

Reply to
kevin

He's selling a business for, say, $5 million now, with $2 million of that in escrow. If he pays taxes on the full amount, and 5 years from now gets none of the escrow, what good is a $2 million capital loss that he likely can never use? In an extreme case, suppose he got $1 million cash, with $10 million in escrow; he couldn't possibly pay the taxes on the full amount.

Given that the money is held by a third party, and the full investment results are taxable, I still don't see any need for imputed interest.

Most recently, they had losses.

Is any such imputed interest deductible by the seller?

Seth

Reply to
Seth

It's the purchase of a business, so there shouldn't be any deduction (just a cost basis). And the full amount paid (including the escrow) is the basis, since it doesn't matter to the buyer whether the escrow goes to the seller or the plaintiff in the lawsuit.

Seth

Reply to
Seth

On the purchase of a business there are different kinds of assets. Some can be deducted right away, some have to be amortized. Some can't be deducted at all, but are allowed to be deducted later from the sale price if the business is sold again later.

The full amount does not necessarily go to the basis of the business. If there is a non-compete agreement the price of that is amortized over the life of the agreement. If there is some equipment that is within the amounts allowed, they can be written off immediately.

Reply to
Stuart A. Bronstein

I don't see any reason either; to me being assigned the investment benefit is exactly the same as being paid interest. That is why I agreed to it. My lawyer and accountant say that is entirely reasonable, but entirely wrong. Installment sales ALWAY have interest paid by the buyer to the seller. If none is stated, then unstated interest is imputed. No exceptions, ever. Who gets the investment benefits is not a factor.

When they explained the penalties for hoping the IRS would feel otherwise, it didn't seem like a good bet.

Reply to
kevin

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