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IRS letter ruling 9306001: a window of opportunity to sell publicly traded stock and use the installment method.

Sec. 453(k)(2) excludes from installment method treatment stock traded on an established securities market. A recent technical advice memorandum appears, however, to offer a vehicle for selling publicly traded stock and recognizing the gain under the installment method. IRS Letter Ruling (TAM) 9306001 involved the sale of convertible preferred stock (which was treated in the TAM as publicly traded stock) as well as the sale of shares of an S corporation that owned some of the same convertible preferred stock. Not surprisingly, the TAM concluded that under Sec. 453(k)(2) the installment method was unavailable for the sale of the (deemed publicly traded) convertible preferred stock. For the sale of the S stock, however, the TAM determined that the taxpayer could use the installment method; while the Treasury was authorized to do so, it had not yet provided regulations preventing the use of passthrough entities to avoid Sec. 453(k)(2).

The flush language of section 453(k) provides the Secretary with the authority to provide for the application of section 453(k) in whole or in part for transactions in which the rules of the section would be avoided through use of related parties, pass-thru entities, or intermediaries. Because the Secretary has not issued regulations pursuant to this authority, however, the flush language may not be applied to the sale of the S common stock.

Example: P, an owner of publicly traded stock with a basis of $40 and a fair market value of $100, wished to sell her stock and use the installment method to recognize the gain. Rather than selling the stock directly, P could refrain from seeking out a buyer, and instead form an S corporation and contribute the stock to it tax free under Sec. 351. After a "decent interval" (as per Rev. Rul. 70-140) P could locate a buyer (B) for the S stock. On the authority of the TAM, P could use the installment method to recognize her $60 gain. B, whose basis in the S stock would be $100, could then liquidate the S corporation. On liquidation, the corporation would recognize a gain of $60, which would cause B's basis in his stock to increase from $100 to $160. The $60 gain would be offset by B's $60 loss when he received assets worth $100 in exchange for his S stock with a basis of $160. Thus, B would be in the same position as if he had purchased the stock directly, and P would have avoided Sec. 453(k).

Obviously, this window of opportunity is open only so long as the Treasury does not publish a position effectively shutting it. However, the published Business Plan for 1993 does not contain any indication that such a publication is currently in the works.
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Author:Bailine, Richard W.
Publication:The Tax Adviser
Article Type:Brief Article
Date:Jun 1, 1993
Words:463
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