Fixed-Payment Period

If a maximum selling price is not determinable under the agreement, but the maximum period over which payments may be received in the contingency sale is fixed, the basis (including selling costs) can be allocated over the fixed-payment period. If the allocated basis or no payment is received for the year, no loss is allowed unless that taxable year is a final payment year or the debt can be classified as a worthless debt. When no loss is allowed, the unrecovered basis is carried over to the subsequent year.

Example: An item of tangible personal property with a basis of $1,000,000 is sold; the agreement does not state a maximum selling price. Under the agreement, the seller receives a percentage of the income for 10 years. The seller can thus recover $100,000 in basis each year. Given the following payment schedule, the gain recognized is as follows:

*$100,000 normal basis recovery plus $10,000 unrecovered basis from 1993