No Fixed Maximum Amount or Fixed-Payment Period

In the situation where the agreement does not specify a maximum selling price or fixed-payment period, the IRS may question whether a sale actually occurred, then Treasury Reg. Sec. 15A.453-1( c) (4) states that the taxpayer’s basis (including selling costs) shall be recovered in equal annual increments over a period of 15 years.

If a payment is not received or the payment is less than basis allocation in a particular year, a loss is not recognized unless it can be proven that the debt is worthless. The excess basis is then reallocated in level amounts over the balance of the 15 years. If at the end of the 15 years, there is any unrecovered basis, it can be carried forward to subsequent years.

A contingency sale can result in several different situations. The first step is to determine whether there is a maximum stated selling price and, if not, whether there is a fixed-payment period. Care should be exercised because the Treasury regulations are very specific in handling these situations.