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Posted by Alan on May 21, 2009, 12:01 pm
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Kevin wrote:
> I just sold my business. There is an ongoing lawsuit against the business,
> and part of the money paid to me was deposited in an escrow account to pay
> for any award. Under the sale contract I am responsible for declaring any
> income on the account on my tax return, and I get whatever is left after the
> suit concludes. It will certainly be a couple years. The purchaser is
> responsible for defending the suit as it is now against him, but I get to
> approve anything they do.
>
> My lawyer and accountant disagree over whether it is an installment sale.
> The accountant says that I was paid everything this year and the money in
> the escrow account is mine, so why would it be an installment sale? Since
> the amount I am going to ultimately get is unknown, it can't be an
> installment sale.
> The lawyer can't put his finger on a comparable case, but feels the IRS will
> insist the escrow dissolution is a second payment and that makes it an
> installment sale; despite the fact that the contract clearly wasn't intended
> to be one. He recommends that I treat it as an installment sale now to
> avoid hassles with the IRS.
>
> The only thing at stake (please let me know if you don't agree with this) is
> whether there is imputed interest or not. My taxes will go up a little if
> there is because it changes capital gains to interest (my basis is nearly
> zero), but the purchaser's taxes will go down significantly as they would
> get to deduct the imputed interest. Seems to me the IRS would rather it not
> be an installment sale, but the lawyer says they aren't that farsighted.
>
> So what do you think? Is there anything definitive on this. Seems to me I
> am risking trouble either way unless there is.
>
Accountant is right. Lawyer is wrong. Besides, when you report
the total sale in 2009 and do not file Form 6252, you have
elected out of an installment sale.
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