Tax Research Problem-Chapter 11

Tax Research Problem-Chapter 11 - the funds placed in...

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Tax Research Problem – Chapter 11 I:11-64 Is the installment method available to Eagle? Rev. Rul. 77-294, 1977-2 C.B. 173, states that if an escrow arrangement incident to a deferred payment sale transaction imposes a substantial restriction, in addition to the payment schedule, upon the seller's right to receipt of the sale proceeds, then the Service will allow the seller to use the installment method of reporting income from the sale, assuming the sale transaction otherwise qualifies under § 453. Rev. Rul. 79-91, 1979-1 C.B. 179, states that in order for an escrow arrangement to impose a substantial restriction, it must serve a bona-fide purpose of the purchaser, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the purchaser. Generally, the deposit of funds by a purchaser into an escrow account results in the constructive receipt of such funds by the seller if the funds are not subject to substantial conditions or restrictions other than time of payment and the seller expects to collect from
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Unformatted text preview: the funds placed in escrow. If the escrowed funds are constructively received by the seller, then the use of the installment method may be denied to the seller. However, if the seller's right to enjoy the trust or escrow funds is subject to a substantial restriction or condition, then the taxpayer is not currently taxable under the economic benefit theory. No, Eagle is not eligible to use the installment method. In fact, the cited authorities above indicate that amounts placed in escrow constitute constructive receipt by the seller. As a result, the entire sales price is considered to have been received by Eagle in 2010. In the absence of any contrary authority, the entire gain is taxable in 2010. In the situation described, financial security and tax security are inversely related. Since the seller faces little financial risk, the gain is taxable in the year of sale. References Internal Revenue Rev. Rul. 77-294, 1977-2 C. B. 173 Internal Revenue Rev. Rul. 79-91, 1979-1 C. B. 179...
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Tax Research Problem-Chapter 11 - the funds placed in...

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