ExpertHard1 markMultiple Choice
CPA · Question 61 · Area 4: Entity Tax Planning
A business owner wants to sell their company to their child using an installment sale. They sell the business for $1,000,000 (Basis $200,000). The child pays $100,000 in Year 1. The child resells the business to a third party for $1,000,000 in Year 2. What is the consequence to the original owner?
A business owner wants to sell their company to their child using an installment sale. They sell the business for $1,000,000 (Basis $200,000). The child pays $100,000 in Year 1. The child resells the business to a third party for $1,000,000 in Year 2. What is the consequence to the original owner?
Answer options:
A.
No change; original owner continues to report gain as payments are received.
B.
Child recognizes the gain.
C.
Original owner must accelerate the remaining gain in Year 2.
D.
Transaction is voided.
How to approach this question
1. Identify Transaction: Installment Sale to Related Party.<br/>2. Identify Event: Second Disposition (Resale) by related party.<br/>3. Timing: Within 2 years.<br/>4. Rule: The original seller is treated as receiving payment in full at the time of the second disposition.<br/>5. Result: Acceleration of gain.
Full Answer
C.Original owner must accelerate the remaining gain in Year 2.✓ Correct
C
Under the 'second disposition rule' for related parties (IRC §453(e)), if the related buyer disposes of the property within 2 years, the original seller is treated as receiving the amount realized by the second disposition, accelerating the deferred gain.
Common mistakes
Assuming the installment treatment continues.
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