Question 1

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?

Accepted Answer

1. Identify Transaction: Installment Sale to Related Party.
2. Identify Event: Second Disposition (Resale) by related party.
3. Timing: Within 2 years.
4. Rule: The original seller is treated as receiving payment in full at the time of the second disposition.
5. Result: Acceleration of gain.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Assuming the installment treatment continues.

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?

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