Imputed (unstated) interest on Installment sales?

Discussion in 'Tax' started by Confused, Apr 25, 2012.

  1. Confused

    Confused Guest

    Topic 705 says "If the installment sales contract does not provide for adequate stated interest, then you may be required to recharacterize part of the installment payments as "imputed" interest"

    Pub 537 says "If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest."

    In both it says "both" rather than "will". What determines whether it is necessary to recharacterize or not (if there is no stated interest...)?
    I have read through section 1274 and section 483 where I presume the answer is, but frankly I don't have any idea what they mean. I would be grateful if someone could explain in English.

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    Confused, Apr 25, 2012
    #1
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  2. Confused

    Bill Brown Guest

    On Apr 25, 3:33 pm, Confused <*> wrote:
    > Topic 705 says "If the installment sales contract does not provide for adequate stated interest, then you may be required to recharacterize part of the installment payments as "imputed" interest"
    >
    > Pub 537 says "If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest."
    >
    > In both it says "both" rather than "will".  What determines whether it is necessary to recharacterize or not (if there is no stated interest...)?
    > I have read through section 1274 and section 483 where I presume the answer is, but frankly I don't have any idea what they mean.  I would be grateful if someone could explain in English.
    >


    It means they (the IRS) can recharacterize gain as interest if they
    want to but they don't have to if they don't want to.

    I realize you want to know when the IRS would do one rather than the
    other. It will only make a difference at all if the gain is long term
    capital in nature to the seller. My educated guess is that if the
    amounts involved are large enough to be significant to YOU, the the
    IRS will require recharacterization.

    The easiest way to mitigate this threat is to have an adequate rate of
    interest stated in the installment sale contract when the seller is
    realizing a long term capital gain.

    --
    << ------------------------------------------------------- >>
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    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
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    Bill Brown, Apr 25, 2012
    #2
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  3. Confused

    Alan Guest

    On 4/25/12 1:33 PM, Confused wrote:
    > Topic 705 says "If the installment sales contract does not provide for adequate stated interest, then you may be required to recharacterize part of the installment payments as "imputed" interest"
    >
    > Pub 537 says "If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest."
    >
    > In both it says "both" rather than "will". What determines whether it is necessary to recharacterize or not (if there is no stated interest...)?
    > I have read through section 1274 and section 483 where I presume the answer is, but frankly I don't have any idea what they mean. I would be grateful if someone could explain in English.
    >

    None of the tax laws are written in English. They are all written in
    "taxspeak". There are a couple of staff members on the Senate Finance
    Committee and the House Ways and Means Committee that are taxspeak
    linguists. As such, they are the ones that can provide a clear
    explanation to you in English. Other than those few individuals, you are
    stuck with pages 10 and 11 of Pub 537.

    --
    Alan
    http://taxtopics.net

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2011) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Alan, Apr 25, 2012
    #3
  4. Confused <*@lippman.info> wrote:

    > Topic 705 says "If the installment sales contract does not
    > provide for adequate stated interest, then you may be required
    > to recharacterize part of the installment payments as "imputed"
    > interest"
    >
    > Pub 537 says "If an installment sale contract does not provide
    > for adequate stated interest, part of the stated principal
    > amount of the contract may be recharacterized as interest."
    >
    > In both it says "both" rather than "will". What determines
    > whether it is necessary to recharacterize or not (if there is no
    > stated interest...)? I have read through section 1274 and
    > section 483 where I presume the answer is, but frankly I don't
    > have any idea what they mean. I would be grateful if someone
    > could explain in English.


    The rule under §483 of the Code is that, when the statute applies
    interest "shall" be imputed. So if the contract calls for too
    little interest, it must be implied.

    The "may" language comes from the fact that the statute is
    complicated, and there are exceptions that apply in some
    circumstances. For example the requirement does not apply to sales
    where the total price cannot exceed $3,000, and to the sales of
    patents when payments are contingent on the productivity of the
    patent.

    But if there is not a specific exception, the requirement applies.

    ___
    Stu
    http://DownToEarthLawyer.com

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2011) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Stuart A. Bronstein, Apr 25, 2012
    #4
  5. Confused

    Bill Brown Guest

    On Apr 25, 6:54 pm, "Stuart A. Bronstein" <>
    wrote:
    > Confused <*> wrote:
    > > Topic 705 says "If the installment sales contract does not
    > > provide for adequate stated interest, then you may be required
    > > to recharacterize part of the installment payments as "imputed"
    > > interest"

    >
    > > Pub 537 says "If an installment sale contract does not provide
    > > for adequate stated interest, part of the stated principal
    > > amount of the contract may be recharacterized as interest."

    >
    > > In both it says "both" rather than "will".  What determines
    > > whether it is necessary to recharacterize or not (if there is no
    > > stated interest...)? I have read through section 1274 and
    > > section 483 where I presume the answer is, but frankly I don't
    > > have any idea what they mean.  I would be grateful if someone
    > > could explain in English.

    >
    > The rule under §483 of the Code is that, when the statute applies
    > interest "shall" be imputed.  So if the contract calls for too
    > little interest, it must be implied.
    >
    > The "may" language comes from the fact that the statute is
    > complicated, and there are exceptions that apply in some
    > circumstances.  For example the requirement does not apply to sales
    > where the total price cannot exceed $3,000, and to the sales of
    > patents when payments are contingent on the productivity of the
    > patent.
    >
    > But if there is not a specific exception, the requirement applies.
    >


    Stu is technically correct and, after all, the Internal Revenue Code
    is nothing but a bunch of technicalities strung together. But, I find
    my answer to be an attractive combination of cynicism and fatalistic
    realism so I still like it.
    :)

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2011) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Bill Brown, Apr 26, 2012
    #5
  6. Bill Brown <> wrote:
    > "Stuart A. Bronstein" <> wrote:
    >>
    >> The rule under §483 of the Code is that, when the statute
    >> applies interest "shall" be imputed.  So if the contract calls
    >> for too little interest, it must be implied.
    >>
    >> The "may" language comes from the fact that the statute is
    >> complicated, and there are exceptions that apply in some
    >> circumstances.  For example the requirement does not apply to
    >> sales where the total price cannot exceed $3,000, and to the
    >> sales of patents when payments are contingent on the
    >> productivity of the patent.
    >>
    >> But if there is not a specific exception, the requirement
    >> applies.

    >
    > Stu is technically correct and, after all, the Internal Revenue
    > Code is nothing but a bunch of technicalities strung together.
    > But, I find my answer to be an attractive combination of
    > cynicism and fatalistic realism so I still like it.
    >:)


    I agree with you that your response was at least as accurate and
    much more poetic. However OP somehow failed to grasp its entire
    import and kept asking the question, which is why I responded the
    way I did.

    By the way, my definition of "cynic" is someone who has an accurate
    view of the world.

    ___
    Stu
    http://DownToEarthLawyer.com

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2011) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Stuart A. Bronstein, Apr 26, 2012
    #6
  7. Confused

    Confused Guest

    On Thursday, April 26, 2012 8:54:31 AM UTC-4, Bill Brown wrote:
    > On Apr 25, 6:54 pm, "Stuart A. Bronstein" <>
    > wrote:
    > > Confused <*> wrote:
    > > > Topic 705 says "If the installment sales contract does not
    > > > provide for adequate stated interest, then you may be required
    > > > to recharacterize part of the installment payments as "imputed"
    > > > interest"

    > >
    > > > Pub 537 says "If an installment sale contract does not provide
    > > > for adequate stated interest, part of the stated principal
    > > > amount of the contract may be recharacterized as interest."

    > >
    > > > In both it says "both" rather than "will".  What determines
    > > > whether it is necessary to recharacterize or not (if there is no
    > > > stated interest...)? I have read through section 1274 and
    > > > section 483 where I presume the answer is, but frankly I don't
    > > > have any idea what they mean.  I would be grateful if someone
    > > > could explain in English.

    > >
    > > The rule under §483 of the Code is that, when the statute applies
    > > interest "shall" be imputed.  So if the contract calls for too
    > > little interest, it must be implied.
    > >
    > > The "may" language comes from the fact that the statute is
    > > complicated, and there are exceptions that apply in some
    > > circumstances.  For example the requirement does not apply to sales
    > > where the total price cannot exceed $3,000, and to the sales of
    > > patents when payments are contingent on the productivity of the
    > > patent.
    > >
    > > But if there is not a specific exception, the requirement applies.
    > >

    >
    > Stu is technically correct and, after all, the Internal Revenue Code
    > is nothing but a bunch of technicalities strung together. But, I find
    > my answer to be an attractive combination of cynicism and fatalistic
    > realism so I still like it.
    > :)
    >

    I like all the replies, though the technically correct ones are probably more useful.

    Reading everything through repeatedly, there is always imputed interest for installment contracts when there is no stated interest with the following exceptions.
    *A sale or exchange for which no payments are due more than one year after the date of the sale or exchange.
    *A sale or exchange for $3,000 or less.
    *An assumption of a debt instrument in connection with a sale or exchange or the acquisition of property subject to a debt instrument, unless the terms or conditions of the debt instrument are modified in a manner that would constitute a deemed exchange under Regulations section 1.1001-3.
    *A debt instrument issued in connection with a sale or exchange of property if either the debt instrument or the property is publicly traded.
    *A sale or exchange of all substantial rights to a patent, or an undivided interest in property that includes part or all substantial rights to a patent, if any amount is contingent on the productivity, use, or disposition of the property transferred. See chapter 2 of Publication 544 for more information.
    *An annuity contract issued in connection with a sale or exchange of property if the contract is described in section 1275(a)(1)(B) and Regulations section 1.1275-1(j).
    *A transfer of property subject to section 1041 (relating to transfers of property between spouses or incident to divorce).
    *A demand loan that is a below-market loan described in section 7872(c)(1) (for example, gift loans and corporation-shareholder loans).
    *A below-market loan described in section 7872(c)(1) issued in connection with the sale or exchange of personal-use property. This rule applies only to the holder.

    So, if this were an installment sale for the purchase of $500,000 of non-privately traded stock, then it would not meet any of the exceptions and would require imputed interest as there was no stated interest.
    (I am not sure what the 3rd one means, but it doesn't seem to apply, since there is no pre-existing debt)

    Do I have it right? Thanks all.

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2011) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Confused, Apr 26, 2012
    #7
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