(1)(a) For transactions prior to January 1, 1985 - With three important exceptions, § 40-18-44 (as in effect before January 1, 1985) is with regard to the sale of real estate and the casual sale of personal property for a price exceeding $1,000, essentially the same as provisions of the United States Internal Revenue Code as in effect prior to January 1, 1985. The Department will therefore consider the rules and decisions of the Internal Revenue Service and the federal courts with respect to this section. The basic differences in the two laws are:

(1) In § 40-18-44(b)(ii), (as in effect prior to January 1, 1985) in order to qualify for the use of the installment method, the Alabama law requires that the principal payments received in the year of sale not exceed forty percent of the selling price.

(2) Alabama law requires that the election to use the installment basis must be made in the return for the year of the sale.

(3) The provision of the Federal Tax Reform Act of 1984 (P.L. 98-369) requiring that depreciation previously expensed be recognized in the year of sale whether or not any payments were received, does not apply.

(b) Installment Sales - Dealers in Personal Property Prior to January 1, 1985.

1. A taxpayer who regularly sells personal property on the installment plan, may report the income from such sales on the installment basis. The seller may treat as income that proportion of the total payments received in the taxable year from installment sales that the gross profit realized or to be realized on the total installment sales made during each year bears to the total contract price of all such sales made during that respective year.

(i) "Gross profit" means sales less cost of goods sold.

(ii) "Total contract price" includes carrying charges and interest ascertainable at the time of sale, but excludes sales tax.

(I) If state, county and city sales taxes are imposed on the consumer, and collected by the seller and remitted to the taxing agency, such sales taxes must not be included in the total contract price for purposes of computing taxable income from installment sales. Payments received are treated as applying first against the sales taxes.

(II) If carrying charges or interest are not determinable at the time of sale and not included in the total contract price, payments received will be treated as applying to such charges before the gross profit percentage is applied against the balance of the total contract price.

2. The installment method described in section 1. above applies only to dealers and to sales of inventoriable personal property.

(2) Installment Method - Transactions occurring after December 31, 1984, and before January 1, 1987.

(a) Notwithstanding the provisions of Reg. 810-3-13-.03 (Method of Accounting), and subject to the requirements and restrictions of this rule, a taxpayer may elect to report income from installment sales under the installment method.

(b) The election to report income from installment sales on the installment method must be made on or before the due date (with extensions) of the income tax return for the taxable year in which the installment sales occur. The election to report income from installment sales on the installment method may not be made, changed or revoked after the due date (with extensions) for the taxable year in which the installment sales occur.

1. The election to report on the installment method is made by including a statement with the income tax return for the taxable year in sufficient form to indicate the taxpayer is electing to report installment sales on the installment method, and containing details of the amounts of such installment sales, the amounts collected and included in income for the taxable year, and the amounts to be deferred to future taxable years.

2. For purposes of this paragraph (2), the following terms have the meanings ascribed to them:

(i) The term "installment sale" means a disposition of property (other than property of a kind which is required to be included in the inventory of the taxpayer if on hand at the close of the taxable year) where at lease one (1) payment is to be received after the close of the taxable year in which the disposition occurs.

(I) The requirements of non-inventoriable property and at least one payment in a subsequent taxable year in section 1. above do not apply if the seller is a person who regularly sells or otherwise disposes of personal property on the installment plan.

(ii) The term "installment method" means a method under which the income recognized for any taxable year from a disposition is that proportion of the payments received in that year which the gross profit (realized or to be realized when payment is completed) bears to the total contract price.

(I) As used in subsection (ii) above, the total contract price of all sales of personal property on the installment plan includes the amount of carrying charges or interest and sales taxes which are determined with respect to such sales and which are added on the books of account of the seller to the established cash selling price of such property. This subsection (I) does not apply with respect to sales of personal property under a revolving credit plan.

(II) If the carrying charges or interest and sales taxes with respect to sales of personal property, the income from which is reported on the installment method, are not included in the total contract price, payments received with respect to such sales shall be treated as first applying against such carrying charges or interest and sales taxes.

(3) For transactions after December 31, 1986 -

(a) Unless otherwise provided an installment sale must be reported under the installment method. An installment sale means a disposition of property where at lease one payment is received after the close of the taxable year in which the disposition occurs.

1. Exceptions to (a) include dealer dispositions. A dealer in real and/or personal property may not use the installment method to report the gain from "dealer dispositions." This includes:

(i) any disposition of personal property by a person who regularly sells such property on the installment plan, and

(ii) any disposition of real property that is held by a taxpayer for sale to customers in the ordinary course of the taxpayer's trade or business.

2. A taxpayer may elect to not have an installment sale be reported as an installment disposition. An election not to report an installment sale on the installment method shall be made on or before the due date prescribed by law (including extensions) for filing the taxpayer's return. Such an election shall be the same for Alabama purposes as for federal purposes. Once the election has been made, it may only be revoked if the IRS allows the election to be revoked for federal purposes.

(b) Second dispositions by related persons - When a person makes an installment sale of property to a related person (first disposition) who in turn, sells the property before the installment payments are made in full (second disposition), the amount realized by the related party from the second disposition is treated as received by the initial seller at the time of the second disposition. Except in the case of marketable securities the related party rule will not apply if the second disposition took place more than two years after the first disposition. Further exceptions are:

1. Reacquisitions of stock by the issuing company.

2. A compulsory or involuntary conversion and any transfer thereafter shall be treated as a second disposition if the first disposition occurred before the threat or imminence of the conversion.

3. Second dispositions occurring after the death of the installment seller or the related purchaser.

(c) Depreciable Property Sales. The installment method does not apply to installment sales of depreciable property between related persons. Therefore, all payments are deemed received in the year of disposition unless the disposition did not have as one of its principal purposes the avoidance of tax. For this purpose the term "related person" is as defined in I.R.C. § 1239(b) and includes partnerships that are more than 50% owned, either directly or indirectly, by the same person.

(d) Use of Installment Method by Shareholders In Certain Liquidations. If in a liquidation to which I.R.C. § 331 applies the shareholder received (in exchange for the shareholder's stock) an installment obligation then the shareholder may report the gain when received. Gain on the transfer of an installment obligation to a shareholder during a liquidation is not immediately taxed to the shareholder. [See I.R.C. § 453(h)(1) for restrictions for use of this rule.]

(e) Exceptions to Dealer Dispositions in (a) that may be reported using the installment method include:

1. The disposition of any property used or produced in the trade or business of farming.

2. The disposition of any residential lot, provided the dealer or any related person is not obligated to make any improvements to the lot.

3. The disposition of time-share rights to use or own residential real property for not more than six weeks per year or a right to use specific campgrounds for recreational purposes.

(i) In order to use the installment method for the disposition of residential lots and timeshares, the taxpayer must pay interest (at the applicable state rate) on the amount of tax that is attributable to the installment payments received during the year (See I.R.C. § 453(l)(3)(B)).

(f) As this section adopts by reference I.R.C. § 453 as in effect from time to time, decisions and interpretations of federal courts and agencies will be given due weight in interpreting this section.

Author: Royce Lader.

Statutory Authority: Code of Ala. 1975, § 40-18-44.

History: Adopted September 30, 1982. Amended filed July 27, 1988; May 15, 1992.

(1)(a) For disposition before January 1, 1985. If an installment obligation is satisfied for other than its face value, sold or exchanged, the realized gain is recognized at that time.

(b) If an installment obligation is distributed, transmitted, or otherwise disposed of other than as in subparagraph (a) above, the balance of the unreported gain is recognized at that time.

(c) Exception is made to subparagraph (b) above in the event of transmission at death, if a qualified bond is filed with the Department of Revenue.

1. The bond required in the case of transmission at death of installment obligations shall be filed at the time of filing the return for the decedent for the year of his death or at such later time as may be specified by the Department of Revenue. Such bond in all cases shall be subject to the approval of the Commissioner of Revenue.

(2) For disposition after December 31, 1984, and before January 1, 1990.

(a)1. General Rule. If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall be recognized to the extent of the difference between the basis of the obligation and -

(i) the amount realized, in the case of satisfaction at other than face value or a sale or exchange, or

(ii) the fair market value of the obligation at the time of distribution, transmission, or disposition, in the case of the distribution, transmission, or disposition otherwise than by sale or exchange.

Any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received.

2. The basis of an installment obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full.

(b) Subparagraph (a) above does not apply to a transmission on the death of the decedent of an installment obligation to the estate of the decedent or to a transfer to a person (other than the obligor) pursuant to the right of such person to receive such amount by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent.

1. If an installment obligation is cancelled or becomes unenforceable, such cancellation or unenforceability shall be treated as a transfer for purposes of this subparagraph (b).

2. If an installment obligation is transferred in a transaction described in this subparagraph (b), -

(i) an amount equal to the excess of the face amount of such obligation over the basis of the obligation in the hands of the decedent shall be considered as an item of gross income in respect of the decedent, and

(ii) such obligation shall be considered a right to receive an item of gross income in respect of the decedent, but the amount includable in gross income shall be reduced by an amount equal to the basis of the obligation in the hands of the decedent.

(c)1. If an installment obligation is distributed in a liquidation to which § 40-18-8(i) (relating to complete liquidation of subsidiaries) applies, and the basis of such obligation in the lands of the distributee is determined under § 40-18-6(a)(6), then no gain or loss with respect to the distribution of such obligation shall be recognized by the distributing corporation.

(i) If the distributing corporation is -

(I) a domestic corporation and the installment obligation has a business situs in Alabama or would be classifiable as nonbusiness income allocable to Alabama under Reg. 810-3-31-.02 if the distributing corporation were a foreign corporation, or

(II) a foreign corporation and the installment obligation represents business apportionable income as defined in Reg. 810-3-31-.02, or

(III) a foreign corporation and the installment obligation represents nonbusiness allocable income which is allocable to Alabama as defined in Reg. 810-3-31-.02; then the nonrecognition provision of this subparagraph (c) shall not apply if the distributee is a foreign corporation, unless the distributee executes an agreement to timely file income tax returns with this Department reporting the income from such installment obligation to this state; to timely pay any income tax due on such income, and consenting to the jurisdiction of this Department and the Courts of Alabama for the filing of such returns and the collection of such taxes.

(ii) The agreement required in subsection (i) above shall be on a form furnished by the Department, or a reasonable facsimile thereof; properly executed; and included in the return of the distributing corporation for its taxable year in which the transfer occurs. Such consent may not be cancelled, revoked or amended after the due date (with extensions) of the return of the distributing corporation.

(iii)(I) In the case of a distribution from a distributor described in clauses (I) and (III) of subsection 1. (i) above, the distributee shall allocate income from such installment obligations to Alabama, notwithstanding the apportionment and allocation rules of Reg. 810-3-31-.02.

(II) In the case of a distribution from a distributor described in clause (II) of subsection 1.(i) above -

I. if the distributee is not otherwise required to file income tax returns with this Department, income from such installment obligations shall be allocated to Alabama, notwithstanding the apportionment and allocation rules of Reg. 810-3-31-.02.

II. if the distributee is otherwise required to file income tax returns with this Department, income from such installment obligations shall be included in apportionable income of the distributee as provided by Reg. 810-3-31-.02.

2. If an installment obligation is distributed by a corporation in the course of a liquidation, and under § 40-18-8(j) no gain or loss would have been recognized to the corporation if the corporation had sold or exchanged such installment obligation on the day of such distribution, then no gain or loss shall be recognized to such corporation by reason of such distribution.

(i) This section 2 does not apply to the extent that gain is required to be recognized under §§ 341(f), 617(d)(1), 1245(a), 1252(a), 1254(a) or 1276(a) of Title 26, U.S.C.

(ii) If the distributing corporation is -

(I) a domestic corporation and the installment obligation has a business situs in Alabama or would be classifiable as nonbusiness income allocable to Alabama under Reg. 810-3-31-.02 if the distributing corporation were a foreign corporation, or

(II) a foreign corporation and the installment obligation represents business apportionable income as defined in Reg. 810-3-31-.02, or

(III) a foreign corporation and the installment obligation represents nonbusiness income which is allocable to Alabama as defined in Reg. 810-3-31-.02; then the nonrecognition provision of this section 2 shall not apply if the distributee is not a resident of Alabama, unless the distributee executes an agreement to timely file income tax returns with this Department reporting the income from such installment obligation to this state; to timely pay any income tax due on such income, and consenting to the jurisdiction of this Department and the State of Alabama for the filing of such returns and the collection of such taxes.

(iii) The agreement required in subsection (ii) above shall be on a form furnished by the Department, or a reasonable facsimile thereof; properly executed; and included in the return of the distributing corporation for its taxable year in which the transfer occurs. Such consent may not be cancelled, revoked or amended after the due date (with extensions) of the return of the distributing corporation.

(iv)(I) In the case of a distribution from a distributor described in clauses (I) and (III) of subsection 2.(ii) above, the distributee shall allocate income from such installment obligations to Alabama, notwithstanding the apportionment and allocation rules of Reg. 810-3-31-.02.

(II) In the case of a distribution from a distributor described in clause(II) of subsection 2.(ii) above

I. if the distributee is not otherwise required to file income tax returns with this Department, income from such installment obligations shall be allocated to Alabama, notwithstanding the apportionment and allocation rules of Reg. 810-3-31-.02.

II. If the distributee is otherwise required to file income tax returns with this Department, income from such installment obligations shall be included in apportionable income of the distributee as provided by Reg. 810-3-31-.02.

(d) If an installment obligation is transferred to a spouse or former spouse (but only if incident to a divorce), then no gain or loss shall be recognized on such disposition.

(i) This subparagraph (d) does not apply if the transferee is not a resident of Alabama, unless the distributee executes an agreement to timely file income tax returns with this Department reporting the income from such installment obligation to this state; to timely pay any income tax due on such income, and consenting to the jurisdiction of this Department and the State of Alabama for the filing of such returns an the collection of such taxes.

(ii) For purposes of this subparagraph (d), the term "incident to a divorce" means the transfer takes place within one (1) year after the date on which the marriage ceases, or is related to the cessation of the marriage.

(3) For dispositions after December 31, 1989, refer to Regs. 810-3-7, 810-3-8 and 810-3-140.02-(3).

Author: Royce Lader.

Statutory Authority: Code of Ala. 1975, § 40-18-44.

History: Adopted September 30, 1982. Amended filed July 27, 1988; May 15, 1992.