check me on this please - Gift of Installment sale debt

[BulldogTom]

Taxpayer sold business to child in 2000, long before I got them as a client.  Child and husband still operate the business.  The sale was recorded on taxpayer's return as an installment agreement.  Payments have been made and recorded every year on the 6252.  When I picked them up in 2011, I took the information as it was and continued on with the same gain percentage.  This year, taxpayers gift to child and spouse maximum amount (56K) to relieve most of the remaining debt on the note.  In 2015, they have gifted the remaining balance.

 

My take:  these are payments on the installment agreement and need to be recorded as such on the 6252.  In 2015, the 6252 will be marked as final and all deferred taxes will have been paid.

 

Am I correct or is there something else that I am missing?

 

Thanks.

 

Tom

Newark, CA

[jklcpa]

You are correct. This qualifies as a gift of a present interest, the parents recognize the amount of the gift as payments received on the installment note and report their proportional share of the gain for the year on the 6252.  It's as if the children paid on the note and the parents gifted that same amount of cash back to the child and child's spouse.  Same next year when the note will be satisfied by the gift of the remaining principal forgiven and will be the final year of the installment sale.  The children will have the full basis in the company according to the original agreement with no reduction for the amount of debt forgiven by the gifts.

 

This is similar to self-cancelling installment notes, aka death-terminating installment notes, that allows transfers of a company or highly appreciated real estate to a child, bypasses the estate tax, and the child still receives a step up in basis.

[BulldogTom]

Thanks for the confirmation Judy.

 

Tom

Newark, CA