Installment sale

[Catherine]

Hi folks --

Client sold a business (online sales) in Sept 2008 (yes, he's way late, and I still don't have complete info for that year, let alone 2009). Contract said about 2/3 of $$ on sale, remaining if certain sales goals were met during 2009, on a schedule. So it looks to me like an installment sale.

But durned if I can figure what kind of property to list on the 6252. Not real estate so it's not S1250. Not personal so it's not S1245. Can't find any _listing_ telling what Sections 1252, 1254, and 1255 property are on the IRS site (I hate their "search" engine), and I'm too cross-eyed to think where else to look (nothing since I started reading this forum; searched it already). Don't want to leave the property type blank if it should be one of those oddball sections.

Clues? Pointers? Statements with or without sidelong snickering for someone working on Sunday night over Labor Day weekend?

TIA,

Catherine (who is now giving up and going to bed)

[TAXBILLY]

Did you fill out Form 8594?

What does the sale agreement say?

What did he sell?

Inventory, client list, equipment?

Not enough info to give an educated answer.

taxbilly

[Catherine]

Did you fill out Form 8594?

What does the sale agreement say?

What did he sell?

Inventory, client list, equipment?

Not enough info to give an educated answer.

taxbilly

Boy, talk about brain-fry. Just re-read my own post and I couldn't figure out what I meant, either!

Almost entire sale was "goodwill"; $5K was non-compete and $40K was inventory; about 2/3 paid on signing and the remainder over calendar 2009 assuming certain sales goals were met, with final payment possibly spilling into calendar 2010.

I figured most was Section 1231 but ATX listed choices of 1245, 1250, 1252, 1254, 1255, and "none". That threw me for a loop and I started second, third, and fourth-guessing myself. That got worse when I went to look up Section 1252, 54, 55 property and could find nothing except listings of their existence. Have since turned to other returns (this guy's stalled so long, he gets back in line _behind_ all my 2009 extension clients) so I still haven't found what property those three sections cover.

Hope this is at least marginally clearer.

Thanks,

Catherine

[DANRVAN]

Goodwill is reported as 1231 / 1245. Covenant is ordinary. Inventory is ordinary business income less cost of goods sold recognized in year of sale.

Hope this helps.

Dan

¶ 2627. Goodwill and covenants not to compete.

Goodwill is a capital asset, unless it is treated as an amortizable section 197 intangible under the rules explained at ¶ 1975 et seq. To the extent that the Code Sec. 197 rules don't apply, proceeds from the sale of a business that are allocable ( ¶ 2626 ) to goodwill are taxed under the capital gain and loss rules, FTC ¶ I-8601 ; USTR ¶ 12,214.55 ; Tax Desk ¶ 229,501 and payments for a covenant not to compete that is severable from the sale of goodwill results in ordinary income. FTC ¶ I-8603 ; USTR ¶ 12,214.56 ; Tax Desk ¶ 229,502

© 2010 Thomson Reuters/RIA. All rights reserved.

(Also see IRS PUB 537)

[jainen]

>> Statements with or without sidelong snickering<<

Let's see--inventory, goodwill.... Hey, don't forget the deemed interest on deferred payments!

[Catherine]

>> Statements with or without sidelong snickering<<

Let's see--inventory, goodwill.... Hey, don't forget the deemed interest on deferred payments!

Hadn't forgotten that but it's not pertinent until the 2009 return; he's still digging out info for 2008.

[Catherine]

Goodwill is reported as 1231 / 1245. Covenant is ordinary. Inventory is ordinary business income less cost of goods sold recognized in year of sale.

Hope this helps.

Dan

¶ 2627. Goodwill and covenants not to compete.

Goodwill is a capital asset, unless it is treated as an amortizable section 197 intangible under the rules explained at ¶ 1975 et seq. To the extent that the Code Sec. 197 rules don't apply, proceeds from the sale of a business that are allocable ( ¶ 2626 ) to goodwill are taxed under the capital gain and loss rules, FTC ¶ I-8601 ; USTR ¶ 12,214.55 ; Tax Desk ¶ 229,501 and payments for a covenant not to compete that is severable from the sale of goodwill results in ordinary income. FTC ¶ I-8603 ; USTR ¶ 12,214.56 ; Tax Desk ¶ 229,502

© 2010 Thomson Reuters/RIA. All rights reserved.

(Also see IRS PUB 537)

Thanks, Dan, and I will have to have him check on the inventory numbers - my understanding is he was selling it at cost BUT I need everything in writing from him.

[jainen]

>>my understanding is he was selling it at cost<<

No can do. In the sale of an entire business, inventory must be valued at FMV before anything else is allocated to goodwill.

[Catherine]

>>my understanding is he was selling it at cost<<

No can do. In the sale of an entire business, inventory must be valued at FMV before anything else is allocated to goodwill.

Well, that is very worth knowing, and thank you. It's not what is says in the sales contract.

I am SOOOOO close to firing this guy and telling him to go elsewhere. Getting information out of him is next to impossible; timely information just doesn't exist.

Anyone want a royal PITA client who doesn't respond to inquiries and who is slow to pay besides?

[Margaret CPA in OH]

Catherine, I think we all have our very own royal PITA clients. I have just sent my final reminder to a client reminder her that her S-corp return is due next week and I still don't have the file. Sigh.... When she is not so distracted she is very good about responding but this year, well, I don't know responding to inquiries and timely information are no longer within her skill set, I think.

Big breath, now.

[jainen]

>>It's not what is says in the sales contract<<

I was referring to treatment under tax rules. Between themselves, they can do whatever they want. It is not unusual to keep separate books for tax and accounting purposes. In fact, Form 1120 for corporations includes a specific schedule to reconcile the second set of books.