CA (CA) SUMMARY: BULLS. The Company uses installment license agreements as a standard business practice and has a history of. Other receivables. Entering Invoices with Installments. To the first installment or prorate tax and freight over all of the installments. Receivables lets you review invoice.

Tax Accounting The Tax Court held that the taxpayers could not report the portion of a sale of a partnership interest that was attributable to unrealized receivables using the installment method. Background Lori Mingo joined Pricewaterhouse­Coopers LLP (PwC) sometime before tax year 2002. Mingo was a partner in PwC’s management consulting and technology services business (consulting business) until tax year 2002, when PwC sold its consulting business to IBM. As an initial step in the transaction, PwCC LP (PwCC), a partnership, was formed in April or May 2002. As part of the transaction, PwC transferred its consulting business to PwCC.

Among the assets PwC transferred to PwCC were its consulting business’s uncollected accounts receivable for services it had previously rendered (unrealized receivables). PwC then transferred to each of the 417 consulting partners an interest in PwCC and cash in exchange for the partner’s interest in PwC. Mingo received a partnership interest in PwCC and cash from PwC in exchange for her partnership interest in PwC. 31, 2002, PwCC was sold to IBM.

The value of Mingo’s partnership interest in PwCC as of Oct. 1, 2002, was $832,090, of which $126,240 was attributable to her interest in partnership unrealized receivables.

Mingo received a convertible promissory note (note) for $832,090 in exchange for her interest in PwCC. The $126,240 attributable to her interest in partnership unrealized receivables was included in that face value.

On their joint federal income tax return and on an attached Form 6252, Installment Sale Income, Mingo and her husband reported the sale of her interest in PwCC as an installment sale. They listed the selling price, gross profit, and contract price as $832,090.

The Mingos did not recognize any income relating to the note other than interest income on their 2002 federal income tax return. The Mingos did not convert any portion of the note during tax years 2002, 2003, 2004, 2005, and 2006 and did not report any income other than interest income from the note for any of those years. During 2007, the Mingos converted the entirety of the note in a series of transactions. 26, 2007, the Mingos converted a portion of the note into shares of IBM stock worth $929,765. 1, 2007, they converted the remainder of the note into shares of IBM stock worth $283,494. In connection with the conversion of the note, the Mingos reported on their Schedule D, Capital Gains and Losses, for 2007 the full amount of the value of the stock received in both exchanges as gain.

Fatxplorer Serial Port on this page. They also claimed a loss of $217,402 for “debt converted to stock.” This loss amount was equal to the value of the stock received for the portion of the note related to the unrealized receivables. The IRS audited the Mingos’ return and disagreed with their treatment of the transactions. It determined that they could not report the amount received from the sale of the unrealized receivables on the installment method. It further determined that the Mingos’ reporting of the sale constituted an establishment of an accounting method under Sec. 446 for which a change of accounting method adjustment under Sec.

481 was required and accordingly issued a notice of deficiency for $126,240 of ordinary income (the amount of Lori Mingo’s share of the unrealized receivables) for 2003. It also issued a notice of deficiency for 2007, increasing long-term capital gain in that year by disallowing the loss for the debt-to-equity conversion and decreasing it for the $126,240 of income it had determined should have been included in 2003. The Mingos challenged the IRS’s determinations in Tax Court.

The Tax Court’s Decision The Tax Court held that the Mingos could not report the income attributable to the sale of the unrealized receivables under the installment method and should have reported it as ordinary income in 2003 as a Sec. 481(a) adjustment. In addition, it held that the Mingos were not entitled to the loss they claimed on the conversion of the promissory note into stock in 2007. With regard to the use of the installment method for the unrealized receivables, the court found that Lori Mingo had engaged in a barter exchange of a property interest (a portion of the note) in exchange for the right to collect unpaid amounts in satisfaction of services her partnership had previously rendered (the unrealized receivables). Therefore, Mingo should have reported the proceeds of this transaction as ordinary income in the year of the conversion.