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S corporation during the year. Since petitioner held his shares
of Edgington Mullins stock as a capital asset, any gain or loss
from the sale of the shares will be characterized as a capital
gain or loss. See sec. 1221.
A taxpayer must generally recognize the entire amount of the
realized gain or loss. Sec. 1001(c). However, where there was
an “installment sale”, a taxpayer can use the installment method
to defer recognition of income.4 See sec. 453. An installment
sale is a “disposition of property where at least 1 payment is to
be received after the close of the taxable year in which the
disposition occurs”. Sec. 453(b)(1). Under the installment
method, a taxpayer recognizes a proportion of the payment
received in any given year commensurate with the percentage that
the gross profit bears to the total contract price. Sec. 453(c);
Raymond v. Commissioner, T.C. Memo. 2001-96.
As discussed herein, petitioner sold his shares of Edgington
Mullins stock on October 26, 2001, for a total of $40,000.5
Petitioner’s adjusted basis in his shares of Edgington Mullins
4 Generally, income from an installment sale is determined
under the installment method unless a taxpayer elects out of the
installment method. Sec. 453(d).
5 The total sales price was later reduced in taxable year
2002 to $28,000 when petitioner agreed to accept a payment of
$20,000 for the $32,000 still owed him under the stock purchase
agreement.
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Last modified: May 25, 2011