By John G. Hodnette

When an S corporation sells its assets, often part of the purchase price is paid via a promissory note issued by the buyer. These promissory notes are part of the purchase price and reported on the installment sale method in Sections 453, 453A, and 453B. Under that method, gain on the sale is recognized over time as installment payments are made. There is often a required interest component that is taxed at ordinary income rates. When the S corporation has sold all of its assets, it often wishes to liquidate and distribute the installment note to its owners. Absent a special rule, this plan would be problematic because the disposition of an installment note generally results in acceleration of the built-in gain of the note. Distribution in liquidation of an S corporation is generally treated as a deemed sale of the assets of the corporation.

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