PROVISIONS RELATING TO INSTALLMENT SALES.

SEC. 10202. PROVISIONS RELATING TO INSTALLMENT SALES. (a) Repeal of Proportionate Disallowance of Installment Method.— (1) In general.— Section 453C (relating to certain indebtedness treated as payment on installment obligations) is hereby repealed. (2) Conforming amendment.— The table of sections for subpart B of part II of subchapter E of chapter 1 is amended by striking out the item relating to section 453C. (b) Repeal of Installment Method for Dealers in Property.— (1) In general.— Subparagraph (A) of section 453(b)(2) (defining installment sale) is amended to read as follows: “(A) Dealer dispositions.— Any dealer disposition (as defined in subsection (1)).” (2) Dealer disposition defined.— Section 453 (relating to installment method) is amended by adding at the end thereof the following new subsection: “(l) Dealer Dispositions.— For purposes of subsection (b)(2)(A)— “(1) In general.— The term ‘dealer disposition’ means any of the following dispositions: “(A) Personal property.— Any disposition of personal property by a person who regularly sells or otherwise disposes of personal property on the installment plan. 101 STAT. 1330–389 “(B) Real property.— Any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer’s trade or business. “(2) Exceptions.— The term ‘dealer disposition’ does not include— “(A) Farm property.— The disposition on the installment plan of any property used or produced in the trade or business of farming (within the meaning of section 2032A(e) (4) or (5)). “(B) Timeshares and residential lots.— “(i) In general.— Any dispositions described in clause (ii) on the installment plan if the taxpayer elects to have paragraph (3) apply to any installment obligations which arise from such dispositions. An election under this paragraph shall not apply with respect to an installment obligation which is guaranteed by any person other than an individual. “(ii) Dispositions to which subparagraph applies.— A disposition is described in this clause if it is a disposition in the ordinary course of the taxpayer’s trade or business to an individual of— “(I) a timeshare right to use or a timeshare ownership interest in residential real property for not more than 6 weeks per year, or a right to use specified campgrounds for recreational purposes, or “(II) any residential lot, but only if the taxpayer (or any related person) is not to make any improvements with respect to such lot. For purposes of subclause (I), a timeshare right to use (or timeshare ownership interest in) property held by the spouse, children, grandchildren, or parents of an individual shall be treated as held by such individual. “(C) Carrying charges or interest.—Any carrying charges or interest with respect to a disposition described in subparagraph (A) or (B) which are added on the books of account of the seller to the established cash selling price of the property shall be included in the total contract price of the property and, if such charges or interest are not so included, any payments received shall be treated as applying first against such carrying charges or interest. “(3) Payment of interest on timeshares and residential lots.— “(A) In general.— In the case of any installment obligation to which paragraph (2)(B) applies, the tax imposed by this chapter for any taxable year for which payment is received on such obligation shall be increased by the amount of interest determined in the manner provided under subparagraph (B). “(B) Computation of interest.— “(i) In general.— The amount of interest referred to in subparagraph (A) for any taxable year shall be determined— “(I) on the amount of the tax for such taxable year which is attributable to the payments received during such taxable year on installment obligations to which this subsection applies, 101 STAT. 1330–390 “(II) for the period beginning on the date of sale, and ending on the date such payment is received, and “(III) by using the applicable Federal rate under section 1274 (without regard to subsection (d)(2) thereof) in effect at the time of the sale compounded semiannually. “(ii) Interest not taken into account.— For purposes of clause (i), the portion of any tax attributable to the receipt of any payment shall be determined without regard to any interest imposed under subparagraph (A). “(iii) Taxable year of sale.— No interest shall be determined for any payment received in the taxable year of the disposition from which the installment obligation arises. “(C) Treatment as interest.— Any amount payable under this paragraph shall be taken into account in computing the amount of any deduction allowable to the taxpayer for interest paid or accrued during such taxable year.” (c) Treatment of Installment Obligations of Nondealers.— Section 453A (relating to installment method for dealers in personal property) is amended to read as follows: “SEC. 453A. SPECIAL RULES FOR NONDEALERS OF REAL PROPERTY. “(a) General Rule.— In the case of an installment obligation to which this section applies— “(1) interest shall be paid on the deferred tax liability with respect to such obligation in the manner provided under subsection (c), and “(2) the pledging rules under subsection (d) shall apply. “(b) Installment Obligations to Which Section Applies.— “(1) In general.— This section shall apply to any obligation which arises from the disposition of real property under the installment method which is property used in the taxpayer’s trade or business or property held for the production of rental income, but only if the sales price of such property exceeds $150,000. “(2) Special rule for interest payments.— For purposes of subsection (a)(1), this section shall apply to an obligation described in paragraph (1) arising during a taxable year only if— “(A) such obligation is outstanding as of the close of such taxable year, and “(B) the face amount of all obligations of the taxpayer described in paragraph (1) which arose during, and are outstanding as of the close of, such taxable year exceeds $5,000,000. Except as provided in regulations, all persons treated as a single employer under subsection (a) or (b) of section 52 shall be treated as one person for purposes of this paragraph. “(3) Exception for personal use and farm property.— An installment obligation shall not be treated as described in paragraph (1) if it arises from the disposition— “(A) by an individual of personal use property (within the meaning of section 1275(b)(3)), or 101 STAT. 1330–391 “(B) of any property used or produced in the trade or business of farming (within the meaning of section 2032A(e) (4) or (5)). “(4) Special rule for timeshares and residential lots.— An installment obligation shall not be treated as described in paragraph (1) if it arises from a disposition described in section 453(l)(2)(B), but the provisions of section 453(l)(3) (relating to interest payments on timeshares and residential lots) shall apply to such obligation. “(5) Sales price.— For purposes of paragraph (1), all sales or exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange. “(c) Interest on Deferred Tax Liability.— “(1) In general.— If an obligation to which this section applies is outstanding as of the close of any taxable year, the tax imposed by this chapter for such taxable year shall be increased by the amount of interest determined in the manner provided under paragraph (2). “(2) Computation of interest.— For purposes of paragraph (1), the interest for any taxable year shall be an amount equal to the product of— “(A) the applicable percentage of the deferred tax liability with respect to such obligation, multiplied by “(B) the underpayment rate in effect under section 6621(a)(2) for the month with or within which the taxable year ends. “(3) Deferred tax liability.— For purposes of this section, the term ‘deferred tax liability’ means, with respect to any taxable year, the product of— “(A) the amount of gain with respect to an obligation which has not been recognized as of the close of such taxable year, multiplied by “(B) the maximum rate of tax in effect under section 1 or 11, whichever is appropriate, for such taxable year. “(4) Applicable percentage.— For purposes of this subsection, the term ‘applicable percentage’ means, with respect to obligations arising in any taxable year, the percentage determined by dividing— “(A) the portion of the aggregate face amount of such obligations outstanding as of the close of such taxable year in excess of $5,000,000, by “(B) the aggregate face amount of such obligations outstanding as of the close of such taxable year. “(5) Regulations.106106 Copy read “Regulations—”.— The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this subsection including regulations providing for the application of this subsection in the case of contingent payments, short taxable years, and pass-thru entities. “(d) Pledges, Etc., of Installment Obligations.— “(1) In general.— For purposes of section 453, if any indebtedness (hereinafter in this subsection referred to as ‘secured indebtedness’) is secured by an installment obligation to which this section applies, the net proceeds of the secured indebted-101 STAT. 1330–392ness shall be treated as a payment received on such installment obligation as of the later of— “(A) the time the indebtedness becomes secured indebtedness, or “(B) the proceeds of such indebtedness are received by the taxpayer. “(2) Limitation based on total contract price.— The amount treated as received under paragraph (1) by reason of any secured indebtedness shall not exceed the excess (if any) of— “(A) the total contract price, over “(B) any portion of the total contract price received under the contract before such secured indebtedness was incurred (including amounts previously treated as received under paragraph (1) but not including amounts not taken into account by reason of paragraph (3)). “(3) Later payments treated as receipt of tax paid amounts.— If any amount is treated as received under paragraph (1) with respect to any installment obligation, subsequent payments received on such obligation shall not be taken into account for purposes of section 453 to the extent that the aggregate of such subsequent payments does not exceed the aggregate amount treated as received under paragraph (1). “(4) Secured indebtedness.— For purposes of this subsection indebtedness is secured by an installment obligation to the extent that payment of principal or interest on such indebtedness is directly secured (under the terms of the indebtedness or any underlying arrangements) by any interest in such installment obligation.” (2) Clerical amendment.— The table of sections for subpart B of part II of subchapter E of chapter 1 is amended by striking out the item relating to section 453A and inserting in lieu thereof the following new item: “Sec. 453A. Special rules for nondealers of real property.” (3) Conforming amendments.— Sections 381(c)(8) and 691(a)(4) and (5) are each amended by striking out “or 453A” each place it appears. (d) Minimum Tax.— Paragraph (6) of section 56(a) (relating to installment sales of certain property) is amended to read as follows: “(6) Installment sales of certain property.— In the case of any disposition after March 1, 1986, of any property described in section 1221(1), income from such disposition shall be determined without regard to the installment method under section 453. This paragraph shall not apply to any disposition with respect to which an election is in effect under section 453(l)(2)(B).” (e) Effective Dates.— (1) In general.— Except as provided in this subsection, the amendments made by this section shall apply to dispositions in taxable years beginning after December 31, 1987. (2) Special rules for dealers.— (A) In general.— In the case of dealer dispositions (within the meaning of section 453A of the Internal Revenue Code of 1986), the amendments made by subsections (a) and (b) shall apply to installment obligations arising from dispositions after December 31, 1987. 101 STAT. 1330–393 (B) Special rules for obligations arising from dealer dispositions after february 28, 1986, and before january 1, 1988.— (i) In general.— In the case of an applicable installment obligation arising from a disposition described in subclause (I) or (II) of section 453C(e)(1)(A)(i) of the Internal Revenue Code of 1986 (as in effect before the amendments made by this section) before January 1, 1988, the amendments made by subsections (a) and (b) shall apply to taxable years beginning after December 31, 1987. (ii) Change in method of accounting.— In the case of any taxpayer who is required by clause (i) to change its method of accounting for any taxable year with respect to obligations described in clause (i)— (I) such change shall be treated as initiated by the taxpayer, (II) such change shall be treated as made with the consent of the Secretary of the Treasury or his delegate, and (III) the net amount of adjustments required by section 481 of the Internal Revenue Code of 1986 shall be taken into account over a period not longer than 4 taxable years. (3) Special rule for nondealers.— (A) Election.— A taxpayer may elect, at such time and in such manner as the Secretary of the Treasury or his delegate may prescribe, to have the amendments made by subsections (a) and (c) apply to taxable years ending after December 31, 1986, with respect to dispositions and pledges occurring after August 16, 1986. (B) Pledging rules.— Except as provided in subparagraph (A)— (i) In general.— Section 453A(d) of the Internal Revenue Code of 1986 shall apply to any installment obligation which is pledged to secure any secured indebtedness (within the meaning of section 453A(d)(4) of such Code) after December 17, 1987, in taxable years ending after such date. (ii) Coordination with section 453c.— For purposes of section 453C of such Code (as in effect before its repeal), the face amount of any obligation to which section 453A(d) of such Code applies shall be reduced by the amount treated as payments on such obligation under section 453A(d) of such Code and the amount of any indebtedness secured by it shall not be taken into account. (4) Minimum tax.— The amendment made by subsection (d) shall apply to dispositions in taxable years beginning after December 31, 1986. (5) Coordination with tax reform act of 1986.— The amendments made by this section shall not apply to any installment obligation or to any taxpayer during any period to the extent the amendments made by section 811 of the Tax Reform Act of 1986 do not apply to such obligation or during such period.