Revenue Ruling 79-371
Internal Revenue Service
1979-2 C.B. 294 (1979)
- Written by Abby Roughton, JD
Facts
A purchased common stock in corporation X in 1970. In 1976, X redeemed A’s stock for a cash downpayment of $20x and a negotiable promissory note in the principal amount of $80x. The note bore interest at 10 percent per year from the date of the stock’s redemption through 1979 and at 7 percent per year thereafter until the note’s principal was repaid. The principal was to be paid in eight annual installments of $10x starting in 1980. A’s initial basis in the note was $8x. The redemption of the stock by X qualified for treatment as a distribution in full payment in exchange for A’s stock under § 302 of the Internal Revenue Code (the Code). A elected to report the gain from the redemption using the installment method of accounting under § 453 of the Code. Under that method, gain would be recognized when each installment of the note payment was received by A. In January 1978, A gave the note to A’s adult child, B, as a gift. At the time of the transfer, no installments had been paid on the note. All accrued interest had been paid to A, and the fair market value of the note was the outstanding principal balance of $80x. The Internal Revenue Service issued a revenue ruling regarding B’s basis in the note.
Rule of Law
Issue
Holding and Reasoning ()
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