How to reconcile final payment on installment sale for IRS form 6252?

Question

I have an installment sale that began in 2008 and ended in 2012 in which I was projected to earn a gain on the sale of $1,000 each year for five years. The projected sales price was not achieved due to portions of the sale being contingent on factors not achieved. Therefore, my gain reported from 2008 through 2011 is overstated. Now in 2012, I received the final payment. Given a gain previously reported over years 2008 through 2011 of $4,000 and an actual gain over the whole 2008 through 2012 of only $3,500, how do I report the net loss of the final year of $500 instead of the original projected gain of the final year of $1,000? I'm reporting this income on IRS form 6252. I've reviewed IRS publication 537, but see nothing there or in the form instructions to cover capped contingent payments that did not reach the cap. I've also reviewed IRS Regulations section 15a.453-1(c). I'm wondering if I would use a negative ratio on line 19 of form 6252? How to I reconcile in the final year the actual gain received? Do I have to go back and amend years 2008 through 2011? I don't think I can amend all the way back to 2008. I would expect there is a way in 2012 to balance out the net profit.

Answer 1

Reading IRS Regulations section 15a.453-1(c) more closely, I see that this was a contingent payment sale with a stated maximum selling price. Therefore, at the time of filing prior years, there was no way of knowing the final contingent payment would not be reached and thus the prior years were filed correctly and should not be amended.

Those regulations go on to give an example of a sale with a stated maximum selling price where the maximum was not reached due to contingency and states that in such cases:

When the maximum [payment] amount is subsequently reduced, the gross profit ratio will be recomputed with respect to payments received in or after the taxable year in which an event requiring reduction occurs.

However, in this case, that would result in a negative gross profit ratio on line 19 of form 6252 which Turbo Tax reports should be a non-negative number. Looking further in the regulations, I found an example which relates to bankruptcy and a resulting loss in a subsequent year:

For 1992 A will report a loss of $5 million attributable to the sale, taken at the time determined to be appropriate under the rules generally applicable to worthless debts.

Therefore, I used a gross profit ratio of zero on line 19 and entered a separate stock sale not reported on a 1099-B as a worthless stock on Form 8949 as a capital loss based upon the remaining basis in the stock sold in an installment sale. I also included an explanatory statement with my return to the IRS stating:

In 2008, I entered into an installment sale of stock. The sale was a contingent payment sale with a stated maximum selling price. The sales price did not reach the agreed upon maximum sales price due to some contingencies not being met. According to the IRS Regulations section 15a.453-1(c) my basis in the stock remains at $500 in 2012 after the final payment. Rather than using a negative gross profit ratio on line 19 of form 6252, I'm using a zero ratio and treating the remaining basis as a schedule-D loss similar to worthless stock since the sale is now complete and my remaining basis is no longer recoverable.

Installment Sale Original Basis reported in 2008 $5,000.
Installment Sale Gain reported 2008 to 2012      $4,000.
Installment Sale Payments received 2008 to 2012 ($8,500.)
Total                                            $  500.