Installment repo

[Marie]

Client sold equipment and goodwill on installment sale. Because equip was depreciated we reported the whole sale in the first year, $10,000 (as is required, I believe). He only received $630 for equipment. Goodwill was reported on installment. Buyer has defaulted on sale. How is this reported? I've done the worksheets, but come up with $10,000 gain on repossession, and I don't understand why. I put in the amount we received(360), not the amount we reported.(10,000) If I put in amount reported, there would be no gain, but can the client, who is putting the equipment back into his business, depreciate it at FMV? Wouldn't his basis be FMV, and no gain on the sale? Where and how do I report the repo on a form? The goodwill is not worth anything now. The worksheet figues gain and loss on the sale, does that equal taxable gain?

I've got Pub 537. but doesn't specifically say what goes where on the forms. Please help

[Marie]

Every time I work the repo worksheet, it comes out with a gain of $10,000 on the equipment - using actual figures of money received or figures that we already paid tax on (the full 10,000). How can he have a gain of $10,000 when he paid tax on that amount? If it is a gain, is it taxable? I thought I could put the equipment back into his depreciation schedule and start over since he paid tax on that amount. If the goodwill is not worth anything now, there is no gain, correct? Who would the goodwill be worth to, and what would the FMV be? Please, I need some guidance. Thanks

[BulldogTom]

Your post is a little confusing. The purpose of an installment sale (tax purpose) is to delay the taxation of the transaction until the money is recieved. If this was treated for tax purposes as an installment sale, there would have been very little or no tax paid on the return because it appears your client recieved no cash at the point of sale. Therefore, when the property was returned, the deferred tax would become due. I assume that is why you are coming up with 10K.

But again, the post is not very clear to me, so I might be off base on this.

Tom

Lodi, CA

[Marie]

Installment sale was set up for equip and goodwill. Equipment that has been depreciated has to be reported in year of sale even if all the money was not received. The payments were made in 2007, 14% was equip, the rest goodwill. But I reported 10,000, the full amount, on the equip because is was all ordinary income, so really not an installment sale for equip. Only 86% of the 2007 payment was reported to goodwill. In 2008, 14% of the payment would not be taxable, because already reported on, and 86% would be put on goodwill installment sale. If equipment is still worth $10,000, is that a taxable gain of $10,000? He's already paid tax on that amount last year. I can't find any info to clear this up for me.

[RoyDaleOne]

Trying bifurcating the installment sale into its components. Kind of wordy.

Try reporting only the Goodwill as an installment sale by dividing the sale in two.

[Marie]

I understand dividing in two separate sales. But what worksheet do I use for just a personal property repossession? I shouldn't be this complicated, I just can't seem to get it straight in my head.

[Terry D EA]

I did one of these a few years ago and will take a look at the paper work. It may take me some time as this is in an archieved client file that is put away and not readily accessible. The Goodwill should have been the only thing on the installment plan. The equipment should be listed separately which you said you knew about. Calculating the reposession is probably where you are getting confused. Once the default took place, the FMV of the equipment needs to be determined to return the equipment to the original owner which would be his basis in the equipment which could result in a gain. He can then donate the equipment back to the company (I am assuming this is a corporation) which would be his basis and the corporation could begin depreciating the equipment using the FMV at the time of transfer as cost. Alot of legal stuff here and I hope your client is seeking legal advice as these things can become quite complicated. Company names may have to change, re-organization, new articles of Incorporation etc. The one I was involved in, I worked with the attorney for 3 to 4 months, new name, new books, and a whole lot of work.

Terry D.

[Marie]

It's not a corp, client just sold off part of his business in another state. If goodwill isn't worth anything, then there would be no gain, correct? How could goodwill be worth anything back in the hands of the owner? Equipment might be worth a little less than what he received for it. Does that consitute a gain and then we start depreciating it again? It looks like he is paying on the equipment twice to me. Once when he sold it and now again repossessing it.

[Terry D EA]

Okay now I am confused a little more. If this is not a corp then how did goodwill ever come into the picture? Under your scenario, if goodwill was indeed sold on an installment sale and defaulted, I believe the defaulted amount would have to be recognized somewhere. Goodwill has no physical substance at all and is an intangible. I am under the understanding for Goodwill to be part of the sale of a company, it could only be taken when an entire company has been acquired by another company. Sounds to me like the simpliest way to handle this is if the disposition was recorded on the assets when they were sold and when your client re-claimed the assets from the repossession, he would report the FMV of the equipment minus the loss on the repo which would return either a loss or gain. His cost on the books is the FMV. I hope I am helping and not adding further confusion.

Terry D.

[DANRVAN]

Your post is a little confusing. The purpose of an installment sale (tax purpose) is to delay the taxation of the transaction until the money is recieved. If this was treated for tax purposes as an installment sale, there would have been very little or no tax paid

That's a common misunderstanding and tax trap of installment sales!

In an installement sale, all depreciation is repcaptured in the year of sale as an ordinary gain, as was done here by JenMO. I believe the worksheet is throwing you off since 100% gain was realized in year of sale. Subtract the basis of the obligation related to the equipment ($9,640) from the FMV on date of repo. For example if the FMV was $10,000, you will have a gain of $360 and basis of $10,000 in the equipment.

Check out Pub 537.

Dan

[BulldogTom]

Danrvan has the equipment part down pat.

I think what we are all confused about is the amount that the buyer paid for (in cash, not notes) for the goodwill. I think Jenmo is trying to bring that back on the books because it was "returned" and she showed it on the sale. But I am not clear if any of the sale of the goodwill was ever recognized for tax purposes. I may be off base, but I think that is what she is asking about. I don't know the answer for sure, but I am guessing that since there was probably no recognized gain on the sale of the goodwill, there is nothing to pay taxes on again.

Tom

Lodi, CA

[Marie]

I'm back in the office. There was some gain on the goodwill. 86% of the payment went to that part of the installment sale. We reported as income on 6252 and flowed to Sch d. I assumed goodwill was a committment not to compete against or do business with the businesses that were associated with the buyer (who purchased the equipment)- all the same sale. Now that the buyer has defaulted, isn't the goodwill gone and worth nothing to anyone?

I've done and redone the worksheets in Pub 537. If equipment FMV is still $10,000 and we actually received only $630, but reported the $10,000 (because of deprec), would my only taxable gain be $630? If so, how is this reported on the form? Repo'ed property - long term or short term gross sales price?, basis. I was hoping when I woke up this morning I would have a revelation - didn't come.