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IRS Letter Ruling Permits Taxpayer to

Revoke Inadvertent Opt-Out from

Installment Method in a Failed Exchange

PLR 200813019, issued on December 17, 2007, and released on March 28, 2008, dealt with the following fact pattern:  Taxpayer, a limited liability company taxed as a partnership, sold relinquished property in a forward exchange in Year 1.  It was unable to acquire replacement property within the 180-day exchange period, and the exchange failed in Year 2.  This failed exchange qualified as an installment sale because Taxpayer did not have actual or constructive receipt of (at least some portion of) the sales proceeds in the year that the property was sold.  However, taxpayer’s accountant failed to recognize that the transaction qualified as an installment sale, and he reported the gain from the sale of the property on taxpayer’s Year 1 tax return.  Declaring the income on Taxpayer’s Year 1 tax return amounted to an option to opt out of the installment method that otherwise would have permitted Taxpayer to defer payment of taxes on the proceeds from this transaction until Year 2. 

Treas. Reg. 15.453-1(d)(4) provides, generally, that an election to opt out of installment sale treatment is irrevocable, and that: “An election may be revoked only with the consent of the Internal Revenue Service.”

When Taxpayer learned of the accountant’s error, it applied to the IRS for consent to revoke its opt-out election.  The IRS was satisfied that the election to pay the taxes in Year 1 was inadvertent and the result of the accountant’s oversight, rather than hindsight by Taxpayer.  Therefore Taxpayer was permitted to revoke its election out of the installment method.   

  Click here to read the PLR.

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