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Can It Be Undone?

How many times have you wished that you could undo something from your past, perhaps a string of incoherent statements made at a client dinner while slightly under the influence, or an expletive-filled email composed and sent in anger?[i] Often enough, right?

I’m certain that those among you who are business owners can probably recall several things that you have done over the years that you regretted at the time, but from which you learned the proverbial lesson.[ii] Still, there are probably moments you wish you could unwind the event or statement in question.

What if I told you there is a place where such wishes may come true?[iii] You’d probably tell me I was full of it, and you wouldn’t regret it.

But seriously, there are circumstances – two of which will be considered here – in which a taxpayer may be able to unwind or undo a transaction without incurring a significant income tax liability in the process.

You may ask, why would undoing an event – specifically, a sale or exchange of property[iv] – generate a tax liability, especially if the event being undone was itself taxable for one or both of the parties?

For example, a sale of property in exchange for cash or for other property that is not of like kind[v] to the property transferred is a taxable transaction in which the amount the amount realized is the sum of any money received plus the fair market value of any other property received. The realized gain, in turn, is determined by subtracting from this sum the transferor’s adjusted basis for the property transferred.[vi]

Is it proper to impose a tax where the parties merely reverse the exchange, with the properties and cash being returned to their original owners?

The Taxable Year

Remember that place where wishes may come true? I may have forgotten to mention there are a number of qualifications for entry.

To appreciate these, one must first understand a general principle of tax accounting: the Code treats each taxable year of a taxpayer as a “separate unit” for tax accounting purposes, and requires that one look at a particular transaction on an “annual basis using the facts as they exist at the end of the [taxable] year.”

In other words, one determines the tax consequences of the transaction at the end of the taxable year in which it occurred, without regard to events occurring in subsequent years.[vii]


It is this basic principle of the annual accounting concept that underlies the first tax rule pursuant to which a taxpayer may unwind a transaction – the rescission doctrine.[viii]

In one of its earliest pronouncements on unwinding a deal, the IRS considered a transaction in which taxpayer A sold a tract of land to B and received cash at closing for the entire purchase price. The contract of sale obligated A, at the request of B, to accept reconveyance of the land from B if at any time within nine months of the date of sale, B was unable to have the land rezoned for B’s business purposes. If there were such a reconveyance under the contract, A and B would be placed in the same positions they were in prior to the sale.

Later in the same taxable year as the sale, B determined that it was not possible to have the land rezoned and notified A of its intention to reconvey the land to A pursuant to the terms of the contract of sale. The reconveyance was consummated before the end of the taxable year and the tract of land was returned to A, and B received back all amounts expended in connection with the transaction.

The IRS ruled that A would not recognize gain on the sale.[ix] It explained its reasoning as follows:

“The legal concept of rescission refers to the abrogation, canceling, or voiding of a contract that has the effect of releasing the contracting parties from further obligations to each other and restoring the parties to the relative positions that they would have occupied had no contract been made. A rescission may be effected by mutual agreement of the parties, by one of the parties declaring a rescission of the contract without the consent of the other if sufficient grounds exist, or by applying to the court for a decree of rescission.”

It then added:

“The annual accounting concept requires that one must look at the transaction on an annual basis using the facts as they exist at the end of the year.”

According to the ruling, the two principal conditions that must be satisfied for the remedy of rescission to apply to disregard a transaction for federal income tax purposes are: first, the parties to the transaction[x] must be restored to “the relative positions they would have occupied had no contract been made”; and second, this restoration must be achieved within the taxable year of the transaction.[xi]

Status Quo Ante

Perhaps the most challenging of these requirements[xii] is that the rescission restored, in all material respects, the legal and financial arrangements between the parties that would have existed had the transaction never occurred.[xiii] Among the factors to be considered in establishing that this condition was satisfied are the following:

(i) no has taken any material position inconsistent with the position that would have existed had the rescinded transaction not occurred;

(ii) no activities occurred prior to the rescission (and none occurred after the rescission) that were materially inconsistent with the rescission;

(iii) the purpose and effect of the rescission was to restore in all material respects the legal and financial arrangements between the parties that would have existed had the transaction never occurred;

(iv) the legal and financial arrangements between the parties were identical in all material respects, from the date immediately before the rescinded transaction, to such arrangements that would have existed had the transaction not occurred;

(v) all material items of income, deduction, gain, and loss of each party were reflected on their respective income tax returns as if the transaction had not occurred;

(vi) during the period between the transaction and the rescission, no material changes to the legal or financial relationships between parties occurred that would not have occurred if the transaction had not occurred; and

(vii) the rescission did not involve any party that was not involved in the transaction.

Failed Rescission

If any of the foregoing requirements are not satisfied – whether because the parties are not restored to their pre-sale positions or the transaction is unwound in a subsequent taxable year – the rescission will not be respected.

In that case, the tax consequences of the original transaction will have to be reported on the tax return for the taxable year in which it occurred, and the “unwinding” of that transaction will be analyzed as a separate event – reported on the return for a later taxable year – that may generate its own tax consequences.

For example, taxpayer A sells property to B in exchange for a single payment of cash at closing. The following taxable year, A and B unwind their transaction, with A returning the cash to B in exchange for the property. The gain recognized by A on the original sale is reported on A’s tax return for the taxable year of the sale. When B returns the property to A the following year, B is treated as having sold the property to A in exchange for cash.[xiv]

Alternatively, if A sells the property to B in exchange for B’s installment obligation, A’s subsequent repossession of the property may be treated as a taxable satisfaction or disposition of the installment obligation in the absence of any statutory relief.


There is one scenario, however, in which Section 1038 of the Code[xv] may provide some relief notwithstanding the parties’ failure to satisfy the above-described criteria for the favorable tax treatment of a rescission.

Unfortunately, as explained below, this relief is only available to a seller of real property who subsequently reacquires such real property from the buyer thereof where the property secures the buyer’s installment obligation to the seller.[xvi]

Not Taxable to Seller

In general, if a sale of real property (the “original sale”) gives rise to indebtedness that is owed by the buyer to the seller,[xvii] and such indebtedness is secured by the real property, and the seller of such real property repossesses or reacquires the property from the buyer in partial or full satisfaction of such indebtedness, then no gain or loss may result to the seller from such reacquisition.[xviii] 

Whether the seller realized a gain or sustained a loss on the original sale of the real property is immaterial, as is the character of the gain or loss realized;[xix] also immaterial is whether it can be ascertained at the time of the sale whether gain or loss occurs as a result of the sale.[xx]

It is also immaterial what method of accounting the seller used in reporting gain or loss from the sale of the real property or whether, at the time of reacquisition, such property has depreciated or appreciated in value since the time of the original sale.[xxi] 

Let’s consider the foregoing conditions for application of the Section 1038.


A buyer’s indebtedness to the seller is secured by the real property for purposes of Section 1038 whenever the seller has the right to take title or possession of the property (or both) if there is a default with respect to such indebtedness.[xxii] It is irrelevant whether the seller is limited in their recourse to the property for payment of the indebtedness in the case of a default.[xxiii]

The relief provision applies only where the seller reacquires the real property from the buyer in partial or full satisfaction of the indebtedness that arose from the sale of the real property and was secured by the real property.[xxiv] That is, the reacquisition must be in furtherance of the seller’s security rights in the property with respect to the indebtedness that arose at the time of the sale, which may not be the case if the seller also transfers additional consideration to the buyer in connection with the reacquisition of the property.

Additional Consideration

Accordingly, if the seller, in reacquiring the real property, does not pay consideration to the buyer in addition to discharging the buyer’s indebtedness to the seller that arose from the original sale and was secured by such property, the reacquisition will qualify for relief even though the buyer has not defaulted in their obligations under the contract, or such a default is not imminent.[xxv]

The above-referenced “additional consideration” paid by the seller may include money and other property paid or transferred by the seller to the buyer in connection with the reacquisition of the real property. Also, the reacquisition by the seller of the real property subject to an indebtedness incurred by the buyer to a third party that arose subsequent to the sale to the buyer, or the seller’s assumption of such indebtedness upon the reacquisition of the property, is considered a payment by the seller of additional consideration in connection with the reacquisition.[xxvi]

Thus, for example, if at the time of the original sale of the real property the buyer executes, in connection with the sale, a first mortgage to a bank and a second mortgage to the seller and at the time of reacquisition the seller takes the property subject to the first mortgage, which the seller does not assume, the seller will be considered to have paid money in an amount equal to the unpaid amount of the first mortgage in connection with the reacquisition.[xxvii]

There are two circumstances, however, in which the seller’s payment of consideration in reacquiring the real property from the buyer, in addition to discharging the buyer’s indebtedness to the seller that arose from the sale of such property, will not deprive the seller of the benefits afforded by Section 1038: first, if the reacquisition and the payment of the additional consideration are provided for in the original contract for the sale of the real property; and second, if the seller reacquires the property either when the buyer has defaulted in their obligations under the contract or when such a default is imminent.[xxviii] 

Stated differently, relief under Section 1038 generally will not apply to a reacquisition of real property where the seller pays consideration in addition to discharging the buyer’s indebtedness to the seller that arose from the sale if the reacquisition and the payment of additional consideration were not provided for in the original contract for the sale of the property, and if the buyer has not defaulted in their obligations under the contract or such a default is not imminent.[xxix]

Reacquisition of the Real Property

The seller must reacquire the real property itself from the buyer[xxx] but the manner in which the seller reacquires the property is generally immaterial. Thus, the seller may reduce the real property to ownership or possession (or both) by agreement or by process of law.

The reduction of the real property to ownership or possession by agreement includes, where valid under local law, such methods as voluntary conveyance from the buyer and abandonment to the seller. The reduction of the real property to ownership or possession by process of law includes foreclosure proceedings in which a competitive bid is entered, such as foreclosure by judicial sale or by power of sale contained in the loan agreement without recourse to the courts, as well as those types of foreclosure proceedings in which a competitive bid is not entered, such as strict foreclosure and foreclosure by entry and possession.[xxxi]

Seller Recognizes Some Gain

As stated above, the seller may not have to recognize gain on the seller’s reacquisition of real property in satisfaction of the buyer’s installment obligation previously issued to the seller in exchange for such property. There is an exception to this nonrecognition rule where the seller has received a payment of purchase price prior to the reacquisition.[xxxii]

Specifically, the seller will be required to recognize gain upon the reacquisition of the real property from the buyer to the extent that the amount of money and the fair market value of other property which are received by the seller (other than an obligation of the buyer)[xxxiii] with respect to the sale of the property prior to such reacquisition[xxxiv] exceed the amount of the gain derived by the seller on the sale of such property which is reported by the seller as income for taxable periods prior to the reacquisition.[xxxv]

The following example[xxxvi] illustrates the application of this rule:

Seller sells real property to Buyer in exchange for Buyer’s installment obligation[xxxvii] of $10,000. Seller’s adjusted basis for the property is $3,000. Thus, the gross profit ratio is 70 percent.[xxxviii] During the year of the sale and the immediately succeeding year, Seller receives total payments of $4,000 on the contract and recognizes $2,800 of gain,[xxxix] which Seller reports using the installment method. In the next succeeding year, Seller receives $1,000 on the contract, and recognizes gain of $700. During that same year, Seller reacquires the property because of Buyer’s default (for example, missed interest payments). The gain on the sale which is returned as income by Seller for periods prior to the reacquisition is $3,500.[xl] The amount by which the total payments received by Seller prior to the reacquisition ($4,000 + $1,000) exceed the total gain reported by Seller prior to the reacquisition ($2,800 + $700), or $1,500, must be reported by Seller as income in the year of reacquisition.

Amounts of money and other property received by the seller with respect to the sale of the property include payments made and other property transferred directly to the seller, as well as payments made by the buyer for the seller’s benefit.[xli]

All payments made by the buyer at the time of the reacquisition of the real property that are with respect to the original sale of the property are to be treated by the seller as having been received prior to the reacquisition with respect to such sale.[xlii] For example, if the buyer, at the time of the reacquisition by the seller, pays money or other property to the seller in partial or complete satisfaction of the buyer’s indebtedness on the original sale, the seller must treat such amounts as having been received prior to the reacquisition with respect to the sale.

However, the amount of gain on a reacquisition of real property, as determined under the above rule, cannot exceed the amount by which the price at which the real property was sold[xliii] exceeded its adjusted basis at the time of the sale, reduced (i) by the amount of gain on the sale of such real property which is returned as income for periods prior to the reacquisition, and by (ii) the amount of money and the fair market value of other property (other than obligations of the buyer to the seller which are secured by the real property) paid or transferred by the seller in connection with the reacquisition of such real property.[xliv]

Character of Gain

The character of the seller’s gain resulting from the seller’s reacquisition of the real property will be the same as that which was or would have been reported by the seller under the installment method.[xlv]


The seller’s basis[xlvi] for the reacquired real property, as determined as of the date of such reacquisition, is equal to the sum of the following amounts:

(i) The adjusted basis of all indebtedness of the buyer to the seller which, at the time of reacquisition, was secured by such real property;

(ii) The gain recognized by the seller with respect to such reacquisition; and

(iii) The money and fair market value of other property paid or transferred by the seller in connection with the reacquisition of such real property.

The basis of any indebtedness of the buyer to the seller which was secured by the reacquired real property is equal to the excess of the face value of the obligation over an amount equal to the gain which would be returnable if the obligation were satisfied in full.[xlvii]

Holding Period

Since the reacquisition is in a sense considered a nullification of the seller’s original sale of the real property to the buyer, for purposes of determining the seller’s gain or loss on a disposition of such property after its reacquisition the period for which the seller held the real property at the time of such disposition will include the period for which such property was held by the seller prior to the original sale to the buyer.[xlviii]

However, the holding period will not include the period of time commencing with the date following the date on which the property was sold to the buyer and ending with the date on which the property was reacquired by the seller.[xlix] 


The following illustrates the application of the Section 1038 rules:

Seller owns real property with an adjusted basis of $5,000. Seller sells the property to Buyer for $20,000 (its fair market value), realizing gain of $15,000. The purchase price is payable $4,000 in cash at closing and a note for the balance of $16,000, payable in equal installments over four years.[l] The note is secured by the real property. Seller reports the gain from the sale using the installment method. Seller’s gain on the sale is $15,000; thus, Seller’s gross profit ratio is 75 percent, meaning 75 percent of each payment of purchase price (principal) received is treated as gain. For the taxable year of the sale, Seller reports gain of $3,000 from receiving the down payment of $4,000. The next year, Seller receives another $4,000 payment (the first on the note) and reports another $3,000 of gain for that year, bringing the total payments received to $8,000 and the total gain recognized to $6,000. Buyer starts to experience some difficulty with their business. Buyer returns the real property to Seller in satisfaction of the remaining $12,000 of debt. Assume the property value has not changed.  

a. On repossession of the property, Seller has gain of:

(i) Money received as down payment: $4,000

(ii) Plus money received on the note: $4,000

(iii) Less gain reported in prior years: $6,000

(iv) Equals Sec. 1038 gain of: $2,000

(Note: $8,000 cash received; $6,000 taxed.)

b. Limitation

(i) Gain realized on sale: $15,000

(ii) Less gain previously reported $6,000

(iii) Limiting amount: $9,000

c. Gain recognized under Sec. 1038 on repossession: $2,000

d. Aggregate gain on sale and repossession: $8,000

(the total amount of purchase price received by Seller)

e. Basis for Repossessed Property

i. Seller’s basis for Note:[li] $3,000

ii. Plus gain to Seller on reacquisition: $2,000

iii. Basis: $5,000

(the same basis Seller had before the sale)

Thus, on a sale of the property for $20,000, the gain would be $15,000 – exactly where Seller was before the original sale to Buyer.

What About the Buyer?

The relief provision benefits only the seller who repossesses the real property from the buyer. Where does that leave the buyer who transfers such real property to the seller in satisfaction of their obligation to seller?

You may recall the earlier discussion of a failed rescission. In that case, the buyer’s transfer of the property is treated as a taxable sale or exchange. Thus, the buyer may recognize gain equal to the excess of the then current fair market value of the property over the buyer’s adjusted basis for the property.[lii]

A number of factors will have to be considered in determining the buyer’s gain, if any, including whether the buyer has claimed any cost recovery deductions with respect to the property, which have reduced its adjusted basis, and whether the buyer made any capital improvements to the property, which would have increased such basis. have taken the property from WP with a cost basis equal to the purchase price

A Fourth “R”?

You may be wondering about different scenarios for which relief under Section 1038 may be available.[liii]

The following describes a Technical Advice Memorandum issued by the IRS’s Office of Chief Counsel that provides a good illustration of one such scenario.[liv] The transaction in question presented a not uncommon fact pattern.

Related Persons

Taxpayers sold their real estate, including land and a building, to their wholly owned corporation in exchange for a note that was secured by a mortgage on the property. The gain from the sale was reported on the installment method. Taxpayers treated the gain as long-term capital gain.

On audit of Taxpayers’ return, the IRS determined that the gain from the sale of the building should have been treated as ordinary income because the parties were related to one another and the building was depreciable in the hands of the buyer-corporation.[lv] Taxpayers conceded that the IRS’s determination was correct.

Shortly thereafter, Taxpayers and the buyer-corporation agreed to cancel the balance due Taxpayers on the mortgage and the corporation quit claim deeded the property back to Taxpayers, presumably so Taxpayers would not have to continue reporting ordinary income from the sale (including interest).[lvi]

Taxpayers reported the transaction as a repossession, in accordance with the provisions of Section 1038, on their federal income tax return. They  included in income the excess of all payments received from the buyer-corporation over the gain they previously reported in the year of the sale and the intervening years.

The IRS concluded that Section 1038 applied in determining the amount of gain resulting upon the reacquisition of the property by Taxpayers. The application of Section 1038 was not precluded by the fact that the conveyance was voluntary, by the fact that default was not imminent and had not previously occurred, or by the fact that the buyer and seller were related persons.

Food for thought.

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The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.

[i] Does the “recall feature” actually work? I have some well-founded reasons (backed by empirical data) to doubt it.

[ii] I know I have, and more times than I care to admit.

[iii] Sounds like something out of Fields of Dreams, doesn’t it?

[iv] Can you imagine unwinding a service?

[v] See Reg. Sec. 1.1001-1(a): “…the gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or as loss sustained.”

[vi] Reg. Sec. 1.1001-1.

[vii] Of course, subsequent events may shed light on the true character of a transaction from an earlier year; for example, a loan vs a gift, or a lease vs a sale. The IRS and the Courts may look upon the parties’ post-transaction activities as manifestations of what the parties originally intended.

[viii] You’d be surprised at the various circumstances in which the rescission doctrine has been applied. For example, to rescind a sale of stock that did not qualify for an election under IRC Sec. 338(h)(10), which was then followed by one that did. Also, a spin-off has been rescinded where changes in the business environment subsequent to the distribution negated the benefit of the spin-off.

[ix] Under IRC Sec. 1001. Rev. Rul. 80-58.

[x] It does not appear to matter whether the transaction to be rescinded was undertaken between unrelated persons or within a group of related taxpayers.

[xi] I.e., before the end of the taxable year in which the transaction took place.

[xii] Due in part to the fact finder’s own subjectivity.

[xiii] This condition is tied closely to the requirement that the rescission occur within the taxable year of the transaction. Again, a taxpayer’s taxable year generally stands on its own – the year starts January 1 and ends December 31. If the taxpayer’s relationship with respect to a specific property begins at point X on January 1, moves to Point Y during the year, but returns to Point X before the end of the year, such that the relationship that existed on January 1 also exists on December 31, it may not be unreasonable to ignore the temporary shift to Point Y.

[xiv] The outcome of the taxable unwinding for B may depend, for example, upon whether B has claimed any cost recovery deduction with respect to the property since acquiring it, thereby reducing B’s adjusted basis and creating potential gain in the exchange.

[xv] See also Reg. Sec. 1.1038-1.

[xvi] A seller-financed transaction. IRC Sec. 1038(a).

[xvii] Basically, an installment obligation.

[xviii] IRC Sec. 1038(a).

[xix] Capital or ordinary.

[xx] See Reg. Sec. 1.1038-1(a)(1).

[xxi] Reg. Sec. 1.1038-1(a)(1).

[xxii] Reg. Sec. 1.1038-1(a)(2).

[xxiii] A nonrecourse debt. It is worth noting that it may at times be difficult to distinguish a recourse debt from one that is nonrecourse for purposes of applying Reg. Sec. 1.1001-2.

[xxiv] Reg. Sec. 1.1038-1(a)(3)(i).

[xxv] Reg. Sec. 1.1038-1(a)(3)(i).

[xxvi] However, the reacquisition by the seller of real property subject to an indebtedness (or the assumption, upon the reacquisition, of an indebtedness) which arose prior to or arose out of the sale to the buyer will not be considered as a payment by the seller of additional consideration.

[xxvii] Reg. Sec. 1.1038-1(c)(4).

[xxviii] Reg. Sec. 1.1038-1(a)(3)(i).

[xxix] Thus, for example, if the buyer is in arrears on the payment of interest or principal or has in any other way defaulted on the contract for the purchase of the property, or if the facts of the case indicate that the buyer is unable satisfactorily to perform their obligations under the contract, and the seller reacquires the property from the buyer in a transaction in which the seller pays consideration in addition to discharging the buyer’s indebtedness to the seller that arose from the sale and was secured by the real property, the relief provision will apply to the reacquisition.

[xxx] Reg. Sec. 1.1038-1(a)(4). The real property reacquired in satisfaction of the indebtedness need not be reacquired from the buyer but may be reacquired from the buyer’s transferee or assignee, or from a trustee holding title to such property pending the buyer’s satisfaction of the terms of the contract, so long as the indebtedness that is partially or completely satisfied in the reacquisition of the property arose in the original sale of the property and was secured by the property so reacquired.

[xxxi] Reg. Sec. 1.1038-1(a)(3)(ii).

[xxxii] IRC Sec. 1038(b)(1). Any amounts received by the seller as interest, whether stated or unstated, are excluded from the computation of gain on the sale of the property and are not considered amounts of money or other property received with respect to the sale.

[xxxiii] Reg. Sec. 1.1038-1(b)(3). The term “obligations of the buyer arising with respect to the sale” of the real property includes only that indebtedness on which the buyer is liable to the seller, and which arises out of the sale of such property. Thus, the term does not include any indebtedness in respect of the property that the seller owes to a third person which the buyer assumes, or to which the property is subject, at the time of the sale of the property to the buyer.

[xxxiv] Including gain on the sale resulting from payments received in the taxable year in which the date of the reacquisition occurs if such payments are received prior to such reacquisition.

[xxxv] IRC Sec. 1038(b); Reg. Sec. 1.1038-1(b)(1). The amount of gain on the sale of the property which is returned as income for periods prior to the reacquisition of the real property does not include any amount of income attributable to a recovery of a bad debt previously deducted by the seller as worthless or partially worthless.

[xxxvi] Reg. Sec. 1.1038-1(b)(1).

[xxxvii] Recall that under the installment method rules, the term “payment” does not include the receipt of evidences of indebtedness of the person acquiring the property. IRC Sec. 453(f)(3).

[xxxviii] ($10,000 minus $3,000) / $10,000. Thus, 70% of every principal payment on the installment obligation will be treated as income.

[xxxix] $4,000 x 70%.

[xl] $5,000 × 70%.

[xli] Reg. Sec. 1.1038-1(b)(2). For example, if the buyer makes payments on a mortgage or other indebtedness to which the property is subject at the time of the sale of such property to him, or on which the seller was personally liable at the time of such sale, such payments are considered amounts received by the seller with respect to the sale. However, if after the sale the buyer borrows money and uses the property as security for the loan, payments by the buyer in satisfaction of the indebtedness are not considered as amounts received by the seller with respect to the sale.

[xlii] Reg. Sec. 1.1038-1(b)(2).

[xliii] IRC Sec. 1038(b)(2). The price at which the real property was sold is the gross sales price reduced by the selling commissions, legal fees, and other expenses incident to the sale of such property which are properly taken into account in determining gain or loss on the sale.

[xliv] Reg. Sec. 1.1038-1(c). This limitation shall not apply in a case where the selling price of property is indefinite in amount and cannot be ascertained at the time of the reacquisition of such property, as, for example, where the selling price is stated as a percentage of the profits to be realized from the development of the property which is sold.

[xlv] Reg. Sec. 1.1038-1(d).

[xlvi] IRC Sec. 1038(c). Reg. Sec. 1.1038-1(g)(1).

[xlvii] IRC Sec. 453B(b).

[xlviii] Reg. Sec. 1.1038-1(g)(3).

[xlix] I.e., the time it was held by the buyer.

[l] Assume the note bears sufficient interest (at least the AFR) so as not to implicate any of the imputed interest rules.  

[li] The $12,000 balance less the $9,000 of gain that would have been recognized on full satisfaction of the note (i.e., the gross profit ration of 75% x the $12,000 of purchase price).

[lii] Of course, the buyer will have taken the real property with a starting basis equal to the purchase price plus certain transaction costs. IRC Sec. 1012.

[liii] It’s OK to admit it. There’s nothing wrong with that.

[liv] TAM 8402006.

[lv] IRC Sec. 1239.

[lvi] I’m guessing the corporation had little gain on its transfer of the property back to Taxpayers. It acquired a cost basis at acquisition.