An Extension of Credit
When one person lends money to another, the lender expects the borrower to repay the loan by an agreed-upon time. In order to compensate the lender for the borrower’s use of the lender’s money (the loan proceeds), the lender will require the borrower – at least in an arm’s length setting involving unrelated persons[i] – to pay interest on the amount borrowed.
The rate of interest charged will depend on several factors including, for example, the term of the loan, whether collateral is provided by the borrower to secure repayment of the loan (as well as the quality and liquidity of such collateral), and the overall creditworthiness of the borrower. In general, the interest rate is related to the various risk borne by the lender.
Sale with Deferred Payments
When a person sells property to another, the seller usually expects, and would certainly prefer, to receive immediate payment from the buyer of an amount equal to the fair market value of the property sold.[ii]
In some cases, however, the buyer may not have the funds for the purchase readily available, may want to invest the funds elsewhere, may not want to liquidate other investments to generate the funds, or may determine that the cost of third-party financing for the amount of the consideration owing to the seller is too expensive.
Under these circumstances, the seller may agree to accept an interest bearing and secured promissory note from the buyer pursuant to which the buyer is obligated to pay the seller the portion of the consideration that the buyer was unable (or unwilling) to pay at closing.
Alternatively, the purchase and sale agreement itself may provide for deferred payments of the purchase price.
The unpaid portion of the consideration, whether reflected in a contract for the sale or exchange of property or in promissory note may be payable as a lump sum at a designated time, or in installments pursuant to an agreed-upon schedule, or upon the happening of specified events.
Earnout
In most cases, the parties to a purchase and sale transaction have agreed to the amount of consideration to be transferred by the buyer to the seller in exchange for the property to be sold.
However, what if the prospective buyer believes the seller has overvalued the property or business in question? Provided the parties are willing to work with one another, they may decide to reconcile their differences of opinion as to value by using an earnout, which is a form of contingent and, therefore, deferred consideration.[iii]
For example, the seller may agree to accept an amount of consideration payable at closing that is less than what the seller believes is the fair market value of their business,[iv] provided the buyer agrees to pay the seller additional consideration if the business reaches specified performance targets within a designated earnout period,[v] thereby supporting a higher valuation for the business as of the date of its sale to the buyer.[vi]
Installment Reporting
In recognition of the fact that a seller who accepts a buyer’s note (or other contractual promise of deferred payment) in exchange for their property has not yet received the entire consideration owing from the buyer and, in acknowledgement of the risk of nonpayment,[vii] the Code generally does not require the seller to immediately recognize the entire gain from the sale of the property. Instead, such gain is recognized by the seller under the installment method as the seller – even one who is an accrual method taxpayer – actually or constructively receives payments of the consideration (i.e., the principal amount of the buyer’s note).[viii]
Specifically, the gain recognized for any taxable year is that proportion of the payments received in such year which the gross profit from the sale (realized or to be realized when payment is completed) bears to the total contract price.[ix]
The installment method of reporting gain from a sale applies even in the case of a contingent payment sale – one in which the aggregate selling price cannot be determined by the close of the taxable year in which such sale occurs (for example, a sale that includes an earnout, as described above).[x]
As in the case of a typical lender-borrower relationship, the seller who disposes of property in exchange for deferred payments of the purchase price will expect the buyer to periodically pay interest on the unpaid balance of the consideration to compensate the seller for the deferred receipt of such consideration – stated differently, for the buyer-debtor’s “use” of the seller-creditor’s money.[xi]
No Interest or Deemed Interest?
There are times, however, in which a buyer may refuse to make an economic outlay beyond the consideration payable for the property acquired; in some cases, that may include the payment of interest.[xii] Some of you may have encountered this situation in a transaction involving the sale of a business where a large portion, if not most, of the purchase price is paid at closing, with the balance payable as an earnout.[xiii]
Notwithstanding any agreement between the parties regarding the buyer’s payment (or not) of interest to the seller with respect to the deferred payment of consideration for the property sold, the Code may recharacterize as a payment of interest a portion of the consideration paid by the buyer for the property, or it may impute such a payment where none has actually been made.
The Rate Difference
“Why is that?” you might ask. For one thing, as stated above, a seller will normally insist that an unrelated buyer pay interest on the unpaid balance of the consideration owed by the buyer for the property sold in order to compensate the seller for the deferred receipt of such amount. Moreover, even where the parties are not related to one another, they may agree to “bury” the economic equivalent of interest (i.e., an amount of compensation for the use of the seller’s money) in the purchase price for the property.[xiv]
After all, the federal tax law distinguishes between ordinary income and long term capital gain in the case of a noncorporate seller, generally taxing long term capital gain at a lower rate.[xv] Accordingly, it may be preferable for a noncorporate seller (or a passthrough entity seller with noncorporate members) to characterize interest as capital gain when possible.
Under the Code
The federal government has long been aware of such arrangements and of their potential for abuse. For example, in the case of an installment sale, Congress recognized it was possible for taxpayers to achieve not insignificant tax benefits by structuring a transaction to include a below-market (even zero) rate of interest on the deferred payment of purchase price.
When a purchase and sale agreement, or a buyer’s note, ostensibly fails to provide an adequate rate of interest with respect to any deferred payments of purchase price owed to the seller, Congress reasoned that the true purchase price of the property was overstated because interest payments were characterized instead as sales price (i.e., “loan principal”).
This recharacterization of interest as sales price, although generally of no immediate economic significance to the parties, could have important tax consequences. For example, if the property sold was a capital asset or a section 1231 trade or business asset in the hands of the seller, then the seller would have transformed interest income, which should have been taxable to the seller currently as ordinary income, into tax-deferred (and tax-preferred) capital gain.[xvi]
The Fixes
Starting from the premise that the lender in any arm’s length transaction – including the seller of property that accepts deferred payments of the purchase price therefor – would insist on being compensated for the borrower’s (or buyer’s) use of the lender’s (seller’s) money, Congress sought to properly account for the time value of money by enacting the OID and imputed interest rules.[xvii]
The effect of imputing interest income into the purchase and sale transaction is not to increase the amount actually paid by the buyer to the seller but to recharacterize a portion of the buyer’s payments (designated as “principal” by the parties) as interest for federal income tax purposes.
OID
In brief, when the buyer’s note – a “debt instrument”[xviii] – does not provide for adequate interest,[xix] or if it does provide for adequate interest but such interest is not unconditionally payable at least annually,[xx] the OID rules[xxi] will require the seller to periodically include in gross income an amount equal to the accrued but unpaid interest.[xxii]
In other words, the seller (i.e., the holder of the note) is required to use the accrual method of accounting for any interest, whether stated or imputed, that is not paid currently.[xxiii]
Other Imputed Interest
If the OID rule does not apply to a transaction,[xxiv] the Code provides another set of imputed interest rules that may apply where the buyer’s deferred payments to the seller are made “under any contract for the sale or exchange of any property” as to which there is “total unstated interest.”[xxv]
According to this rule, interest will be imputed to a deferred payment of “purchase price” under a contract for the sale or exchange of property that does not provide adequate interest; meaning, a portion of the payment will be treated as interest,[xxvi] and such interest will be accounted for by the taxpayer under the taxpayer’s regular method of accounting. Thus, a cash basis seller will include the imputed interest in gross income (as ordinary income) when the payment is received.
Uncertain Purchase Price?
All well and good, you might say, when the purchase price and the schedule of payments are known.
But what if the purchase price is not known at the time the sale closes?[xxvii] How is the unstated interest to be determined?
That question brings us to the case of a disgruntled shareholder (“Taxpayer”) of a closely held corporation (“Corp”), who became an even further disgruntled former shareholder following the recent decision of the Third Circuit Court of Appeals in which the application of the Code’s imputed interest rules figured prominently.[xxviii]
The Buyout
Corp was a closely held C corporation that was originally owned by Dad. Dad established trusts for each of his four children, including Son and Taxpayer. Together, these trusts owned all of Corp’s issued and outstanding shares of common stock.
Consolidation
Over time, however, Son consolidated the ownership of Corp until only Son’s trust and Taxpayer’s trust (“Trust”) held Corp’s stock.
Subsequently, Corp acquired all the stock of another corporation, Sub. Additional corporate restructuring removed Trust as a shareholder of Corp and resulted in Trust’s holding only shares of Sub stock; a portion of the shares of Sub stock also found their way into Son’s trust, and to trusts for the benefit of Son’s children.
Eventually, Son’s trust and the trusts for his children contributed their interests in Corp and in Sub to a separate corporate entity, Partners, which thereby became Corp’s sole shareholder.
Trust held no interest in Partners but continued to have an ownership interest in Sub, which Partners sought to eliminate either by purchasing Trust’s stock (a cross-purchase) or by causing Sub to redeem the stock.
Short-Form Merger
After Taxpayer’s Trust rejected multiple offers from Partners for the acquisition of its interest in Sub, the President of Corp informed the trustees of the Trust that Sub was prepared to use the applicable State short-form merger law[xxix] to compel the redemption of Trust’s shares of Sub stock “at a price to be determined by us and our financial advisors.”[xxx]
Concerned that Taxpayer’s Trust would be deprived of its stake in Sub, its trustees filed a lawsuit against Corp, Partners, and others (the “Litigation”).
Despite the Litigation, Partners and Corp took steps to effectuate a short-form merger between Sub and its newly created parent company, Parent, to which Partners and Corp contributed their shares of Sub stock, giving Parent ownership of 83.6 percent of Sub’s common stock, and leaving Taxpayer’s Trust with a 16.4 percent interest in Sub.
Parent’s and Sub’s respective board of directors approved a short-form merger plan under which Parent would merge with and into Sub (the “Merger Agreement”), with Sub as the surviving corporation.[xxxi] The Merger Agreement provided that each share of Parent common stock would be converted into one share of Sub common stock, while the shares of Sub stock previously owned by Parent would be cancelled.
Significantly, for purposes of this post, the shares of Sub stock held by Taxpayer’s Trust would be converted into the right to receive an $82.8 million promissory note, due in a single payment two years later, together with interest accruing at 10 percent per year.
Dissenters’ Rights
However, the Merger Agreement also noted that Trust had dissenters’ rights (or “appraisal rights”) under State law that Trust could exercise to ensure it was paid “fair value” for its Sub stock.
In general, when a minority shareholder exercises their statutory dissenters’ rights in connection with a proposed transaction, the shareholder will cease to have any of the rights of a shareholder on consummation of the transaction, except the right to be paid the fair value of their shares[xxxii] – in other words, a dissenting shareholder effectively turns into a creditor of the corporation.
Sub filed the articles of merger and the Merger Agreement with State. Shortly thereafter, Taxpayer’s Trust amended its Litigation complaint to challenge the validity of the merger and demanding a statutory appraisal of its interest in Sub under State’s dissenters’ rights law.[xxxiii]
Settlement
After months of negotiation, and approximately three years after the articles of merger were filed with State, the parties settled the Litigation.
Among other things, the Settlement Agreement required Sub to pay Taxpayer’s Trust $191 million (the “Settlement Amount”) in exchange for its Sub shares.[xxxiv]
The Settlement Agreement also acknowledged the parties’ dispute as to the timing of the sale of Trust’s shares of Sub stock in respect of which this payment was to be made; specifically, whether the sale of Trust’s Sub stock was effectuated by the earlier filed Merger Agreement, or by the later Settlement Agreement.
The Parties’ Tax Dispute
In Sub’s view, the Settlement Amount was a deferred payment for the purchase of Trust’s shares of Sub stock pursuant to the Merger Agreement; the exercise of Trust’s dissenters’ rights only had the effect of determining the share price for purposes of the purchase. According to this position, Trust would be required, under the imputed interest rules, to characterize part of the Settlement Amount as ordinary interest income.
Taxpayer’s Trust took the position that payment of the Settlement Amount was not a deferred payment for Trust’s shares of Sub stock. According to Trust, the payment was made in connection with the sale of its Sub stock “under” the Settlement Agreement and did not relate back to the earlier Merger Agreement. Thus, no portion of the Settlement Amount paid to Trust would be characterized as interest from an earlier sale; instead, the entire payment would be taxed to Trust as long term capital gain.
IRS Audit
After auditing the tax return filed by Taxpayer’s Trust for the year of the settlement, the IRS determined that part of the Settlement Amount paid to Trust represented, and should have been reported as, unstated interest income – taxable as ordinary income – accruing from the earlier year, in which the merger was completed.
The agency issued a notice of deficiency to Trust, which then timely petitioned the U.S. Tax Court for a redetermination of the income tax deficiency[xxxv] asserted by the IRS.
The Tax Court, however, agreed with the IRS and concluded that the merger pursuant to the Merger Agreement constituted a sale of Trust’s shares under a contract for the sale or exchange of property for purposes of applying the Code’s imputed interest rules.
Accordingly, the Tax Court determined that Sub made the $191 million settlement payment as a deferred payment “under” the Merger Agreement to satisfy its obligation to pay for Trust’s Sub shares.
Thus, the Tax Court decided that Taxpayer’s Trust was liable for taxes on approximately $31 million of ordinary income that the Tax Court deemed was the interest portion of the $191 million Settlement Amount.
Trust appealed to the Third Circuit.
The Circuit Court
The Court began by reviewing the tax treatment accorded a payment of interest versus a payment of principal.[xxxvi] It then launched into a discussion of the imputed interest rules.
Section 483
The Court explained that four conditions had to be satisfied in order for the imputed interest rules to apply to a payment:
- There had to be a payment “under any contract for the sale or exchange of any property.”
- That payment must have been made “on account of the sale or exchange of property,” “constituted part or all of the sales price” of the property, and was “due more than 6 months after the date of such sale or exchange.”
- Some or all of the payments under the contract were “due more than 1 year after the date of the sale or exchange.”
- There was “total unstated interest” under the contract as measured against the rates determined by the IRS.
When these condition are satisfied, the Court continued, any “unstated interest” that is properly allocable to a payment must treated as interest for tax purposes.
The IRS contended that the $191 million payment made three years after the merger satisfied all of these requirements. Most relevant, the agency argued that the payment was made “under” the Merger Agreement because that agreement “extinguished” Trust’s Sub shares and obligated Sub to pay a redemption price for those shares.
Notwithstanding the Merger Agreement, Trust argued that the imputed interest rules were inapplicable because Trust’s Sub stock remained outstanding and in Trust’s possession until the Settlement Agreement, which was the contract pursuant to which the payment in question was made.
The Court disagreed with Trust’s assertions and found the Merger Agreement was a “contract for the sale” of Trust’s Sub shares for purposes of the imputed interest rules, and the payment of the $191 million Settlement Amount was made “under” the Merger Agreement.
For purposes of the imputed interest rules, the Court stated, a payment is made “under” a contract when the contract serves as the basis for, or authorizes, the sale of property.
The Court determined that the Merger Agreement “served as the basis for payment” of the Settlement Amount for Trust’s Sub shares – it effected the sale of Trust’s shares of Sub stock and created Sub’s obligation to pay Trust.
In contrast, the Settlement Agreement specified that it did not constitute an agreement to sell Trust’s Sub shares; rather, it stated there was an ongoing dispute as to when those shares were sold. Trust conceded that Sub’s payment of the Settlement Amount fulfilled Sub’s obligation to compensate Trust for its Sub shares.[xxxvii]
Still, Trust argued that because the Settlement Agreement “explicitly mandated” payment of the Settlement Amount, payment was made “under” that agreement.
The Court rejected Trust’s argument, pointing out that State law governed its interpretation of each contract, and by extension, whether the terms of either contract indeed supplied the basis for the payment. According to the Court, Trust’s Sub shares were sold pursuant to the Merger Agreement, and Trust rejected the price set forth in that agreement. Having exercised its dissenters’ rights to seek a fair value for such shares, the note authorizing the original $82.8 million payment from Sub was never issued. And, while the sale was effected, the price to be paid for the Trust’s shares remained to be determined.
Under State law, the Court explained, the lack of a definite price term did not invalidate an otherwise valid contract. The Merger Agreement specified a price for Trust’s Sub shares and there was no missing term. The complication here was that this definite term – the price – was later contested by a non-party to the Merger Agreement (i.e., Trust). Moreover, the parties who entered into the Merger Agreement were different than those who entered into the Settlement Agreement.
Nonetheless, the Court found that, under State law, the Merger Agreement was valid, the sale occurred, and the disputed price term could be supplied later, which is exactly what the Settlement Agreement did three years after the sale was completed. In other words, although the Settlement Agreement supplied the missing terms of payment, the Merger Agreement “provided the basis” for the fact of that payment.[xxxviii]
Conclusion
In sum, the Court concluded that the $191 million payment was made “under” the Merger Agreement, which was a “contract” for the “sale or exchange” of Trust’s Sub stock. Because the contract had no stated interest when Sub later paid the Settlement Amount on account of that sale, the imputed interest rules applied to treat part of the payment as interest income that Trust should have reported when the payment was received.
Observation
The above discussion illustrated only one form of contingent payment transaction[xxxix] that, because it will necessarily be made after the sale of the property in question is completed – a deferred payment of purchase price – may implicate the imputed interest rules and, thus, affect the after-tax economic consequences of the transaction. There are others.
Any contract for the sale or exchange of property that provides for one or more contingent payments of purchase price may be subject to the imputed interest rules. This will certainly cover most arrangements that provide for an earnout, whether in the context of a taxable sale or a tax-deferred exchange.[xl]
Unless the seller is attuned to the application of these rules and is willing to address their tax consequences with the buyer, the successful satisfaction of the earnout conditions and the subsequent payment of the additional consideration will still result in the seller’s receiving less than full value for their business.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the firm.
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[i] Related parties present another set of issues. Depending on the related parties’ particular facts and circumstances, they may have to consider the application of IRC Sec. 482 or Sec. 7872.
[ii] Why continue to bear any economic risk with respect to the property when you no longer own it?
[iii] The earnout – or, stated differently, additional consideration – may be contingent upon the satisfaction of certain financial targets (for example, based on revenues or net income), or upon the satisfaction of other conditions (such as the retention of a particular client, or the successful expansion into a new market).
[iv] Noncontingent payments may be treated as a separate debt instrument. See Reg. Sec. 1.483-4(c).
[v] Because the value determined under the earnout relates back to the date of the closing, the earnout period should not be unreasonably long; otherwise, the nexus between the value of the business as of the closing date and the value of the business as demonstrated by its performance on the earnout date becomes more tenuous.
In some cases, the seller’s principals should be alert to the potential treatment of the earnout as compensation for services. For example, see https://www.taxslaw.com/2022/06/the-earnout-contingent-purchase-price-or-compensation/.
[vi] The amount of the positive adjustment to the purchase price (which may be capped) would only be payable upon the business’s achievement of the agreed-upon performance goals.
Thus, the earnout assures the buyer they are not overpaying for the target business. It also affords the seller the opportunity to demonstrate that the business was worth more than the base amount payable at closing.
[vii] Compare the situation in which the buyer secures its obligation to the seller by irrevocably setting aside an amount of cash equal to the unpaid balance of the consideration for the property. In that case, the seller is required to include all the gain from the sale on its tax return for the year of the sale. Reg. Sec. 15a.453-1(b)(3)(i). (By analogy, think of a secular trust in the context of deferred compensation.)
[viii] IRC Sec. 453. An installment sale is a sale of property where the seller receives at least one payment after the tax year of the sale. This rule applies to both cash basis and accrual basis taxpayers.
There are other limitations on the seller’s ability to defer recognition of the gain from the sale. See, for example, the pledge rule under IRC Sec. 453A(a)(2) and Sec. 453A(d).
In addition, Congress was aware that cooperative parties may try to use installment reporting to defer recognition by the seller of as much of the gain as possible. To prevent this outcome, IRC 453A(a)(1) and Sec. 453A(c) impose an interest charge on the deferred tax liability attributable to certain “larger” installment sales.
[ix] IRC Sec. 453(c).
[x] Reg, Sec. 15a.453-1(c).
[xi] The amount to which the seller became entitled at the closing of the sale. Query how the amount of interest is determined when there is an earnout.
[xii] Similarly, the buyer will almost always refuse to pay the sales tax, or will agree to pay only a portion of such tax, that arises in the context of a purchase and sale of assets.
[xiii] How often have you been told that it was not “market” to charge interest with respect to an earnout payment?
From the buyer’s perspective, the purchase price for an asset to which the cost-recovery rules apply may be expensed, depreciated, or amortized. If some portion is treated, instead, as a payment of interest, the interest may be deductible as it is paid. From the seller’s perspective, the gain from the sale may be tax-favored (for an individual) long term capital gain, whereas the receipt of interest is taxed as ordinary income.
[xiv] They mischaracterize the interest as principal.
[xv] An individual’s long term capital gain is generally taxed at a federal rate of 20%, while interest is treated as ordinary income, which is taxed at a top federal rate of 37%.
[xvi] At least in the hands of an individual taxpayer.
If the property was depreciable in the hands of the purchaser, then the purchaser would be entitled to higher depreciation deductions, the value of which may be more than the value of the lost interest deductions. Moreover, if the property was tangible personal property used in a trade or business, the purchaser may be entitled to claim an immediate deduction for bonus depreciation.
[xvii] We’re assuming non-traded notes and property throughout this post.
[xviii] IRC Sec. 1275(a) defines the term “debt instrument” to mean a bond, debenture, note, or certificate or other evidence of indebtedness.
[xix] At the applicable federal rate, or AFR, under IRC Sec. 1274(d).
[xx] I.e., it is not “qualified stated interest.”
[xxi] IRC Sec. 1274 applies to any debt instrument that satisfies the following: it is given in consideration for the sale or exchange of property; at least one payment under the debt instrument is due more than 6 months from the sale or exchange; and the note’s stated interest is less than the AFR (or, if at least equal to the AFR, is not payable unconditionally at least annually).
[xxii] IRC Sec. 1274.
[xxiii] The effect is to require the seller and the buyer (the lender and borrower) to account for interest annually.
[xxiv] Reg. Sec. 1.483-4 provides the following example: pursuant to a corporate reorganization qualifying under IRC Sec. 368(a)(1)(B), Corp M acquires the one-half interest of Corp O held by Corp N in exchange for 30,000 shares of Corp M voting stock and a right to receive up to 10,000 additional shares of Corp M’s voting stock during the next 3 years, provided the net profits of Corp O exceed certain amounts specified in the contract. No interest is provided for in the contract. No additional shares are received in Years One or Two. In Year 3, the annual earnings of Corp O exceed the specified amount, and an additional 3,000 Corp M voting shares are transferred to Corp N.
According to the example, IRC Sec. 1274 does not apply to the right to receive the additional shares because the right is not a debt instrument for federal income tax purposes. As a result, the transfer of the 3,000 Corp M voting shares to Corp N is a deferred payment subject to the imputed interest rules of IRC Sec. 483 and a portion of the shares is treated as unstated interest under that section.
[xxv] IRC Sec. 483. This section will not apply to a payment unless: the payment is under a contract for the sale or exchange of property; the payment is due more than 6 months after the date of the sale or exchange; at least one payment under the contract is due more than 1 year after the sale or exchange; and the contract does not provide adequate stated interest.
[xxvi] I.e., a portion of the purchase price will be recharacterized as interest.
[xxvii] This would seem to be an unusual situation. However, what if the final price is determined pursuant to an earnout that is not capped?
[xxviii] Charles G. Berwind Trust v. Comm’r, No. 24-2360 (3d Cir. 2025).
[xxix] State’s corporation law provided a mechanism by which a parent corporation could merge with its 80-percent-owned subsidiary without a vote by the subsidiary’s shareholders (i.e., Trust).
[xxx] A “squeeze out.”
[xxxi] As a minority shareholder of Sub, Trust was not entitled to vote on the Merger Agreement per the short-form merger statute.
[xxxii] For example, see Sec. 623 of New York’s BCL, and Sec. 262 of Delaware’s GCL. The reference to “fair value” is not necessarily the same as fair market value.
[xxxiii] Because Taxpayer’s Trust exercised its dissenters’ rights, the $82.8 million promissory note ultimately was not issued.
[xxxiv] Compare the sum of $82.8 million offered under the Merger Agreement.
[xxxv] Arising from the imputation of ordinary interest income.
[xxxvi] Thus, the Court discussed how the Code distinguishes between capital gain and ordinary income. Capital gains are often taxed at lower rates, the Court stated, than ordinary income, including interest. Accordingly, the Court continued, taxpayers sometimes try to characterize income as capital gain rather than as ordinary income. The Court explained that, prior to the enactment of the imputed interest rules, taxpayers could “convert” what was actually ordinary interest income into capital gain by agreeing to sell property in exchange for payments made over time without specifically providing for interest payments. Such payments would then be taxed as capital gains without any portion attributed to ordinary-income interest.
In enacting the imputed interest rules, the Court stated, Congress intended to prevent taxpayers from converting ordinary interest income into capital gain where the dollar amount of the deferred payments was larger than it would have been had payment been made immediately. According to the Court, the imputed interest rules ensure that a taxpayer does not avoid income taxes by structuring an installment sale to provide only for the payment of principal (taxed as capital gains) without interest (taxed as ordinary income).
[xxxvii] Which supported the conclusion that the payment was made “under” the Merger Agreement, which imposed the payment obligation.
[xxxviii] Trust made other arguments to support its claim that the sale occurred at the time of the Settlement Agreement, but the Court easily disposed of these.
[xxxix] The payment of fair value to a dissenting shareholder who exercises appraisal rights in connection with a merger.
[xl] See, e.g., Reg. Sec. 1,483-4(b), Ex. 2.