Installment Sale-Goodwill

[sami]

Client had a pet sitting business and sold the client list (as goodwill for $36,000). The buyer gave $6000 down payment and agreed to pay $6000 plus 4% interest for next 5 years. After two years the buyer defaults and can not afford to make the installment sale payments and tells my client to take the business back. My client has moved on in different profession and said I don't need it back and let it go. I have filed her past returns with form 6252 but now in 2019 I don't know how to report the final installment sale since the business was never repossessed and not sure if I can claim a loss on the goodwill ?
Any ideas which form to report this final payment and close this for the future?

[Lion]

Whether or not she uses the client list in her business, I think she did repossess her client list/goodwill. Search on repossession to learn how to handle it on her tax return. And, she can sell her client list again. If her former clients were unhappy with the new owner, they may be happy to have her negotiate with a new owner.

[sami]

She has no intention of going into the business. As a self employed individual she was so sick of it. It took her years to sell this one and she does not want to go thru it. Basically it is closed deal but I don't know how to wrap up her tax return. She never received any goodwill payments once March of 2019.

[Rapid Robert]

ot sure if I can claim a loss on the goodwill ?

How could you claim a loss when there was no basis to the asset sold?

Maybe I'm missing something, but why not just revise the sale price in the final year to reflect the profit actually received? (total proceeds less interest)

[sami]

I don't think their is a loss here but the form 6252 shows the selling price less what she received prior to default. My question is how do I report to IRS that this goodwill will never be paid and its a done deal.

[Rapid Robert]

I did this on my own return recently when I sold a subset of my clients to another preparer. It was a two year deal contingent on the revenue received in both years, which of course could not be known in advance, only estimated. So in the second (final) year, I just adjusted the sale price in Part I of the form to match the actual amount received (less interest). Then in Part II, the payments received in prior years plus payment received in current year equals the total sale price in Part 1, so end of story. I believe it would have been more complicated had there been basis in the asset. (gross profit percentage was 100%).

If I did it wrong, I'd love to be educated in the correct way.

[edit] From Pub 537:

"Contingent Payment Sale
A contingent payment sale is one in which the total selling price can’t be determined by the end of the tax year of sale. This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. If the selling price can’t be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. For rules on using the installment method for a contingent payment sale, see Regulations section 15a.453-1(c)."

Maybe after tax season I'll go read about it.

[Lion]

Start with https://www.irs.gov/pub/irs-pdf/p4681.pdf

[Burke]

Doesn't sound like OP's situation is a contingent deal. Just a default on installment sale. Report what income they got in 2019 on 6252, and unless there was basis in the goodwill, that's the end of it. IRS doesn't have to be advised that no more income will be received in the future. The client list is hers to do with as she wishes.

[Rapid Robert]

Doesn't sound like OP's situation is a contingent deal.

I agree. That was my example of a similar situation, not the original one.

Report what income they got in 2019 on 6252, and unless there was basis in the goodwill, that's the end of it. IRS doesn't have to be advised that no more income will be received in the future. The client list is hers to do with as she wishes.

Confirming. Zero basis makes it a special, simple case. We don't know if the IRS is able to track the Form 6252 amounts across the years and generate computer letters based on inconsistencies.