Installment Sale Change

[JMGCville]

New client this year - in 2019, the client sold ownership in a pharmaceutical company to a larger company. The client received 1/6 of the money in the first year with waterfall payments scheduled in subsequent years if certain targets were hit. The prior accountant set up an installment sale and applied a piece of the basis against the payment received in 2019. The client is hearing that no subsequent payments will be made and received an Escrow payment in 2020.

What is the best way to handle - Amend 2019 return to remove the installment, declare all the income and the associated basis, creating a loss.....or should we pick up the remaining basis against the 2020 escrow payments since we know no subsequent payments will be received? Or is there another way to approach it?

[Lee Welter]

This is a legal question of when the installment was earned. I don't think you can go back and reverse the prior year 1/6th installment, because it really happened. In the current year, if the deal is completely done, claim the escrowed income as proceeds and the remaining basis for a loss. The escrow money probably was not recorded as receipts in the prior year.