Sec 331 Note Receivable allocation

C Corp sold all assets for $500,000 plus took a note receivable of $1,000,000 (payable 200,000/yr for 5 yrs)

Corp dissolves under Sec 331 liquidating distribution.

Shareholders adjusted basis in stock is $400,000 total gain s/b = 1,100,000 (1,500,000 - 400,000)

Shareholder does not elect out of installment method under 453(h) (ie wants to report gain on sale of stock using the installment method - the payments on the note as received)

500,000 cash = 33%
1,000,000 note = 67%
-------------
1,500,000 total sale price

Is my allocation 33% to the cash part of the distribution making the gain on it $368,000 in the first year
( $500,000 - ( .33 X 400,000)) ?

And $200,000 - (( 400,000 X .67)/5) of installment payments rec'd = 146,400 ?

Assuming the first payment of 200,000 of the note also received in the same year of the 500,000 cash liquidating distribution then the LTCG would be 514,000 (368,000 + 146,000).

514,400 yr 1
146,400
146,400
146,400
146,400 yr 5
------------
1,100,000 total gain

Is that how a note received in a 331 liquidation is allocated ??

Thanks

Typically for an installment sale you would take the gain divided by the total price to get a ratio for what percentage of payments is gain. A simple 1.5m sale with 400k of basis would mean 73% of money received each year would be gain.

Depending on the details, section 331 shouldn't somehow negate the installment sale treatment. See Treas Reg 1.453-11:
https://www.law.cornell.edu/cfr/text/26/1.453-11

The shareholder likely will just assume the installment sale treatment as if it was for their stock.
Year 1 gain = 73% of 700k payments = 511k
Y2-5 = 146k gain per year

But then there's also some interest to figure in there. If it's in addition to the 200k per year then cool, otherwise there's OID.

Thanks for taking a look Miles.

Apparently we aren't very far apart. I like your way better because, unless your numbers are just rounded, you saved the taxpayer 5,000

Assuming it was all sold together then it would be a 1.5m sale and you would apply the gain ratio for the whole sale as money is received. There's no need to weight the down payment from the note or anything.

My assumptions are that the dissolution was incidental to the sale, TP basically sold his business for 1.5 but the acquirer didn't want the stock since it was better tax-wise to restart depreciation and not step into the TP's shoes. They likely agreed to 500k for the value of the tangible assets and the rest as intangible. Acquirer will probably use faster depreciation for assets and then the intangible would be straight line over 15 years. This would allow acquirer to basically be able to deduct the whole purchase price against corp income instead of having it stuck as just his basis in the stock. I assume the 500k allocation for the tangible assets and the 500k down are coincidental and not a separate sale or something.

You are correct.

Isn’t the corporate liquidation a fully taxable event to the corporation?

You mean except for what MilesR says in post #2 above? Then yes.

I was reading that post in the context of the shareholder, not the corporation