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Washington Tax Alert August 10, 2009 (purchase price adjustments)

Washington Tax Alert from Don Barnes, dbarnes@washingtontaxlaw.com

August 10, 2009

In light of current economic conditions, many taxpayers who previously purchased or sold property in exchange for one or more deferred payments that the seller is reporting on the installment method are considering reducing the buyer's liability for these deferred payments from the amount originally agreed to by the buyer and seller.

The tax issues raised by this debt restructuring are whether the reduction in the buyer's liability can be treated as a nontaxable purchase price adjustment, and whether the seller of the property would be treated as having disposed or cancelled the installment obligation under IRC § 453B, thereby triggering gain.

The IRS National Office studied this issue in the early 1990's, and I understand taxpayers have made several recent inquiries.