## Facts

- In 1970, Taxpayer A purchased common stock of Corporation X.
- In 1976, Corporation X redeemed all of A’s stock in a transaction qualifying under § 302 as a distribution in full payment in exchange for the stock.
- X paid A 20x in cash and delivered a negotiable promissory note with principal of 80x.
- A’s basis in the redeemed stock was 10x.
- The note provided for eight annual principal payments of 10x beginning in 1980, with stated interest (10% through 1979 and 7% thereafter).
- A elected the installment method under § 453(b) for the redemption; A reported 18x of gain in 1976 and had an 8x basis in the note.
- In January 1978, before any principal payments, A transferred the note to A’s child, Taxpayer B, as a gift.
- At the time of the gift, the note’s fair market value equaled its outstanding principal balance (80x), and all accrued interest had been paid.

## Issues

1. Whether A’s gift of the installment note is a “disposition” of an installment obligation under § 453(d)(1)(B), requiring A to recognize the remaining deferred gain.
2. If so, what basis B takes in the note under § 1015 when the note’s fair market value equals its face amount.

## Decision

- The gift transfer of the installment note was a disposition under § 453(d)(1)(B).
- A had to recognize gain in the year of the gift equal to the note’s fair market value (80x) minus A’s basis in the note (8x), for 72x of additional gain.
- B’s basis in the note was 80x (its face amount/fair market value at the time of the gift).

## Legal Principles

- A non-sale transfer (including a gift) of an installment obligation is a disposition under § 453(d)(1)(B) that accelerates recognition of the transferor’s remaining deferred installment gain, measured by FMV minus basis in the obligation.
- Basis of an installment obligation for § 453(d) purposes is determined under § 453(d)(2) (face amount reduced by the income that would be reportable if satisfied in full).
- When § 453(d) causes the transferor to recognize the remaining deferred gain on a gifted installment obligation, the transferee’s basis under § 1015 is the obligation’s FMV (here, face amount), so later principal collections do not trigger additional gain (interest remains ordinary income).

## Conclusion

The ruling treats a shareholder’s gift of an installment note received in a § 302 redemption as a § 453(d) disposition that forces the donor to recognize the remaining deferred gain, and it assigns the donee a basis equal to the note’s fair market value/face amount at the time of the gift.


Rev. Rul. 79-371, 1979-2 C.B. 294 (1979)