Answer: The answer to that question is “yes”, which may be surprising to some tax practitioners. Cash basis taxpayers recognize income when payment is received. Payment does not include evidences of indebtedness, such as a note, of the person acquiring the property (IRC 456(f)(3)). A note is an evidence of indebtedness.
If the evidence of indebtedness is payable on demand or is readily tradable, the sale will not qualify as an installment sale. An evidence of indebtedness is readily tradable if it is issued with interest coupons attached or in registered form or in any other form which is designed to render such note readily tradable in an established securities market. A note from a buyer to a seller will not typically be readily tradable. If a note is payable over a specified term it is not payable on demand.
Exception (IRC 453 (g)):
A sale of depreciable property to a related person does not qualify as an installment sale unless the taxpayer establishes that the disposition did not have as one of its principal purposes the avoidance of federal income tax.
The term “depreciable property” means property of a character which (in the hands of the transferee) is subject to the allowance for depreciation provided in the Internal Revenue Code.
The exception set forth above would apply regardless of whether the sale utilized Articles of Agreement or a note.
It is likely that the proposed transaction does not come within the exception for two reasons. First, the Wisconsin property will not be depreciable in the hands of the transferee as long as the property is held solely for personal use. Second, tax avoidance is not a principal purpose of the transaction. The principal purpose of the transaction is to provide Mary Ann Johnson with necessary financial support.