Las Vegas, NV · Member since 2009 · 196 posts · 32 votes
Does anyone know if mobile homes on leased land (no parcel) and
seller-financed would be eligible for installment method reporting since
they are (i) personal not real property, (ii) the notes cannot be
considered as cash equivalent and are generally not marketable (no
established secondary market), (iii) have a high rate of
default/repossession and thus may effectively crumble one of the pillars
of revenue recognition? Example: buy-here-pay-here car lots as mentioned in post from a CPA in this thread.
The Joyners case (props for finding it) is very complex and would take a good 2-day seminar to cover all its background, specifics and implications. Some issues were addressed conclusively, other issues have room for interpretation, and a lot of the case deals with this couple's pretty unique way of doing business.
That said, you refer to two specific issues, and we'll use an example: bought a trailer for $5k, sold it for $25k with a $5k down payment and then $2k/yr for 10 years plus interest.
1. Can you apply an installment method? It would be paying taxes on 80% of the down payment ($4k) in the first year and then on the 80% of the future principal payments ($1,600) for the next 10 years? The answer in the court case is 100% black and white: no, you cannot. You have to pay tax on the full amount of gain in year one, which at first sounds like a $20k gain.
2. But do you actually have a $20k gain on this sale? In the Joyners' case, the answer was no. The court determined that the notes they received for their "sales" were worthless, so they did not "receive" $25k and could not be taxed on the $20k potential gain. It's very different from the installment sales issue. Also, I doubt that you would succeed claiming that the value of your notes was $0, just like their bogus notes without any qualifications and with an almost 100% default rate.
Now, can you succeed arguing that you're eligible for a discount on your notes? It has been attempted, with mixed results. Your specific circumstances need to be evaluated before you can assess the risk of such a position, as well as any alternative approaches.