[Federal Register Volume 64, Number 14 (Friday, January 22, 1999)]
[Proposed Rules]
[Pages 3457-3461]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1148]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-110524-98]
RIN 1545-AW85


Capital Gains, Installment Sales, Unrecaptured Section 1250 Gain

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed amendments to the regulations 
relating to the taxation of capital gains on installment sales of 
depreciable real property. The proposed regulations interpret changes 
made by the Taxpayer Relief Act of 1997, as amended by the Internal 
Revenue Service Restructuring and Reform Act of 1998 and the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act of 1999. The 
proposed regulations affect persons required to report capital gain 
from an installment sale where a portion of the capital gain is 
unrecaptured section 1250 gain and a portion is adjusted net capital 
gain.

DATES: Written comments or requests for a public hearing must be 
received by April 22, 1999.

ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-110524-98), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. In the alternative, submissions may be hand 
delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. 
to: CC:DOM:CORP:R (REG-110524-98), Courier's Desk, Internal Revenue 
Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, 
taxpayers may submit comments electronically via the Internet by 
selecting the ``Tax Regs'' option on the IRS Home Page, or by 
submitting comments directly to the IRS Internet site at http://
www.irs.ustreas.gov/prod/tax__regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Susan 
Kassell, (202) 622-4930; concerning submissions, LaNita VanDyke, (202) 
622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR Part 1) relating to the taxation of capital gains 
on installment sales of depreciable real property.
    Prior to 1997, the maximum rate on net capital gain for individuals 
was 28 percent. In the Taxpayer Relief Act of 1997, Public Law 105-34 
(111 Stat. 788, 831) (1997 Act), Congress amended section 1(h) 
generally to reduce the maximum capital gain tax rates for individuals. 
Certain substantive changes and technical corrections to section 1(h) 
were enacted as part of the Internal Revenue Service Restructuring and 
Reform Act of 1998, Public Law 105-206 (112 Stat. 685), including the 
repeal of an 18-month holding period requirement for amounts properly 
taken into account after December 31, 1997, and by the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act, 1999, 
Public Law 105-277 (112 Stat. 2681).
    As amended, section 1(h) generally divides net capital gain into 
three rate groups based on the nature of the property, the nature of 
the gain, and the holding period of the property.
    A maximum marginal rate of 28 percent applies to 28-percent rate 
gain (28-percent gain), the combination of (1) capital gains and losses 
from the sale or exchange of collectibles held for more than one year; 
(2) an amount equal to gain excluded from income on the sale or 
exchange of certain small business stock under section 1202; (3) 
capital gains and losses determined under special transition rules in 
section 1(h)(13) for certain amounts taken into account in 1997; (4) 
net short-term capital loss for the tax year; and (5) any long-term 
capital loss carryover to the tax year under section 1212.
    A maximum marginal rate of 25 percent applies to unrecaptured 
section 1250 gain (25-percent gain), which is defined in section 
1(h)(7)(A) as the amount of long-term capital gain (not otherwise 
treated as ordinary income) that would be treated as ordinary income if 
section 1250(b)(1) included all depreciation and the applicable 
percentage under section 1250(a) were 100 percent, reduced by any net 
loss in the 28-percent rate category. Effectively, the amount of gain 
taxed at 25 percent is the amount of straight-line depreciation allowed 
for the property. Thus, the 25-percent rate category partially 
recaptures such depreciation, but the recapture is limited, inter alia, 
in that the recapture rate may be less than the marginal rates that 
applied to the depreciation deductions. Section 1(h)(7)(B) limits the 
unrecaptured section 1250 gain from section 1231 assets for any tax 
year to the net section 1231 gain for that year.
    A maximum marginal rate of 20 percent generally applies to adjusted 
net capital gain (20/10-percent gain), defined in section 1(h)(4) as 
the portion of net capital gain that is not taxed at the 28-percent or 
25-percent rates. Under section 1(h)(1)(B), a 10-percent rate applies 
to any portion of adjusted net capital gain that would otherwise be 
taxed at a 15-percent rate if capital gains were taxed as ordinary 
income.
    For amounts properly taken into account after July 28, 1997, and 
before January 1, 1998, an 18-month holding period is required to 
obtain the maximum 25-percent, 20-percent, or 10-percent rates.
    Section 453 provides that, unless taxpayers elect out, gain from an 
installment sale is recognized as payments on the installment 
obligation are received. Before the 1997 Act, reporting capital gain 
under the installment method was relatively straightforward: the 
capital gain portion of each payment was taxed at the maximum capital 
gain rate of 28 percent. Section 1(h) provides for multiple rates, but 
does not address how to treat an installment sale of depreciable real 
property when the gain to be reported consists of both 25-percent gain 
and 20/10-percent gain.

Explanation of Provisions

Front-Loaded Allocation of Unrecaptured Section 1250 Gain

    Under the proposed regulations, if a portion of the capital gain 
from an

[[Page 3458]]

installment sale is 25-percent gain and a portion is 20/10-percent 
gain, the taxpayer is required to take the 25-percent gain into account 
before the 20/10-percent gain, as payments are received. (Because sales 
that result in 28-percent gain cannot also yield 25-percent gain or 20/
10-percent gain, an allocation rule for 28-percent gain is 
unnecessary.)
    A front-loaded allocation method for 25-percent gain is generally 
consistent with the statute, under which 20/10-percent gain (that is, 
adjusted net capital gain) is defined as the residual category of 
capital gain not taxed at maximum rates of 28 percent or 25 percent. 
The front-loaded method precludes taxpayers from recognizing some 20/
10-percent gain from an installment sale even when the amount 
ultimately recognized proves to be less than the amount subject to 
recapture at the 25-percent rate. Absent a front-loaded allocation 
method this inappropriate result could arise, for example, when a 
taxpayer later disposes of an installment obligation at a discounted 
price or when the amount to be received is contingent.
    The IRS and Treasury Department have previously adopted analogous 
front-loaded allocation methods with respect to installment sales. For 
example, before 1984--when Congress enacted section 453(i), which 
requires immediate recognition of recapture gain at ordinary rates 
under sections 1245 and 1250-- taxpayers were permitted to defer 
recognition of this ordinary-rate recapture gain under the installment 
method. Thus, an installment payment could contain both capital gain 
and gain taxed at ordinary rates. By regulation, a front-loaded 
allocation of the ordinary-rate recapture gain was required. 
Secs. 1.1245-6(d); 1.1250-1(c)(6). See Dunn Construction v. United 
States, 323 F. Supp. 440 (N.D. Ala. 1971) (upholding Sec. 1.1245-6(d) 
as ``reasonable and consistent with the underlying statute'' and a 
valid exercise of the regulatory authority under section 453). See also 
Secs. 1.1251-1(e)(6), 1.1252-1(d)(3), 1.1254-1(d), and 16A.1255-
1(c)(3).

Interaction With Section 1231

    Section 1(h) also does not address the interaction of the capital 
gain rates, the installment method, and the rules in section 1231. 
Section 1231(a) generally provides that, when gains from the sale or 
exchange of property used in a trade or business exceed losses from 
such property, the gains and losses are treated as long-term capital 
gains and losses. Conversely, when section 1231 losses exceed section 
1231 gains, the gains and losses are treated as ordinary. The capital 
nature of net section 1231 gain is subject to an exception: under 
section 1231(c), net section 1231 gain is treated as ordinary income to 
the extent of the taxpayer's non-recaptured net section 1231 losses for 
the preceding five years.
    With respect to the interaction of section 1231(c) and the capital 
gain rates, the IRS and Treasury Department have already provided that 
section 1231 gain that is recharacterized as ordinary gain under 
section 1231(c) is deemed to consist first of 28-percent gain, then 25-
percent gain, and finally 20/10-percent gain. See Notice 97-59 (1997-45 
IRB 7, 8). An example in the proposed regulations illustrates the 
application of this principle in the installment sale context. 
Consistent with this treatment and with the general rule that 25-
percent gain is front-loaded, another example in the proposed 
regulations illustrates that--in a year in which installment gain is 
characterized as ordinary gain under section 1231(a) because there is a 
net section 1231 loss for the year--the gain is treated as consisting 
of 25-percent gain first, before 20/10-percent gain, for purposes of 
determining how much 25-percent gain remains to be taken into account 
in later payments.
    The examples in the proposed regulations--regarding the interaction 
of sections 1(h), 453, and 1231--are specific applications of the 
general rule that, for any given installment payment, gain from all 
previous payments is treated as consisting first of 25-percent gain, 
rather than 20/10-percent gain, in determining how much of each 
category of gain remains to be reported with respect to current and 
subsequent payments. Under the regulations, in making this 
determination it is generally irrelevant how such prior gain was 
actually reported and taxed. For example, an installment payment that 
is taxed at 15 percent because the taxpayer is in a low tax bracket may 
be treated as consisting of 25-percent gain (that is, unrecaptured 
section 1250 gain) for allocation purposes, even though the gain is not 
actually taxed at 25 percent. The proposed regulations focus on 
examples involving section 1231 since they are the most common.

Treatment of Installment Payments From Sales Prior to the Effective 
Date of the 1997 Act

    The capital gains provisions of the 1997 Act were effective for 
taxable years ending after May 6, 1997. However, the maximum rate of 28 
percent was not reduced for gains properly taken into account before 
May 7, 1997. Under settled authority, originating in Snell v. 
Commissioner, 97 F.2d 891 (5th Cir. 1938), the law in effect when an 
installment payment is received controls the tax treatment of the 
payment. Unless otherwise provided, installment payments received after 
a change in the law are taxed under the new law, whether favorable or 
unfavorable, looking back to the original transaction for the facts 
necessary to apply the changed law. In Snell, for example, installment 
payments from what was a capital asset in the sale year were taxed as 
ordinary income after Congress changed the definition of a capital 
asset. See also Estate of Kearns v. Commissioner, 73 T.C. 1223 (1980); 
Klein v. Commissioner, 42 T.C. 1000 (1964); Rev. Rul. 79-22 (1979-1 CB 
275). Congress also implicitly has recognized the Snell principle by 
enacting grandfather exceptions when the application of Snell would be 
unfavorable. For example, when Congress extended the holding period 
requirement for capital gain in 1976, the legislation specifically 
excepted from the new, harsher requirements post-1976 installment gain 
from pre-1976 sales.
    The legislative history of the 1997 Act reflects the Snell 
principle, providing that section 1(h) ``generally applies to sales and 
exchanges (and installment payments received) after May 6, 1997.'' 
Conf. Rep. 105-220, 105th Cong., 1st Sess. 382, 383 (1997). Thus, under 
these settled principles, gain on installment payments received after 
May 6, 1997, from sales on or before that date, is taxed at the new, 
lower maximum rates of 25 percent, 20 percent, or 10 percent if it 
qualifies as unrecaptured section 1250 gain or adjusted net capital 
gain. However, as in the case of gain from post-effective-date sales, 
section 1(h) does not specify how to allocate the two categories of 
gain.
    The proposed regulations provide that the capital gain rates 
applicable to installment payments that are received on or after the 
effective date of the 1997 Act from sales prior to the effective date 
are determined as if, for all payments received after the date of sale 
but before the effective date, 25-percent gain had been taken into 
account before 20/10-percent gain. This approach is consistent with the 
Snell principle in that it provides for the same method of allocation, 
whether the sale occurred before or after the effective date of the 
1997 Act. For taxpayers who sold property and received installment 
payments before the effective date of the 1997 Act, this provision is 
favorable, since it generally reduces or eliminates the amount of 25-
percent gain to be reported on installment payments

[[Page 3459]]

received after the effective date. The approach is also simple--because 
it is generally irrelevant how the prior gain was actually reported and 
taxed, in most cases taxpayers will simply calculate the total amount 
of 25-percent gain on the sale and subtract from that all gain 
previously reported, in order to arrive at the amount of 25-percent 
gain remaining to be reported.

Treatment of Installment Payments Received Between the Effective Date 
of the Statute and the Effective Date of the Final Regulations

    The proposed regulations also address the treatment of gain in 
installment payments that are received during the period between the 
effective date of section 1(h) and the effective date of the final 
regulations. The proposed regulations provide that, in the event the 
cumulative amount of 25-percent gain actually reported in installment 
payments received during this period was less than the amount that 
would have been reported using the front-loaded allocation method of 
the regulations, the amount of 25-percent gain actually reported, 
rather than an amount determined under a front-loaded allocation 
method, must be used in determining the amount of 25-percent gain that 
remains to be reported. This provision ensures that taxpayers cannot 
underreport the total amount of 25-percent gain by taking inconsistent 
positions with respect to payments received before and after the 
effective date of the regulations. By providing for this rule, no 
inference is intended that any allocation method other than the method 
provided for by the regulations was a reasonable interpretation of 
section 1(h) in this context. However, the IRS will not challenge the 
use of a pro rata allocation method--that is, a method under which the 
amounts of 25-percent gain and 20/10-percent gain in each installment 
payment bear the same relationship as the total amounts of 25-percent 
and 20/10-percent gain to be reported on the sale--for installment 
payments received before the effective date of the final regulations, 
if the taxpayer used the same pro rata method for all installment 
payments during such period.

Proposed Effective Date

    The regulations are proposed to be effective for payments properly 
taken into account after the date the regulations are published as 
final regulations in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It also has been determined 
that section 553(b) of the Administrative Procedure Act (5 U.S.C. 
chapter 5) does not apply to these regulations, and, because the 
regulations do not impose a requirement for the collection of 
information on small entities, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply. Pursuant to section 7805(f) of the Internal 
Revenue Code, this notice of proposed rulemaking will be submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. The IRS and 
Treasury Department request comments on the clarity of the proposed 
rules and how they can be made easier to understand. All comments will 
be available for public inspection and copying. A public hearing may be 
scheduled if requested in writing by a person that timely submits 
written comments. If a public hearing is scheduled, notice of the date, 
time, and place for the hearing will be published in the Federal 
Register.

Drafting Information

    The principal authors of these regulations are Susan Kassell and 
Rob Laudeman, Office of the Assistant Chief Counsel (Income Tax & 
Accounting). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendment to the Regulations

    Accordingly, the IRS proposes to amend 26 CFR part 1 as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.453-12 is added to read as follows:


Sec. 1.453-12  Allocation of unrecaptured section 1250 gain reported on 
the installment method.

    (a) General rule. Unrecaptured section 1250 gain, as defined in 
section 1(h)(7), is reported on the installment method if that method 
otherwise applies under section 453 or 453A and the corresponding 
regulations. If gain from an installment sale includes unrecaptured 
section 1250 gain and adjusted net capital gain (as defined in section 
1(h)(4)), the unrecaptured section 1250 gain is taken into account 
before the adjusted net capital gain.
    (b) Installment payments from sales before May 7, 1997. The amount 
of unrecaptured section 1250 gain in an installment payment that is 
properly taken into account after May 6, 1997, from a sale before May 
7, 1997, is determined as if, for all payments properly taken into 
account after the date of sale but before May 7, 1997, unrecaptured 
section 1250 gain had been taken into account before adjusted net 
capital gain.
    (c) Installment payments received after May 6, 1997, and before the 
effective date of the final regulations. If the amount of unrecaptured 
section 1250 gain in an installment payment that is properly taken into 
account after May 6, 1997, and before the effective date of the final 
regulations, is less than the amount that would have been taken into 
account under this section, the lesser amount is used to determine the 
amount of unrecaptured section 1250 gain that remains to be taken into 
account.
    (d) Examples. In each example, the taxpayer, an individual whose 
taxable year is the calendar year, does not elect out of the 
installment method. The installment obligation bears adequate stated 
interest, and the property sold is real property held in a trade or 
business that qualifies as both section 1231 property and section 1250 
property. In all taxable years, the taxpayer's marginal tax rate on 
ordinary income is 28 percent. The following examples illustrate the 
rules of this section:

    Example 1. General rule. This example illustrates the rule of 
paragraph (a) of this section.
    (i) In 1998, A sells property for $10,000, to be paid in ten 
equal annual installments beginning on December 1, 1998. A 
originally purchased the property for $5,000, held the property for 
several years, and took straight-line depreciation deductions in the 
amount of $3,000. In each of the years 1998-2007, A has no other 
capital or section 1231 gains or losses.
    (ii) A's adjusted basis at the time of the sale is $2,000. Of 
A's $8,000 of section 1231 gain on the sale of the property, $3,000 
is attributable to prior straight-line depreciation

[[Page 3460]]

deductions and is unrecaptured section 1250 gain. The gain on each 
installment payment is $800.
    (iii) As illustrated in the following table, A takes into 
account the unrecaptured section 1250 gain first. Therefore, the 
gain on A's first three payments, received in 1998, 1999, and 2000, 
is taxed at 25 percent. Of the $800 of gain on the fourth payment, 
received in 2001, $600 is taxed at 25 percent and the remaining $200 
is taxed at 20 percent. The gain on A's remaining six installment 
payments is taxed at 20 percent. The table is as follows:

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                                                                   1998         1999         2000         2001         2002      2003-2007    Total gain
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Installment gain.............................................          800          800          800          800          800         4000         8000
Taxed at 25%.................................................          800          800          800          600  ...........  ...........         3000
Taxed at 20%.................................................  ...........  ...........  ...........          200          800         4000         5000
Remaining to be taxed at 25%.................................         2200         1400          600  ...........  ...........  ...........  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Example 2. Installment payments from sales prior to May 7, 1997. 
This example illustrates the rule of paragraph (b) of this section.
    (i) The facts are the same as in Example 1 except that A sold 
the property in 1994, received the first of the ten annual 
installment payments on December 1, 1994, and had no other capital 
or section 1231 gains or losses in the years 1994-2003.
    (ii) As in Example 1, of A's $8000 of gain on the sale of the 
property, $3000 was attributable to prior straight-line depreciation 
deductions and is unrecaptured section 1250 gain.
    (iii) As illustrated in the following table, A's first three 
payments, in 1994, 1995, and 1996, were received before May 7, 1997, 
and taxed at 28 percent. Under the rule described in paragraph (b) 
of this section, A determines the allocation of unrecaptured section 
1250 gain for each installment payment after May 6, 1997, by taking 
unrecaptured section 1250 gain into account first, treating the 
general rule of paragraph (a) of this section as having applied 
since the time the property was sold, in 1994. Consequently, of the 
$800 of gain on the fourth payment, received in 1997, $600 is taxed 
at 25 percent and the remaining $200 is taxed at 20 percent. The 
gain on A's remaining six installment payments is taxed at 20 
percent. The table is as follows:

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                                                                   1994         1995         1996         1997         1998      1999-2003    Total gain
--------------------------------------------------------------------------------------------------------------------------------------------------------
Installment gain.............................................          800          800          800          800          800         4000         8000
Taxed at 28%.................................................          800          800          800  ...........  ...........  ...........         2400
Taxed at 25%.................................................  ...........  ...........  ...........          600  ...........  ...........          600
Taxed at 20%.................................................  ...........  ...........  ...........          200          800         4000         5000
Remaining to be taxed at 25%.................................         2200         1400          600  ...........  ...........  ...........  ...........
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    Example 3. Effect of section 1231(c) recapture. This example 
illustrates the rule of paragraph (a) of this section when there are 
non-recaptured net section 1231 losses, as defined in section 
1231(c)(2), from prior years.
    (i) The facts are the same as in Example 1, except that in 1998 
A has non-recaptured net section 1231 losses from the previous four 
years of $1000.
    (ii) As illustrated in the table at the end of this example, in 
1998, all of A's $800 installment gain is recaptured as ordinary 
income under section 1231(c). Under the rule described in paragraph 
(a) of this section, for purposes of determining the amount of 
unrecaptured section 1250 gain remaining to be taken into account, 
the $800 recaptured as ordinary income under section 1231(c) is 
treated as reducing unrecaptured section 1250 gain, rather than 
adjusted net capital gain. Therefore, A has $2200 of unrecaptured 
section 1250 gain remaining to be taken into account.
    (iii) In 1999, A's installment gain is taxed at two rates. 
First, $200 is recaptured as ordinary income under section 1231(c). 
Second, the remaining $600 of gain on A's 1999 installment payment 
is taxed at 25 percent. Because the full $800 of gain reduces 
unrecaptured section 1250 gain, A has $1400 of unrecaptured section 
1250 gain remaining to be taken into account.
    (iv) The gain on A's installment payment received in 2000 is 
taxed at 25 percent. Of the $800 of gain on the fourth payment, 
received in 2001, $600 is taxed at 25 percent and the remaining $200 
is taxed at 20 percent. The gain on A's remaining six installment 
payments is taxed at 20 percent. The table is as follows:

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                                                                   1998         1999         2000         2001         2002      2003-2007    Total gain
--------------------------------------------------------------------------------------------------------------------------------------------------------
Installment gain.............................................          800          800          800          800          800         4000         8000
Taxed at ordinary rates under section 1231(c)................          800          200  ...........  ...........  ...........  ...........         1000
Taxed at 25%.................................................  ...........          600          800          600  ...........  ...........         2000
Taxed at 20%.................................................  ...........  ...........  ...........          200          800         4000         5000
Remaining non-recaptured net section 1231 losses.............          200  ...........  ...........  ...........  ...........  ...........  ...........
Remaining to be taxed at 25%.................................         2200         1400          600  ...........  ...........  ...........  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Example 4. Effect of a net section 1231 loss. This example 
illustrates the application of paragraph (a) of this section when 
there is a net section 1231 loss.
    (i) The facts are the same as in Example 1 except that A has 
section 1231 losses of $1000 in 1998.
    (ii) In 1998, A's section 1231 installment gain of $800 does not 
exceed A's section 1231 losses of $1000. Therefore, A has a net 
section 1231 loss of $200. As a result, under section 1231(a) all of 
A's section 1231 gains and losses are treated as ordinary gains and 
losses. As illustrated in the table at the end of this example, A's 
entire $800 of installment gain is ordinary gain. Under the rule 
described in paragraph (a) of this section, for purposes of 
determining the amount of unrecaptured section 1250 gain remaining 
to be taken into account, A's $800 of ordinary section 1231 
installment gain in 1998 is treated as reducing unrecaptured section 
1250 gain. Therefore, A has $2200 of unrecaptured section 1250 gain 
remaining to be taken into account.
    (iii) In 1999, A has $800 of section 1231 installment gain, 
resulting in a net section 1231 gain of $800. A also has $200 of 
non-recaptured net section 1231 losses. The $800 gain is taxed at 
two rates. First, $200 is taxed at ordinary rates under section 
1231(c), recapturing the $200 net section 1231 loss sustained in 
1998. Second, the remaining $600 of gain on A's 1999 installment 
payment is taxed at 25 percent. As in

[[Page 3461]]

Example 3, the $200 of section 1231(c) gain is treated as reducing 
unrecaptured section 1250 gain, rather than adjusted net capital 
gain. Therefore, A has $1400 of unrecaptured section 1250 gain 
remaining to be taken into account.
    (iv) The gain on A's installment payment received in 2000 is 
taxed at 25 percent, reducing the remaining unrecaptured section 
1250 gain to $600. Of the $800 of gain on the fourth payment, 
received in 2001, $600 is taxed at 25 percent and the remaining $200 
is taxed at 20 percent. The gain on A's remaining six installment 
payments is taxed at 20 percent. The table is as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   1998         1999         2000         2001         2002      2003-2007    Total gain
--------------------------------------------------------------------------------------------------------------------------------------------------------
Installment gain.............................................          800          800          800          800          800         4000         8000
Ordinary gain under section 1231(a)..........................          800  ...........  ...........  ...........  ...........  ...........          800
Taxed at ordinary rates under section 1231(c)................  ...........          200  ...........  ...........  ...........  ...........          200
Taxed at 25%.................................................  ...........          600          800          600  ...........  ...........         2000
Taxed at 20%.................................................  ...........  ...........  ...........          200          800         4000         5000
Net section 1231 loss........................................          200  ...........  ...........  ...........  ...........  ...........  ...........
Remaining to be taxed at 25%.................................         2200         1400          600  ...........  ...........  ...........  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (e) Effective date. This section applies to installment payments 
properly taken into account after the date these regulations are 
published as final regulations in the Federal Register.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 99-1148 Filed 1-21-99; 8:45 am]
BILLING CODE 4830-01-U