n the current year, Ho Corporation sells land that has a $6,000 basis and a $10,000 FMV to Henry, an unrelated individual. Henry makes a $2,500 down payment this year and will pay Ho $2,500 per year for the next three years, plus interest on the unpaid balance at a rate acceptable to the IRS. Ho's realized gain is $4,000. Since Ho is not in the business of selling land, it will use the
installment method of accounting. How does this transaction affect Ho's E&P in the current year and the three subsequent years?
What will be an ideal response?
In the current year, Ho recognizes $1,000 of gain [($4,000/$10,000 × $2,500] in computing taxable income. Ho will also recognize $1,000 of gain in computing taxable income in each of the next three years. All $4,000 of Ho's realized gain must be included in current E&P. As Ho collects the installments, E&P will need to be reduced by $1,000 in each of those years since all $4,000 was included in E&P in the current year.
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