26 U.S.C. § 453B — Gain or loss on disposition of installment obligations

(a) General rule: If an installment obligation is paid off at other than its face value, or is distributed, transferred, sold, or otherwise disposed of, this creates a gain or loss. The amount is the difference between the obligation's basis and either (1) the amount received, if it was paid off at other than face value, or sold or exchanged, or (2) the obligation's fair market value at the time, if it was distributed, transferred, or otherwise disposed of. That gain or loss is treated as coming from the sale or exchange of the original property the installment obligation was received for. (b) Basis of the obligation: The obligation's basis is its face value minus the amount of income that would still be reportable if the obligation were paid in full. (c) Special rule for transmission at death: Except for section 691 (about income later paid to someone's estate or heirs), this section does not apply when an installment obligation passes to someone because the holder died. (d) Exception for certain corporate distributions: (a) does not apply to a distribution covered by section 337(a). (e) Life insurance companies: (1) In general: If anyone other than a life insurance company disposes of an installment obligation to a life insurance company (or to a partnership where that company is a partner), no rule providing tax-free treatment of gain can stop the gain under (a) from being taxed. If a corporation becomes a life insurance company this tax year but wasn't one the year before, it's treated as having transferred all its installment obligations to a life insurance company on the last day of the prior year. If a partnership gains a life-insurance-company partner, it's treated the same way, as of the last day before that partner joined. (2) Exception where the company elects to treat the income as not related to its insurance business: (1) doesn't apply to a transfer if the life insurance company elects — as regulations describe — to figure its taxable income by (A) reporting income on that obligation under the installment method in section 453, and (B) treating that income as coming from a "noninsurance business." (3) "Noninsurance business": (A) In general — means any activity that is not an insurance business. (B) Certain activities still treated as insurance businesses — an activity that isn't an insurance business is still treated as one if (i) it's a type life insurance companies traditionally carry on for investment purposes, as long as carrying it on (other than real estate) doesn't amount to actively running a trade or business, or (ii) it involves performing administrative services for plans providing life insurance, pension, or accident and health benefits. (f) If the obligation becomes unenforceable: If an installment obligation is canceled or otherwise becomes unenforceable — (1) it's treated as disposed of other than by sale or exchange, and (2) if the debtor and the person owed the money are related persons (as defined in section 453(f)(1)), the obligation's fair market value is treated as no less than its face amount. (g) Transfers between spouses or incident to divorce: For a transfer described in section 1041(a) (other than a transfer into a trust) — (1) the gain/loss rule in (a) doesn't apply, and (2) the person receiving the obligation gets the same tax treatment the person who transferred it would have had. (h) Certain liquidating distributions by S corporations: If (1) an installment obligation is distributed by an S corporation in a complete liquidation, and (2) receiving that obligation isn't treated as payment for the shareholder's stock under section 453(h)(1), then — except for taxes imposed under subchapter S — the distributing corporation recognizes no gain or loss on distributing the obligation. Regulations set the character of the shareholder's eventual gain or loss, following the principles of section 1366(b).