Contingent payment sales
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In business dealings, transactions often occur that include variables based on future events that can be difficult to ascertain (for example, a company may sell in an amount stock along with a percentage of that company’s net profits.) As these transactions are contingent on payments that occur in the future, and the total selling price cannot be determined as of the end of the taxable year of the sale, they are known as Contingent Payment Sales.[1] Because of the uncertainty surrounding the final amounts of these transactions, they are difficult to evaluate for the purpose of tax liability.
[edit] Methods of computing tax liability for contingent sales:
- Maximum Selling Price:
If the maximum amount of sales can be determined in the year in which they occur by assuming that all contingencies are met, the price can be calculated in a manner similar to the installment sales method. If the amount is reduced in subsequent years, than the formula is recomputed accordingly.[2]
- Fixed Period:
If the maximum selling price cannot be determined, but the period over which payments may be received is fixed, then the seller’s basis is recovered ratably over the period during which payment may be received under the contract.[3]
- If the agreement neither specifies a stated maximum price nor limits payments to a fixed period, than a question arises as to whether a sale has realistically occurred.[4]
