What are the rules for using Section 453 for the sale of a going concern business that includes significant customer contracts or recurring revenue streams?

Question

Tyler Smith · Accepted Answer

When selling a going concern business that includes significant customer contracts or recurring revenue streams, Section 453 can generally be utilized for the portion of the sale price attributable to goodwill, customer lists, and other intangible assets, as well as capital assets. However, careful consideration is needed for how the value of these contracts and revenue streams is allocated. The sale of future income rights from existing contracts might, in some cases, be viewed differently from the sale of the underlying business enterprise. Generally, the sale of an entire business, including its customer base and the right to future earnings from those customers, qualifies for installment sale treatment for the capital gain portion. The key is that the 'customer contracts' are part of the overall sale of the business as an asset or stock sale, not merely a sale of future income. If the contracts represent pre-paid services or products, the associated deferred revenue liabilities typically transfer to the buyer, and the gain calculation reflects the net assets. The value attributed to long term customer relationships, often considered part of goodwill, is a prime candidate for capital gains deferral under Section 453. The deferral of gain on these valuable assets can significantly improve the seller's post-tax cash flow.