Contingent payments can be ambiguous, which causes headaches for transaction tax planning. A few examples of contingent payments are (i) fixed installment payments if a certain level of earnings is met or (ii) contingent payments based on a percentage of the operating cash flow over the next five years. The nuance between (i) and (ii) is that the value of (ii) is unknown. For tax purposes these contingent payments can be treated under the closed transactions approach (Section 1001), open transactions approach, or installment sales approach (Section 453 and Regs. Section 15A.453-1(c)). The installment sales approach is treated as a closed transaction. The lion share of transactions uses the closed transactions approach, which taxes the expected fair market value of all assets being received in the year that the deal is signed. Therefore for QSBS purposes, the contingency payments can be excluded from capital gains on the same tax return as the non-contingent gains. When the number of contingent payments are unknown they can be treated as open transactions where the gain is differed until it is received. Even though the gain may be deferred by electing the open transaction approach the gain will still be considered QSBS in the year it is received so long as the full gain does not exceed $10 million or 10x the original investment.

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