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The ability to use the installment method of accounting when selling an interest in a partnership is contingent on the nature of the assets within the partnership and the specific circumstances of the sale.
According to Subsection 453(b) of the Internal Revenue Code (IRC), an installment sale is defined as a disposition of property where at least one payment is to be received after the close of the taxable year in which the disposition occurs. However, the term "installment sale" does not include a disposition of personal property of a kind which is required to be included in the inventory of the taxpayer if on hand at the close of the taxable year.In the context of a partnership, the installment method of accounting can be used to report income from the sale of a partnership interest, except for the portion of the income that is attributable to the partnership's substantially appreciated inventory. This is because, as per Rev. Rul. 89-108, the installment method is not available for reporting income realized on the sale of a partnership interest to the extent attributable to the substantially appreciated inventory which constitutes inventory within the meaning of section 453(b)(2)(B).
Furthermore, as per section 751(a) of the IRC, the amount received by a transferor partner in exchange for all or part of a partnership interest shall be considered as an amount realized from the sale or exchange of property other than a capital asset, to the extent such an amount is attributable to unrealized receivables or inventory items that have appreciated substantially in value.
Therefore, to answer your question, you can use the installment method of accounting when selling an interest in a partnership, but not for the portion of the income that is attributable to the partnership's substantially appreciated inventory or unrealized receivables for services rendered. The remaining capital gain portion of your gain from the sale of the partnership interest may be subject to the installment method of accounting.
Sources:
Rev. Rul. 79-92
Notice 2000-26
FAA 20124201F
§ 453. Installment method
PLR 200521007
CCA 200722027
Rev. Rul. 68-150
PLR 202319010
Rev. Rul. 89-108
TAM 9213001
