Installment Sale - Treatment of Escrowed Consideration

Treatment of Escrowed Consideration

If, instead of a note, consideration is held back in an escrow account, installment reporting may be available if the escrow imposes a "substantial restriction" and is arranged to "serve a bona fide interest of the buyer." For example, if the escrow secures representations and warranties of the seller, installment reporting is available to report payments as they are released from escrow. In contrast, if amounts are released from escrow with the mere passage of time, installment reporting is not available.

Whether, in a merger or acquisition, escrows established to secure the continued employment of selling shareholders who are also management employees (so-called "golden handcuffs") are reportable on the installment method is currently an unresolved question, even if it is assumed that such amounts are properly treated as merger consideration and not compensation for employment. On the one hand, such conditions are clearly established for the benefit of the buyer. On the other, amounts in escrow appear to be released with the passage of time in a manner that is within the control of the seller, and so arguably the escrow does not impose a "substantial" restriction.