Cancellation of Installment Obligations
One of the most surprising — and far reaching — provisions in the Installment Sales Revision Act of 1980 was the section dealing with the cancellation or forgiveness of principal amounts by the seller. Before enactment of that legislation, it was generally believed by taxpayers and many tax practitioners that cancellation or forgiveness of principal did not result in negative income tax consequences to the seller forgiving or cancelling payments. Indeed, it had been reported that at least two District Directors of Internal Revenue had taken that position in writing.
The 1980 legislative provision was clearly aimed at sellers (usually parents or close relatives to the buyers) who cancel or forgive principal by gift with an objective of transferring wealth to a later generation.