First, the contingent payments may be subject to a stated maximum selling price, e.g., "5% of future profits up to a maximum of $1,000,000." In this case, the regulations require the seller to calculate the profit ratio by assuming that the maximum will actually be reached. As compared to a situation where the maximum in fact is not reached, this requirement has the effect of increasing the profit ratio and thus the gain reportable for each year, deferring recovery of basis. Any deficiency between the actual amounts received and the stated maximum selling price will result in unrecovered basis, for which no loss may be reported until there is no more right to future payments.
