I would very carefully consider that the OID reported each year would be an addition to basis. My thought is that there was an expectation, based on the terms of the instrument. If a 1099-OID was issued each year, that would help to reinforce my consideration of a basis adjustment. 

I think even the reigning supreme source of tax how too agrees with me. https://ttlc.intuit.com/community/taxes/discussion/interest-shortfall-on-contingent-payment-debt/00/....

I would never bother attaching a 1099. IRS would already have it and they tend to never read any attachments, unless required.  Your #4 seems to say you did not properly explain what you did with proper documentation in the response to IRS letter. I am unclear how you determined a shortfall prior to sale. The explanation in the return would not have changed things. The explanation in response to the IRS billing should have worked if you were correct. Document what you do this year and confer with your sophisticated investor that your logic is correct. Have that documentation and agreement with client in hand for the IRS letter to come later.