A uniquely qualified dealer in capital assets
Toll Free: 866-345-7561 - Email Us
176. Does an Installment Sale Defer the Tax on Recapture of Accelerated Depreciation? No. Can the Tax on Recapture of Accelerated Depreciation Nevertheless Be Deferred When an Installment Sale Occurs? Yes.
162. Transfer a Family Business to the Next Generation During the Parent's Lifetime, Retain an Asset for Income, Give the Transferee a Stepped-up Basis, Defer the Gain on Sale, Support the Parent with Deductible Rent, and Finance the Transaction, Too
December 10, 2015
Those of us who are old enough to remember what was happening in 1980 can recall all too well the state of the economy then: high inflation, high interest rates, and high unemployment. We remember the “misery index” which was created by economist Arthur Okun: the sum of the inflation rate and the unemployment rate.
It was the high interest rates, though, that did the most to bring institutional lending for the buying and selling of real estate and other capital assets nearly to a halt—and Congress heard from the people about it.
Part of Congress’ response was the 1980 codification of what came to be termed the monetized installment sale provisions in the tax code. Congress saw installment sales as a potentially substantial contribution to economic recovery, because a particular seller who could “carry the paper” on a sale and a particular buyer who needed financing to be able to buy could agree on any interest rate they might choose, regardless what market interest rates were at banks and other financial institutions.
So, to encourage sellers to be willing to carry the paper so that someone could afford to buy, Congress added provisions which allow sellers to sell on installment contracts but receive borrowed money in hand at the same time, without losing the tax deferral that typically accompanies an installment sale. Under these new provisions, sellers could defer the tax on the sale but have liquidity at the same time.
The rules which Congress put into place allow sellers of agricultural properties and homes to sell on installment contracts and at the same time borrow money, with the loan being secured by the installment contract. In the case of installment sales of business or investment property, Congress said that the installment seller could enjoy tax deferral and still borrow...
July 16, 2015
I am a persuaded advocate of Monetized Installment Sales (M453) transactions, and I believe that the legal and factual reasons and precedents in support of them are far, far stronger than whatever arguments one could make against them. Let’s put all of that aside for now, though, and consider how one may develop a financial analysis of the prospects for and against M453.
How can a seller or a seller’s adviser put a number on the risk of a tax audit and of a possible decision adverse to tax deferral with M453? How can a seller intelligently financially calculate whether the risk is worth taking?
Calculating the Probability-weighted 30-year Benefit
1. Estimate the probability, expressed as a percentage, that the M453 will continue as planned for 30 years. 90%? 75%? 50%? 25%?
2. Project the amount of after-tax return over that 30-year period, on the net proceeds of the monetization loan.
3. Multiply #1 by #2.
4. Add the net proceeds of the monetization loan, because the seller will retain this amount.
5. Subtract the net sale proceeds, because the seller will not receive this amount. (The seller will receive this amount at the end of 30 years, but then the money will go to repay the monetization loan.)
6. Subtract the estimated eventual tax cost on the sale, and the resulting figure is the projected benefit if the M453 is undertaken and proceeds as planned.
Calculate the Probability-weighted Cost of an Adverse Tax Decision
7. Estimate the probability, expressed as a percentage, that the seller will undergo a tax audit and that the M453 transaction will be challenged in that audit.
8. Estimate the probability, expressed as a percentage, that the outcome of the tax audit will be...
May 21, 2015
(Please note: On this Website the reader will see countless references to “collateralized installment sale” transactions, and to “C453”, for short. Because the IRS has used the term, “monetized installment sale”, we’re changing our terminology accordingly, without any change in the content of the deal. So, wherever on this Website you see the phrase, “collateralized installment sale”, think “Monetized Installment Sale” instead, and wherever you see “C453”, think “M453” instead. Regardless of the name change, the structure of the deal remains as it has been since 2011.)
I’ve frequently been asked whether the ultimate purchaser can purchase on an installment contract from S.Crow Collateral Corp., when S.Crow Collateral Corp. purchases from a seller in a tax-deferred Monetized Installment Sale (M453) transaction. My answers have not always appeared to be consistent, and I’ll try to clear up that seeming inconsistency now, with this post.
First, the rationale: For the lender to be willing to fund the monetization loan to the seller, the lender requires assurance that S.Crow Collateral Corp. has deployed the resale proceeds in such a way that the lender can...
March 25, 2015
For owners of C corporations a major hurdle to overcome is the double-tax problem for corporate earnings: the tax on the income at the company level, and the tax at the shareholder level when the money is taken out.
At the top federal corporate tax rate of 35% and a rather average 6.75% assumed for the corporation’s state income-tax return, the total corporate rate on additional income would be 41.75%. If the money is paid out to upper-income shareholders as a qualified dividend, it will be taxed again for federal income-tax purposes at 23.8%, including the net investment income tax. If the state’s tax on personal income is 6.75%, then the total tax cost could be an awful 72.3%.
Now, let’s suppose that the corporation has a valuable capital asset which it wishes to sell and for which there is a ready, willing and able buyer, at a price of $5 million. Let’s assume further than the corporation’s basis in that asset is zero. If the asset were to be sold for cash, the tax cost of taking that $5 million out of the company could be $3,615,000 (at the 72.3% overall rate).
If instead the asset is sold by the corporation on a no-money-down, non-amortizing installment contract for $5 million due in 30 years with monthly interest throughout those 30 years, the up-front tax cost on the sale would be zero. In the meantime the company would have the non-taxable proceeds of a monetization loan in an amount nearly equal to the $5 million.
So, when the installment contract is paid in full at the end of 30 years and if the same tax rates apply then, the tax cost then would be the same as now, in numbers of dollars: $3,615,000, just as now—except that the tax will be paid in depreciated dollars because of inflation over the 30 years. If we have a 3% inflation rate for that 30-year period, the dollar will be worth 41 cents then compared with today, so the $3,615,000 will be worth only $1,482,150...
January 21, 2015
Without my trying here to delineate all of the boundaries, let’s get one example of “when you can’t” out of the way right now. What you better not try to do is to back date something so that you can pretend that you did it then rather than now. The pretense is cheating. Don’t do it.
On the other hand, for an example of “when you can”, suppose that you entered into a transaction on, say, January 1, 2013, and now either you or the other party (let’s call her Jill) wishes, or both of you wish, that it had been done differently. You may wish that items A, B and C had been done differently, and Jill may wish that items D, E and F had been done differently. Jill and you talk it over, the two of you find some room to agree on some changes, and the two of you discuss what the effective date for the changes should be. Both Jill and you decide that it would be better for both of you if the effective date of the changes would be the beginning date—January 1, 2013—rather than now, two years later.
So, Jill and you sign a new agreement, you date it now, and you say in it that the changes you’re making will be effective from the beginning (more than two years ago) rather than now and rather than some date in the future. To the extent that requires one of you to pay money, transfer an asset, or provide other performance, that is done now.
If this requires that the...
January 08, 2015
All right, it’s time that we talked this matter out: a real heart-to-heart conversation in which each of us hears—really hears—what the other is saying.
As I understand it, what you’re saying to me is that you are the attorney for the owner of a $100 million commercial building. The owner has a tax basis of $20 million. He wants to sell, and he doesn’t want to do a 1031 tax-deferred exchange; he’s done lots of those already, and now he wants an exit strategy—not just another trade, not just another property to manage, but a real exit without having to pay the capital gains tax now.
When I say to you that your client should consider an installment sale coupled with a monetization loan (as the Internal Revenue Service calls it) as a tax-deferred exit strategy, you sort of blow me off. (Pardon me for putting it so bluntly.) You say that of course a $100 million installment sale won’t do the trick, because of the requirement in Internal Revenue Code Section 453A that the seller pay interest to the IRS on the deferred tax if the installment sale price exceeds $5 million per owner (unless it’s agricultural or personal-use property).
I reply: Here’s where it gets really interesting, but it’s also where it gets really difficult and requires some patience to hear me out. What I’m saying is...
October 29, 2014
Graydon Garner, Certified Financial Planner in Stamford, Connecticut, hosted a meeting of about twenty professionals, principals and advisors at the Hyatt Regency Greenwich on Thursday morning, October 23. He introduced Stan Crow for a presentation of S.Crow Collateral Corp.'s "collateralized installment sale" or "C453" transaction process and the "monetization loan" which a third-party lender makes available to C453 sellers.
October 09, 2014
The question arose this week whether a “collateralized installment sale” or “C453” transaction can be used to defer the tax on the sale of an in-force life insurance policy, such as a sale by an insured to a life settlements investor.
The answer is yes, for part of the transaction. The tax can be deferred on the other part, too, but for a different reason and in a different way.
The Internal Revenue Service treats life insurance policies as capital assets, but that fact alone doesn’t mean that an installment sale of such a policy will permit deferral of all of the tax under the installment-reporting section (Section 453) of the tax code. That’s because part of the gain may be treated not as proceeds of the sale but as an assignment of an accrued right to receive ordinary income: the net inside build-up that the insured would otherwise receive if the insured simply surrendered the policy to the life insurance company. It has long been true that the IRS doesn’t generally allow taxpayers to escape tax on earned ordinary income by assigning that income to someone else. When an insured sells his or her policy, that part of the selling price which is a substitute for net inside build-up will be taxed as ordinary income (that is, not as capital gain from the sale of a capital asset), and a C453 transaction by itself doesn’t enable the insured to defer the tax on that part.
For the insured to be able to defer tax on the sale of a life insurance policy, I recommend that the insured sell, pursuant to an installment contract with S.Crow Collateral Corp., only a fractional interest in the policy, that is, all of the policy except the net inside build-up, which will continue to be the insured’s property. ...
The Latest Installment addresses situations, questions and issues which are brought to us in the course of the consideration, negotiation or execution of transactions. We don't use the real names of parties to transactions, and we may edit the statement of the question to try to tell the story better. Please feel free to comment, or to take issue, or to raise your own question or situation. If you do the latter, please do not relate any confidential information.
The Latest Installment blog is edited by Stanley D. Crow, who is president of S.Crow Collateral Corp.
As a principal only, S.Crow Collateral Corp. does not act in the capacity of a broker, sales representative, investment advisor, or tax or legal advisor; does not sell or recommend any security; and does not accept any transaction fee or payment for transaction services. No part of The Latest Installment is intended to be, or be received as, tax, legal or investment advice.
Circumstances may affect tax and legal outcomes. Each transaction is different and unique to each participant. Neither S.Crow Collateral Corp. nor any of its officers or employees may or does provide tax, legal or investment advice. Nothing in The Latest Installment is intended to be, or may be taken to be, tax, legal or investment advice. Interested parties should consult their legal, tax and investment advisors before participating in any transaction.