The Latest Installment

On September 27 (see below), I wrote that "the tax problem on the sale of a business is solved." I referred explicitly to the sale of a "C" corporation’s assets and the sale of the shareholders’ stock in the company.

I said that in addition to eliminating the tax on "phantom" income, the following results could be achieved: 1) Elimination of the tax entirely at the corporate level; (2) capital-gains treatment for the shareholders; and (3) deferral of that capital-gains tax for as much as 30 years, (4) without creating undue transactional risk, cost or complications for the seller or ultimate buyer.

Now I’ve been asked: Can comparable results be achieved on the sale of the assets of an "S" corporation and on the sale of the shareholders’ stock in the "S" corporation?

The answer is: yes. If your business ("C", "S", LLC, whatever) is for sale, we’ll show you how, and maintain careful attention to IRS Notice 2008-111.—Stan Crow

It’s a common problem, when a company reaches a new and higher status in its market arena, that either the management or the governing board, or both, needs different people with different abilities, to match the new situation. (If the company doesn’t have a board of directors, policy making may occur under some other structure or label, but the need for change is likely to be the same.)

If the company is on a downward slope, the same is true; it’s just more obvious. I’m going to deal here with the situation of a company that is enjoying increasing success.

I propose that the shareholders ask potential board members to undertake a self-evaluation process using the "Lake Erie" criteria, using "Erie" as an acronym for the following:

1. Expertise;

2. Reputation;

3. Influence;

4. Experience.

Potential (including existing) board members should evaluate what they would bring to the table as directors, if they are elected or re-elected to serve on the company’s board in the new situation in which the company now operates. In other words, what expertise does the board member have that is relevant to the company’s new stage in its business? How would the person enhance the company’s reputation for probity, insight, competitive advantage, execution, follow-through, and customer satisfaction? How would the person be able to increase the company’s influence with potential counterparties, service providers, customers, and applicable regulators? What experience does the person have in dealing with the new circumstances of the company’s new business situation?

Brand-new companies may do a similar analysis, but if they do it, typically it’s almost subconscious and quite inexplicit. The stakes rise as the company rises, however, and "subconscious" and "inexplicit" no longer suffice. Conscious thought and explicit analysis become necessary in any determination of the composition of management and the policy-making board. Keeping the same people by default becomes potentially deadly to the company.

That’s a hard but necessary transition in small companies. Small companies which don’t make that transition usually stay small, forego much success, and eventually die.

I recommend that shareholders of growing companies ask each candidate for election to the governing board to provide a written self-evaluation of what the candidate believes he or she would bring to the table as a board member, using the "Erie" criteria, and to place that evaluation in front of the shareholders when they vote. Then those who are elected as directors may reasonably ask the same of those who would serve in management.

The business of business is business. Let’s get on with business.—Stan Crow

We’ve been asked whether S.Crow Collateral Corp. has a solution for tenant-in-common ("TIC") investors in a commercial property that is facing foreclosure. The answer is that yes, we do have a solution for their tax problem, but no, we don’t have a ready-to-go solution that will rescue the TIC investors’ investment.

Nearly all TIC investors are ones who "exchanged out of" an appreciated asset and "exchanged into" the TIC investment, as a tax-deferred exchange under Section 1031 of the Internal Revenue Code. Their problem is that Section 1031 is designed for a rising market, and their deferred tax will become due whenever they sell (or lose) their interest in the property which they "exchanged into". They deferred their tax on gain which they will now never see, but they still owe the tax as if the gain were still coming to them.

An aside: I wonder whether the 1031 accommodators who promoted 1031 exchanges at the top of the market have had any second thoughts today about their role in the whole thing. If, instead, the investors who took part in tax-deferred exchanges had sold in tax-deferred installment sales, the investors would not be taxed unless and until they receive the gain. Ooops.

Now, though, the TIC investors are in this awful mess. Is there a way out?

On the taxes, yes, because S.Crow Collateral Corp. can buy each one’s TIC interest in a tax-deferred installment sale. If we purchase all of the TIC interests, we can sell the property to the lender in exchange for the debt, so that the lender receives title to the property immediately without the delay, costs and risk of a foreclosure proceeding. We re-sell the debt to a private lender whom we introduce to the TIC investors, each of whom is given the opportunity to receive a new, long-term loan (in replacement of the existing debt) for which the repayment is fully funded by S.Crow Collateral Corp.’s installment debt to that seller.

Thereby, the taxable gain is entirely deferred for, say, 30 years, to allow time for the TIC investor’s wealth to recover before the tax has to be paid. It doesn’t save the property, but it makes the tax of almost no consequence, when it is paid in 30 years in what will likely be much-depreciated dollars.

Notice that I said that each of the TIC investors may receive an installment obligation and a loan. That means that the unanimity requirement for actions by the TIC investors is overcome, and put to an end.

If some of the TIC investors do not want to do this, S.Crow Collateral Corp. can accomplish this result anyway for the cooperating TIC investors (with a slight variation), and leave the uncooperative ones to fend for themselves with the foreclosing lender.—Stan Crow

An industrial company has a fleet of aircraft, each of which is owned through a separate subsidiary. Every other year, the oldest airplane is sold, and a new one is acquired. The selling price is usually substantially greater than the depreciated tax basis of the aircraft.

We’ve been asked: When an aircraft is sold, is there a way to avoid the tax on depreciation recapture, or if not to avoid the tax, then to defer it?

The hurdle is Section 1245 of the Internal Revenue Code, which states the general rule that depreciation recapture on the sale of personal property or equipment is taxed as ordinary income. The taxable gain is the excess of "the lower of" (1) the "recomputed basis", (2) the "amount realized" on the sale, or (3) the property’s "fair market value" over (4) the property’s adjusted basis. The section goes on to say that "(s)uch gain shall be recognized notwithstanding any other provision of this subtitle"—which means that deferral of recognition of gain under Section 453 (the installment-reporting section) is not available.

According to Section 1245, the "recomputed basis" is calculated by adding back to the adjusted basis any depreciation deductions that were taken or that could have been taken.

So, since deferral of the tax is not available, the remaining choice is to avoid the tax, by having the "amount realized" on the sale be the same as the property’s adjusted basis.

Well, duh, you might say: Of course one could avoid the tax, by selling the property at book value, but who would do that, if the aircraft is worth substantially more?

Indeed, but remember that I said that each of the aircraft is owned by a separate entity. Therein lies an answer.

S.Crow Collateral Corp. can buy the aircraft at book value, for cash, and re-sell it at its market value. Later, in a tax-deferred, all-capital-gain transaction, S.Crow Collateral Corp. can buy 79% of the entity itself on an installment contract, at essentially the market value of 79% of the entity that the entity had while it owned the aircraft. We can buy the other 21% more than 12 months later, also on a tax-deferred installment contract. In the meantime, a separate lender is willing, when the aircraft is sold, to lend to the selling owner of the entity an amount of money that is nearly equal to the value of the aircraft that is sold. Our installment contracts assuredly fund the repayment of the loan.

Results: (1) The aircraft are sold at no taxable gain to the entity, either as ordinary income or as capital gain; (2) the owner of the entity sells the entity in tax-deferred, all-capital-gain transactions; (3) on day 1, the owner of the entity receives non-taxable loan proceeds in lieu of taxable sale proceeds; (4) the installment contracts assuredly fund the loan’s repayment; and (5) for reasons and in ways not explained here, the limitations in Section 453A are not a problem.

Careful planning of the ownership and transactional structures is required; one cannot wing it, and this is not for the haphazard or flighty.—Stan Crow

In an insightful article entitled, "Will Political Uncertainty Cast a Shadow Over Commercial Real Estate?", published today by National Real Estate Investor,

http://nreionline.com/finance/does_political_uncertainty_shadow_main_11162011/, the authors said:

"(O)ne factor that has attracted capital and business to the United States has been its stable political environment. And that’s the way commercial real estate investors like it.

"Today, however, political unrest is asserting itself in America in ways unseen in decades, creating the most uncertain political climate many commercial real estate investors have witnessed. . . .

"Ultimately, who wins the 2012 election, how emergent mass movements shape pending legislation, how the Dodd-Frank and health care reform acts are enacted, how federal deficit reduction affects government office space, how the tax code changes and how government policy affects the economic recovery will be key questions over the coming months and years."

I was particularly interested in one part of that statement, the part that refers to "how the Dodd-Frank and health care reform acts are enacted" (emphasis added)—because the comment reveals more truth than may have been intended. Dodd-Frank and the health-care reform have already been enacted, but they grant so much power to officials that they almost give non-elected officials the power to make the law to be whatever they decide that they want it to be.

It’s not just Dodd-Frank and health-care reform, either. The nation seems to be moving all too quickly away from law by elected legislators toward law by appointed officials—and the trend undermines bulwarks that have been carefully erected over centuries, to protect the people from arbitrary power.

If you think that the bulwarks of freedom remain securely in place, then let me ask you this: To take just one example, do you think the tax law is what the statutes say it is, or do you think it’s what the Internal Revenue Service says it is? If you are a tax professional and you advise your clients not to make use of the tax law’s provisions in their favor unless the IRS tells them it’s okay, aren’t you giving in to the idea that officials make the law?

Americans are voluntarily giving away their freedoms, when they, and their advisers, won’t pass go without a permission slip from the IRS. As this obsequiousness takes hold, it’s no longer any wonder that officials begin to grab even more power.

The idea that the tax law is what the IRS says it is is reminiscent of`the former Soviet Union, or even of how modern-day Russia has used its tax law to attack opponents of the Putin regime. Tax advisers who give away their clients’ freedoms if there isn’t an IRS say-so are not behaving as friends of freedom. Taxpayers who put up with it are acquiescing in their own loss of freedom.

A whole industry has grown up around asking the IRS to please tell us what the law is. So why did we bother with electing Congress? Say it isn’t so!—Stan Crow

The question arose today whether agricultural water rights can be sold on an installment contract for more than $100 million, without incurring the obligation, under Section 453A of the Internal Revenue Code, to pay interest to the IRS on the proportionate part of the deferred tax that relates to the part of the purchase price above $5 million.

The answer is yes, the water rights can be sold in any amount, without incurring the interest obligation under Section 453A.

That is true, because Section 453A’s general requirement that such interest be paid does not apply, if the "installment obligation . . . arises from the disposition . . . of any property used or produced in the trade or business of farming". What is "the trade or business of farming" is defined in Section 2032A (e)(4) and (e)(5), where a "farm" is defined as including:

"stock, dairy, poultry, fruit, furbearing animal, and truck farms, plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards and woodlands";

and "farming purposes" is defined as including:

"cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for, training, and management of animals) on a farm; . . . and . . . the planting, cultivating, caring for, or cutting of trees."

Further, it is clear that the reference to the "disposition . . . of any property" does not mean only real property, because real property cannot be produced in the trade or business of farming. "Property", in Section 453A, as is true generally in the Internal Revenue Code, means anything that is "property" under state law.

If water rights are a property right under state law, then they constitute "property" for purposes of Section 453A. If those property rights are "used . . . in the trade or business of farming", then Section 453A imposes no interest obligation on the deferred tax on their sale under Section 453. Therefore, such water rights may be sold on an installment contract under Section 453, even for more than $100 million, without incurring any interest obligation to the IRS under Section 453A.

Regardless, however, even without the agricultural exception in Section 453A, an installment seller of an asset that might otherwise sell for more than $5 million, $10 million, $25 million, $100 million or whatever amount, can avoid the interest obligation under Section 453A if the seller sells to S.Crow Collateral Corp. How we accomplish that we’ll leave to private conversation.—Stan Crow

Just days before the closing of the sale of the assets of a C corporation to a private equity firm, and after his having researched alternatives for minimizing or deferring the tax on sale, the owner of the C corporation—let’s call him Big Ben—contacted us. Ben wanted to know whether we could improve his after-tax return on the sale.

I started into my usual story about how a collateralized installment sale ("C453") transaction can avoid the tax at the corporate level; allow the shareholders to have an all-capital-gain sale; defer their capital-gains tax for 30 years; when paired with a loan to the shareholders from a third-party lender, provide those shareholders with non-taxable loan proceeds up front (instead of taxable sale proceeds); and assuredly provide the funds for the repayment of the loan, both principal and interest.

Ben liked all of that, but he (and his attorney) voiced concern about whether S.Crow Collateral Corp.’s involvement at this late date could delay the closing. That concern arose from the fact that in a C453 transaction, S.Crow Collateral Corp. would become the intermediate buyer of the selling company’s assets, and the intermediate seller of those assets to the intended acquirer. Although both the instrument of transfer for the assets and the representations and warranties would still flow directly from the C corporation to the acquirer rather than through S.Crow Collateral Corp., the concern was that the acquirer would want time to do due diligence on S.Crow Collateral Corp., as the legal transferor of the assets to the acquirer.

Ben and his attorney expressed some further concern that even raising, at the last minute, the idea that another company (S.Crow Collateral Corp.) might have some involvement might "spook" the deal.

None of that is ordinarily an issue, because usually there is plenty of time for information, explanations, and adaptation.

Ben had already arranged with the acquirer to pay for the assets on a rather unusual installment contract (and matching promissory note), which called for 99% of the purchase price to be paid one day after closing, and the other 1% after January 1. Ben knew that having any part of the purchase price paid in a later year was sufficient to qualify the debt as an installment debt, with installment reporting of the gain under Section 453. He thought that before the 99% would be paid he could sell the paper in another installment sale transaction, and thereby defer the gain.

I said that wouldn’t work, because selling the paper would cause all of the gain to be recognized immediately, as a "disposition" under Section 453.

Ben then asked whether the already-planned installment note could be integrated in some way into what S.Crow Collateral Corp. does (meaning C453)—and that was the creative thinking which led to a solution.

Carefully avoiding any assignment or disposition by the C corporation of the acquirer’s debt obligation, and in a very clean and simple transaction, S.Crow Collateral Corp. took an "assignment for payment" from the acquirer and, as agent for the acquirer, received payment of the 99% of the purchase price from the acquirer. The C corporation gave to the acquirer a covenant not to collect from the acquirer any money that is paid by the acquirer to S.Crow Collateral Corp. The acquirer granted to S.Crow Collateral Corp. the authority, on the acquirer’s behalf, to amend the note, as long as we created no further obligation for the acquirer.

Together with the C corporation, we then amended the note to delay principal payments for many years, and a lender whom we introduced to Ben loaned a nearly equivalent amount of money to the C corporation. Among other things, that loan was used to refinance certain debts of the C corporation.

Results: (1) The C corporation deferred the tax on the gain on the sale of the assets (except for certain items); (2) the C corporation incurred no taxable income on the pay-off of the corporation’s existing debts; (3) the acquirer received the tax basis it had sought for the acquired assets; (4) the acquirer has no further risk, liability or entanglement with S.Crow Collateral Corp.; and (5) the post-closing activities between the C corporation and the acquirer (e.g., consulting services by Ben, and some interim sharing of the management of operations under existing contracts) can proceed solely between the C corporation and the acquirer.

What this didn’t immediately accomplish was an all-capital-gain sale of the stock in the C corporation—but that can happen later, maybe after the consulting period. In a way that will then avoid the tax that at the corporate level is now deferred, S.Crow Collateral Corp. can at that time buy the assets that the corporation will then have, and also buy the stock with a C453, in what will then be an all-capital-gain transaction.

Ben’s creative thinking, even at the last minute, opened the door for adaptations that further opened the way to achieve the desired outcome for all concerned. Ben there, done that.—Stan Crow

Financial reporting gave a yawn to Wednesday’s announcement by the Bureau of Labor Statistics that the Consumer Price Index rose 3.9% over the 12 months ending in September. Here’s the BLS’ chart:

The very next day, however, the story changed. The Treasury’s auction on Thursday of 30-year "Treasury Inflation-protected Securities" or "TIPS" saw "the heaviest bidding in 13 years" and "fierce demand", according to The Wall Street Journal.

Just maybe there’s a connection? Duh.

As Bloomberg put it after the TIPS sale, "The Treasury sold $7 billion of inflation-linked debt at an all-time low yield of 0.999 percent as investors besides the primary dealers required to bid at the auction combined to purchase a record amount (of) the securities."

The Federal Reserve continues to use soothing words about inflation, as it has done ever since it invented the idea of not counting food and energy costs in what they like to call "core" inflation. The Federal Reserve’s view is that inflation will soon decline, but that is clearly not the market’s view, as evidenced by the TIPS sales on Thursday. The market was willing to accept a record-low yield to get inflation protection, and the market wouldn’t be doing that if it believed the Federal Reserve’s forecast.

Whom should you believe? As you think about that, keep in mind that because of the rapid increase in the federal debt the federal government now has a very great incentive to foster inflation; if the value of the dollar declines, paying the federal debt will be far less painful. Of course, that means that those who invested in government bonds (other than TIPS) will be paid back with less-valuable dollars, but oh, well.

The big disadvantage of TIPS is that investors are taxed currently on the interest income and the inflation adjustments, but don’t actually receive that money currently.

I asked you last week what your strategy was, to cope with rising inflation. Over the long term, both real estate and the stock market tend to keep ahead of inflation, although real estate now has a long way to go, and the stock market’s volatility and relative lack of liquidity are disconcerting.

Another alternative, although limited in amounts, is the federal "I" bonds, which are both inflation-adjusted and tax-deferred.

And, we’re working behind the scenes now on a private-sector version that will be inflation-adjusted, tax-deferred, and not limited in amounts. Stay tuned.—Stan Crow

Today’s Producer Price Index report from the U.S. Bureau of Labor Statistics caught forecasters by surprise, as the BLS said that producer prices in September rose 0.8% over the previous month. That rate is 6.9% higher than the price index figure for September of 2010.

If the 0.8% rate of increase in September were to continue for 12 months, that would mean a price rise of 10.1% by September, 2012.

Here’s the BLS chart, released today, of what might be called the "lagging" 12-month rate, that is, the rate of increase in prices in the stated month over what prices were in the same month one year earlier:

Many mistakes in understanding of taxes could be avoided, if tax advisers would approach tax issues deductively (to start with general principles) rather than inductively (to start with details).

The tax code is horribly complicated and cries out for reform, but as long as we’re stuck with it, those of us who have to work with it should do our best to understand it. It is much more feasible to understand the tax code, if we first understand the principles of the tax code.

It takes away nothing from expert tax advisers, to say that some of them do most of their work in the applications and exceptions in just one category. That focus can, however, cause them to see everything through the lens of that part of the tax code with which they regularly deal, when maybe the issue at hand belongs elsewhere.

It can lead to better understanding if the tax code is viewed as being in outline form, to read first the general propositions, and then the general categories within each proposition, and then the applications and exceptions within each category.

Indeed, I believe that most tax issues are issues of category: Is this transaction in category A, or B, or C? Once the correct category is determined, it may be comparatively easy to work through the applications and exceptions, to see what the correct tax treatment is for the transaction.

Here’s a concrete example: tax-deferred exchanges. Many advisers who deal extensively with tax-deferred exchanges think that an exchange is something different—in a different category—from a sale. That is not correct, however, because the tax code and the regulations under it explicitly treat tax-deferred exchanges as sales, but sales that are taxed differently in certain limited circumstances.

Many advisers further forget that the tax code generally recognizes that there are two categories of sales: sales for cash, and sales on installment contracts. Tax-deferred exchanges fall into either category, depending on when the exchangor receives the money back on a failing exchange.

Does this tree belong in that forest, or some other? To answer the question correctly, one must examine the forest, not just the particular tree.—Stan Crow

Within the past week, I’ve heard, from two informed sources within the 1031 tax-deferred exchange industry, that their business nationwide is down 80% from its peak. These are dark days for that business—literally, with darkened offices, laid-off staff, and time on their hands.

The principal reason why is that the tax regulations which govern tax-deferred exchanges make it very difficult to accomplish the desired tax deferral through an exchange unless prices are rising. It’s hard to trade up—as required—when prices are falling, financing is hard to get, and the owners of the really desirable properties (the ones an exchangor would want to "trade into") aren’t eager to turn loose of them when selling prices aren’t attractive.

There’s another reason, however, and that is this: Can you think of anyone who ever really wanted to do an exchange in the first place?

No thinking person would voluntarily choose to tie one hand behind his back, the way the 1031 exchange rules do. No one would voluntarily choose to give himself only 45 days—as the 1031 regulations do—in which to search for the right property to acquire. No one would voluntarily choose to give himself only 180 days in which to try to buy the right property to complete an exchange, as the 1031 regulations do.

So why have otherwise sentient people done so in such large numbers? It’s not because they thought, "I really want to do an exchange." It’s because they wanted tax deferral, and they thought that the price of getting tax deferral was to submit to the restrictions, time limits, and risks of the 1031 exchange rules.

So, the 1031 exchange industry grew up around trying to persuade would-be sellers of appreciated properties that the only choice they had was either paying the tax on the gain now or submitting to the rigors of a 1031 exchange.

Tax-deferred exchanges originated in that rare situation in which A really wanted to own B’s property, B really wanted to own A’s property, and so they agreed to exchange one for the other. Or, occasionally, A wanted to own B’s property, B wanted to own C’s property, and C wanted to own A’s property, so they agreed to a three-way exchange.

Apart from those rare situations, however, no one ever really wants an exchange of properties. Instead, owners want to sell one property and then want to buy another when they find just the right one. They have no desire whatever to exchange—but they do so anyway, via a 1031 accommodator, because they think that’s the only way they can sell one property and acquire another without paying tax at the time of transaction.

My answer to my question about whether the 1031 industry will ever come back is that it won’t return to its former vigor; by the time market conditions make widespread use of tax-deferred exchanges feasible again, the secret will be out, that an exchange isn’t necessary, to achieve tax deferral.

Since no one yearns to exchange, that will pretty much be the end of that.—Stan Crow

Is it fate, or merely coincidence, that so many people seem to have the same problem at the same time?

Maybe you’ll say, "It’s the economy, stupid!" You are right that the economy is the reason for such a large foreclosure problem. The economy didn’t create the tax problem, however; that is the work of Congress and the IRS.

Anyway, the number of calls for help with the tax part of the problem, just this week, is an indication of how difficult things are out there.

Last week I learned of one company that tells borrowers who are facing foreclosure that the company can help them to escape the tax on cancellation of debt if the company buys their loans from the bank and takes over the properties from the borrowers. The company says it will release the borrowers from their debts when the company buys the loans, and the company’s purchase of the loans will prevent the bank from sending 1099s to the IRS and the borrowers, to report the cancellation income. (The company doesn’t mention the additional tax on recapture of depreciation.)

What the company says seems to me to be true, except the part in which the company says the borrowers can escape the tax liability. My response to that was to ask, "What does the company think excuses the company from sending a 1099 when it, rather than the bank, forgives the remainder of the debt? And, if the property is a business or investment property, what about the tax on depreciation recapture?

Well, enough about them. Now, about us.

S.Crow Collateral Corp.’s approach to the problem is similar in one respect: we, too, seek to buy the loan from the bank. That’s where the similarity ends, however, because we first buy the property from the borrower on an installment contract. We then sell the property to the bank in exchange for the bank’s transfer of the loan to us. That done, and with the bank now out of the picture, we sell the loan again, this time to a cooperating private lender who does not reduce the amount of the debt. That way, there is no cancellation-of-debt income to report, period.

Furthermore, the installment contract defers the tax on depreciation recapture, to the extent that the depreciation was taken on the building rather than on equipment.

We then arrange things so that the installment debt to the borrower completely funds the borrower’s future loan payments to the cooperating private lender. The borrower has no further net cost for the loan, but keeps the loan in place, typically for 30 years or so. The borrower has no net tax cost, either, for those 30 years. At the end of that time, the borrower will owe a tax, but not on cancellation-of-debt income; the tax will be on any capital gain which is contained in the installment sale.

The up-front cost to the borrower for all of this has two components, as follows: (1) a loan fee to the cooperating private lender, and (2) some amount, as agreed with the private lender, as an initial pay-down on the loan. The total of the two will typically be much less than the borrower’s tax cost would have been. The long-term cost to the borrower is a modest annual fee to an escrow affiliate of the private lender, for the processing of the installment payments and (matching) loan payments each year.

Then, when the installment contract and loan come due in 30 years or so, the purchase price that is paid to the borrower pursuant to the installment contract will fully pay the unpaid balance on the loan.

Instead of plain vanilla, our ingredients make this something you can savor, with no disagreeable after-taste. Now serving.—Stan Crow

And just what is that problem? Part of it is the double taxation that typically results when a "C" corporation business is sold: the tax at the corporate level, and then again at the shareholder level. Part of it is the buyer’s need to expense the assets purchased, and the seller’s need for capital-gains treatment. Part of it is the need to defer the capital-gains tax, to ameliorate its burden. Part of it in some circumstances is tax on phantom income, when debt of the selling company is paid upon the sale. Part of it is that if the overall tax cost is too high, or if the conflict between seller and buyer over taxes is too great, the sale probably won’t occur at all, and an otherwise-willing seller will remain effectively locked into a business which could be made more efficient and profitable by a better-capitalized buyer with greater reach.

When an otherwise-willing seller is locked into the business because of the tax cost of selling, the government’s pursuit of increased tax revenues right now turns out to be counter-productive and results in lower tax collections over the long term.

When a prospective seller of a business is in this situation, it is a complex problem to solve, while complying with the law, Treasury Regulations, the rulings and notices of the Internal Revenue Service, and the tax doctrines of "economic substance", "step transactions", and so on. For a solution to be what it ought to be, it should accomplish the following: (1) Elimination of the tax entirely at the corporate level; (2) capital-gains treatment for the shareholders; and (3) deferral of that capital-gains tax for as much as 30 years, (4) without creating undue transactional risk, cost or complications for the seller or ultimate buyer.

Our approach does that. How does yours measure up?—Stan Crow

In The Latest Installment posting on June 18, I wrote about the latest inflation figures as of that time, which showed an inflation rate of 3.6% for the 12-month period ending in May. I contended that it was comparable to a 3.6% tax increase.

It turns out that the inflation rate for that 12-month period was not a fluke, and the inflation numbers are continuing to edge upward. As shown by my chart here, the 12-month inflation rates have held or risen since then.

The new monthly numbers are even worse, however. The inflation rate for July, if it were to continue for 12 months, would be 6.2%. The rate for August, if it were to continue for 12 months, would be 4.9%.

So, the only reason why the rate for the latest 12-month period is as low as it is, is that it is reduced by the much-lower numbers of a year ago. Those much-lower numbers are no longer with us, so the annualized inflation rates are headed upward.

I wrote on June 18:

"As taxpayers, there’s one more way to fight inflation, for those who are considering selling any capital asset: sell it in an installment sale—particularly a collateralized installment sale—so that you can pay the tax many years from now in those much-depreciated dollars. That is one way to fight back, so that while inflation eats away at everything else, at least it will eat away at the money you pay in taxes, too.

"I prepared the accompanying chart [both the one I posted in June and the one here today] from the government’s statistics, because I think the chart clearly shows how serious the problem is. Every American should see it."

It’s even more serious now. Furthermore, if the government is going to promote inflation as a cheap way to reduce the burden of the federal debt (and to reduce the value of everything we own), it’s only fair that we respond by paying our taxes in later years when the money will be worth less than it is today.—Stan Crow

If you receive sales-commision income, you need to be alert to the tax consequences—which, because commissions are ordinary income, could mean a tax of as much as 45%, depending on the state in which you live and the level of your income.

The really good news is that, if you are alert and act in time, the tax on your commission income can be deferred, with DEFCOMM ("defer commission").

These are the alert-condition levels:

DEFCOMM 5: Normal alert, because you have no listings and so are not in danger of having any income.

DEFCOMM 4: Above-normal alert, because you have at least one listing which may result in a commission; inform your client about tax deferral.

DEFCOMM 3: Medium alert, because movement is occurring toward a possible transaction; complete the education process and prepare to take action to achieve deferral for both your client and yourself.

DEFCOMM 2: High alert, because a transaction seems to be nearing completion; complete the tax-deferral transaction arrangements for both your client’s tax deferral and yours.

DEFCOMM 1: Maximum alert, because a transaction is about to close, meaning that there is no time to lose to achieve tax deferral—for either your client or yourself.

Once you reach DEFCOMM 4, it’s time to begin the conversation with your client about using a "collateralized installment sale" or "C453" (a reference to Section 453 of the Internal Revenue Code) to achieve tax deferral for your client’s gain. At that time, your client should become acquainted with C453, how it works, and what its benefits are. If S.Crow Collateral Corp. buys the asset from your client with a C453 and re-sells to the ultimate buyer, we can enable your client to enjoy tax deferral and for your commission to be tax-deferred, too. We can’t do so, though, as a stand-alone deal for you; we can accomplish this only if your client uses a C453.

When there is movement toward a transaction—DEFCOMM 3—it’s time to begin to make arrangements for your client’s C453 transaction for your ancillary tax deferral—without any cost to your client for your tax deferral.

If you wish, S.Crow Collateral Corp. will introduce you to a lender who is willing to lend to you an amount of money that is nearly equal to the amount of the commission, so that you may have non-taxable loan proceeds in lieu of commission earnings. If you decide to undertake such a loan, its re-payment will be entirely funded by S.Crow Collateral Corp.’s interest and final payments to you.

In this way, the tax on your commission can be deferred for as much as 30 years, but you’ll have the non-taxable loan proceeds, without any need for you to use your other resources to re-pay that loan.

Be alert. Save that that tax money for yourself, with DEFCOMM. There’s no other way.—Stan Crow

As I heard the story from her, she is rather upset about the advice you gave her in 2007, to sell her commercial properties in 1031 exchanges.

At the time, she was already well into her senior-citizen years, and she wanted to get out of real estate. She had been in contact with S.Crow Collateral Corp. and was very interested in selling her properties in collateralized installment sale ("C453") transactions. The idea was that she could bring her real estate involvement to an end, obtain tax deferral on the capital gain, and invest the gross proceeds, pre-tax, in financial investments.

So she went to you for advice, and you advised against her using C453 transactions. I gather that your advice amounted to, "Well, I don’t know much about installment sales, and maybe the IRS would audit you. I think you should just trade into something else in tax-deferred exchanges."

Relying on your advice, at the peak of the market she sold all four of her properties in 1031 exchanges, and traded into other properties at higher prices, for which she had to incur new debt.

Well, I’m sure you know what happened. All four of the replacement properties promptly plummeted in value. They’re now worth far less than she owes on them. She has lost millions. Vacancies are ‘way up, she can’t keep up with the payments on the debt and she can’t sell them for enough to cover the debt, let alone the taxes which she deferred and still owes. So, here she is, deep in debt and struggling with underwater real estate long after she wanted to be enjoying her retirement—and could have been, if you had advised otherwise.

Now she has contacted S.Crow Collateral Corp. again and has asked whether there might be anything which we could do to rescue her from her mess. I’m sorry that we had to say that we have no such magic; we can’t march time backward.

I’m told that your position now is that, after all, you’re only a lawyer, and you couldn’t have been expected to know that the real estate market would crash or that financing for real estate would become problematic. Even so, if that’s so, what were you thinking, when you advised her to trade into other properties, when she was already in her eighties and she’d said she wanted out of real estate? And did it even occur to you to tell her that tax-deferred exchanges under Section 1031 are structurally designed for rising markets and for increasing debt? Even if you weren’t able to know what the market would do, wouldn’t it have been wise to let her know that the success of her 1031 exchanges would depend on whether market values would continue to rise and on whether financing would remain readily available? At least, if you had told her that, she could have made her own decision about whether she wanted to lock herself into taking that market risk.

There’s no pleasant outcome from this. As you probably know, she’s suing her broker. I don’t know whether you’re next. I’m sorry for her, for her broker, and for you. As it often does, giving rather off-the-cuff and easy advice has caused the chickens to come home to roost, around everyone who had a role in the decision that was made.

It was all so unnecessary, and it’s all so sad.—Stan Crow

First, about the Economy in General:

As I write this, the Dow Jones Industrial Averages has closed down more than 500 points on the day, and the story about it in the on-line edition of The Wall Street Journal said that "investors appeared to lose faith in the ability of the world’s policy makers to revive the global economy and stave off a rolling debt crisis in Europe."

I wonder where these investors have been, that they still had some confidence to lose, in policy makers’ ability "to revive the global economy".

Maybe those investors have been taken in by politicians, many of whom seem to think that reviving the economy is up to them. I can’t begin to guess how many times I’ve heard this or that politician say, "We have to produce jobs", "We must cause exports to grow," "We must rebuild the manufacturing sector," "We must re-start the housing industry," and so on—as though the power to do those things was in politicians’ hands.

The truth is this: Politicians cannot possibly do those things. They can make it easier or harder for the private sector to rebound, but they can’t make the rebound happen. Their claims of omniscience and omnipotence are wearing very thin indeed, and they no longer have the spare money lying around with which to buy the people’s allegiance.

Those silly investors who only now have lost confidence in politicians would find renewed confidence in the future, if politicians would see their proper role as being to minimize, in every way possible, the tax, legal and regulatory barriers to finding financial success. Economic growth is the answer. Politicians can stop it, but they certainly can’t cause it.

Now, about Your Own Economy:

Two substantial barriers to economic growth right now are (1) excess debt and (2) tax disincentives to sell. Because of excess debt, potential buyers don’t know that prices (for investment assets, housing, whatever) have reached bottom. Even if potential buyers think prices have reached bottom, they can sit on their hands and wait for deep bargains and sacrifice sales. On the other side, potential sellers with excess debt or who face a high tax on sale are unable to sell for a price which someone is willing to pay.

With all of this and on current trend, it may take years and much pain, to work through this logjam and for the economy to gain much strength.

Here’s the good news:

(1) To the extent the tax cost of selling (such as the unpaid tax from previous tax-deferred exchanges, or the tax from debt over basis, or the tax on cancellation of debt) stands in your way, that problem is easily fixed, with the tools provided by a collateralized installment sale. Don’t just sit there. Call us; we’re a qualified collateralized installment sale dealer.

(2) To the extent that excess debt keeps you from selling, we have remedies in some situations, if the loan is held by your lender and wasn’t packaged with other loans and sold. For this, too, don’t just sit there. Call.

Especially, don’t wait for politicians to come to your rescue. Washington could freeze over first.—Stan Crow

An owner of an investment property planned to sell the property at auction, but the combination of burdensome debt on the property (that’s why he needed to sell) and the property’s recent decline in value meant that he likely wouldn’t net any cash from the auction sale. What’s worse, he would owe a substantial tax after the auction, because the property which he planned to sell was one which he had "exchanged into" in a series of tax-deferred exchanges. So, even if he didn’t receive any cash at all from the auction sale, he would still have to pay the tax on the auction-sale price, less any remaining tax basis which he had in the property.

Before the auction, he asked whether S.Crow Collateral Corp. could do something to help.

For illustration here, let’s assume that he bought the first commercial property ("Property #1") for $1 million. Several years thereafter, he exchanged Property #1 for another, and several years after that exchanged for yet another, and so on, each time without having to add new money. Finally, in 2006 he exchanged for the current property, then worth $12 million. He promptly borrowed $8 million against it, and he still owes the $8 million, which is about what the property is worth now. Because of depreciation deductions (which I assume here to have been for depreciation of the building), his original $1 million basis is now zero.

Before the auction, S.Crow Collateral Corp. entered into an agreement to purchase the current property and to re-sell it to the successful bidder at the auction.

If it were not for his agreement with S.Crow Collateral Corp., upon the closing of the sale at auction he would have owed tax for $1 million in depreciation recapture, plus capital-gains tax on $7 million—all of which he would have had to pay out of pocket, because the entire $8 million proceeds from the auction would have gone to pay his debt. If altogether the combined applicable state and federal rate is 25%, he would have owed $2 million in taxes and would have had to pay it now, because of the auction sale.

Because of our installment contract with the seller and a coordinated refinancing of the $8 million debt, S.Crow Collateral Corp. will receive the $8 million auction proceeds, the $8 million debt will be refinanced with a new lender (a third-party lender which will pay the original creditor in full), the successful bidder will receive the property free and clear of all liens, and the seller will owe $8 million (to the new lender)—but the seller’s repayment of the $8 million to the new lender will now be funded by our payments on our installment contract with the seller.

With this arrangement, under Section 453 of the Internal Revenue Code the seller may defer paying the tax for 10, 20, 30 years or even more—by which time, because of inflation between now and then, the $2 million (if that’s what it still is) might not be worth much. In the meantime, the seller will have taxable interest income from the installment contract, but will also have a tax deduction for interest expense on the new loan.

A further advantage, if the seller dies before the expiration of the installment contract and before the (matching) maturity date of the new loan, is that for estate-tax purposes the installment contract should receive a discounted valuation, but the on-going debt should be 100% deducted from the seller’s taxable estate.

These same outcomes would be true, as well, if our seller had arranged with us for a sale other than at auction; it’s the sale, not the auction form of sale, that causes the tax liability. It’s just that most people assume that if a property is sold at auction, nothing can be done to defer the tax. That is not true, as this demonstrates.—Stan Crow

If anyone were to wonder whether we live in a regulatory state, one would need only to listen to taxpayers as they express their fears of being audited by the IRS. Taxpayers don’t just fear doing something that might violate some tax rule; they fear being audited, even if they do everything right.

Bankers have told me that they don’t just fear their regulators; they fear their shadows.

And so it goes, in manufacturing, retail sales, mortgage lending, food processing and marketing, professional services, energy production, shipping—you name it. That’s not to say that’s all bad, but it is to say that as layers of regulation add up, economic activity necessarily is reduced from what it otherwise would have been, and many ventures are simply dropped entirely because of fear of entanglement with regulatory procedures and burdens.

Be that as it may be, I can provide some practical pointers to help you to limit the problem in at least one context: tax audits.

Make Your Facts.

If the IRS in an audit raises questions about some transaction in which you engaged, remember this truth: The IRS must examine that transaction from your perspective and must see it through your eyes. It is your transaction that is being examined, not someone else’s. Relevant questions will be why you engaged in the transaction, what facts you knew at the time, what you expected the outcome to be, which circumstances you controlled, what steps you took and why you took them. That doesn’t mean that the IRS must accept your understanding of the applicable law, but the IRS must accept the facts as they are—and your perspective, knowledge, expectations, actions and reasons are the core facts.

So, when you undertake a transaction that you think might raise questions in a tax audit, prepare for that possibility before you engage in the transaction. Carefully document your perspective about the transaction, the facts as you know them, what steps you take, and why you take them.

When you do that, you are not making up your facts; you are making your facts. You are documenting as true, what you believe to be true.

Agree on the Common Facts.

Then, strengthen your position even further, by arranging for the other party to the transaction to reach agreement with you on the facts as you see them. When two independent parties enter into a contract and recite in the contract the factual context—the situation as they understand it, their respective reasons for the deal, and so on—that agreed factual context gains something further: it becomes legally binding. It can even become binding on the IRS in an audit.

Stick to Those Facts.

Be careful to understand me here. Sometimes people enter into transactions for the purpose of minimizing or avoiding unknown risks. In those circumstances, the unknown risk actually becomes a known reason for the transaction, and that should be recited in your transaction documentation.

Apart from those situations, however, you won’t generally enter into a transaction on the basis of what you don’t know. Generally, you will enter into a transaction on the basis of what you know and what you expect. That being so, if you get into an audit it will not serve your interests to express your guesses about those things which you didn’t know or expect when you did the deal. Just as a witness in a court case is required to testify only within the witness’ personal knowledge, in your conversations during an audit you should not wander away from what you actually knew or expected when you entered into the transaction. You can’t be held responsible, for example, for what the other party knew or did but didn’t tell you.

Put these pointers to work, work with your legal and tax advisers, and you will minimize that scourge of all taxpayers: audit fear. Remember, "Just the facts, ma’am."—Stan Crow

While taxpayers try to find a way to shelter interest income, or at least to convert it to capital gain, the Internal Revenue Service is on the lookout to try to stop taxpayers from succeeding in their efforts.

So, let me share with you a way in which both objectives can be accomplished, simultaneously, in one particular transaction.

Here’s the deal: If you: (1) sell a capital asset to S.Crow Collateral Corp. on an installment contract; (2) simultaneously borrow money from a lender we introduce to you; and (3) invest the loan proceeds in appreciating assets; you can accomplish these objectives: (a) defer the tax on the gain on sale for 30 years or even more; (b) avoid all net tax cost on the installment interest (because of a matching interest-expense deduction for the loan interest); and (c) be taxed at only capital-gains rates on the capital gain from the new investment.

That was always true with a collateralized installment sale, but the problem, until very recently, was obtaining a loan to match the installment contract—especially when credit has been tight.

Now, though, any installment seller to S.Crow Collateral Corp. can obtain a matching loan, because the installment contract itself is the only qualification for the loan.

This may be one of the most tax-efficient transactions available today, and it’s available to everyone with a capital asset to sell.—Stan Crow

I’ve been asked when it’s okay, and when it isn’t, for an installment seller to borrow money at the same time as the installment-sale transaction. The question is essentially this: Can the loan be deemed by the Internal Revenue Service to be sale proceeds, so that the seller is treated as having sold for cash?

Here’s my short response: It depends.

Here’s my longer answer: Stay on the right side of these important (and, in part, rather obvious) guidelines, and your loan should not be at risk of being treated as just a sneaky way of getting cash without having a cash sale. Keep this objective in mind: The substance of the sale, not just the form, must be an installment sale. The substance of the loan must be a real loan, not just a substitute for a cash sale.

Guideline #1: Don’t Pledge or Assign the Installment Contract

If you assign the installment contract to your lender, or give the lender a security interest in the installment contract, your doing so will have the same effect as if your sale were a cash sale. Under the statute, an assignment or pledge of an installment contract is a "disposition" (a sale) of the installment contract, and the IRS is authorized to treat that as full payment to you of the amount owing on the installment contract, even if you haven’t been paid in full. So, don’t assign the installment contract or give anyone a lien on it.

Guideline #2: Don’t Borrow Against the Installment Contract

Just as with a disposition of an installment contract, borrowing against your installment contract will cause your installment sale to be deemed to have been a cash sale. The rationale is clear: you sold on an installment contract, but then you borrowed money and used the contract as collateral. That, too, counts as a "disposition" of the installment contract. It’s fine to list the installment contract as an asset on your financial statement when you borrow money, but don’t borrow specifically against the installment contract.

Guideline #3: Retain Unrestricted Ownership of the Installment Contract

You should remain the sole owner of the installment contract and not give your lender ownership rights in the installment contract. The installment contract should remain as an asset on your balance sheet, for the full duration of the installment contract. The installment contract should not be on the lender’s balance sheet.

Guideline #4: Be the Recipient of the Installment Payments

You should arrange things so that the installment payments go into your account, as your money. That doesn’t mean that the installment payments necessarily have to go into the same bank account where you keep your other money, but the payments should go to an account that is yours and that has your name and tax number on it.

Guideline #5: Be the Payor of the Loan Payments

You should arrange things so that the payments on the loan come from your account and your funds. That can be a special account, but it must be your account, with your name and tax number on it.

Guideline #6: Receive 1099s

Things should be arranged in such a way that you are assured that the IRS and you will receive a 1099 each year to show the installment payments that are made to you by the buyer, and that the IRS and you will receive a separate 1099 each year to show the loan payments that you make to the lender. Those are required, so be sure the process is in place.

Guideline #7: Receive Full Documentation

Be sure that both the installment contract and the loan are fully documented. Then comply fully with the terms and conditions. Also, it’s a good idea to have those documents state explicitly what your substantive business purposes (as distinct from any tax benefits) are for entering into those agreements. That’s valuable for yourself later, if you someday wonder, "Why did I do this?" It’s valuable, also, in the event of a tax audit, because your real business reasons will be right there for the auditor to see and understand. Of course, be sure that your attorney reviews the documents on your behalf.

Guideline #8: State a Distinct, Clear Business Purpose for the Loan

Be sure that the loan documents identify your business purpose for the loan. That’s important for your ability to deduct the loan-interest payments. It’s important for the lender, if the lender is not in the consumer-finance business. If one of your uses of the money will be to pay business debt, be explicit that the money is for refinancing purposes.

Guideline #9: Use an Established Lender

Borrow only from an established lender. That goes a long way toward assuring that the loan will be—and will be seen to be—a real deal.

Guideline #10: Use an Independent Lender

Borrow only from a lender which is independent of you, and independent of your installment buyer: someone you don’t control, and someone your installment buyer doesn’t control.

In case you might wonder, I can tell you: S.Crow Collateral Corp.’s "collateralized installment sale" transactions comply with all ten of the above guidelines.

Follow these guidelines, and then if you need to worry about something, it can be something other than your installment sale.—Stan Crow

 The news from the Congressional Budget Office on Wednesday was rather dismal:

"Recently, the federal government has been recording budget deficits that are the largest as a share of the economy since 1945. Consequently, the amount of federal debt held by the public has surged. At the end of 2008, that debt equaled 40 percent of the nation’s annual economic output (a little above the 40-year average of 37 percent). Since then, the figure has shot upward: By the end of this year, the Congressional Budget Office (CBO) projects, federal debt will reach roughly 70 percent of gross domestic product (GDP)—the highest percentage since shortly after World War II."

That 70% number is a shocking one—and it’s 10% worse than the CBO projected just one year ago, for 2011.

Those who still believe in Keynsian economics are in a tight spot, because Keynes advocated increasing spending in recessionary times, without raising taxes, on the ground that a fiscal policy like that would stimulate the economy back toward recovery. Keynes’ followers, including the present administration, want to maintain elevated spending levels, all right, but they know that the debt is getting out of control. So, for the sake of keeping up the spending, they want to raise taxes, too—an improvisation that violates their Keynesian doctrine.

Those who believe in supply-side economics want to deal with the debt problem by cutting spending and by preventing any tax increases, so that the private sector’s capacity for growth will lead to production, investment and spending in the private sector rather than in the government.

Regardless which view is right, it’s clear that the federal debt has grown so high so fast that the things the government can no longer do the things it might do if it were starting from a position of strength. It’s nearly powerless to help—but it will do a great deal of damage if it doesn’t begin to reduce the debt.

According to the CBO, failure to solve the debt problem will have adverse consequences such as these:

"Rising debt would increasingly restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises. As a result, the effects of such developments on the economy and people’s well-being could be worse." [One could add, rising debt would reduce the nation’s ability to control inflation, to influence world events, to protect the shipping lanes from piracy, to protect the nation from cyberespionage, to pursue America’s interests around the world, to maintain our infrastructure here at home, and on and on.]

"Growing debt also would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates. Such a crisis would confront policymakers with extremely difficult choices."

Nevertheless, the private sector still has some options to contribute to a recovery.

One of those is because of Section 453 of the Internal Revenue Code, for the installment reporting of capital gains on sale of capital assets. That tax deferral encourages the re-deployment of capital assets to more productive uses. By far, the best way for that re-deployment to occur is with a collateralized installment sale, combined with a third-party lender’s loan to the installment seller, under an arrangement by which the installment payments assuredly fund the seller’s loan payments. (Shameless promotion: We do collateralized installment sales, and we do them really well.)

Another private sector action would be broad-based resolution of the problem of "underwater" loans. For that to occur quickly, there’s going to have to be some way of putting private-sector money to work repairing troubled loans, not to take advantage of the trodden-down debtor, but to pay the debt. It won’t work unless it’s done purely as a freely-chosen business deal in pursuit of mutual profit. It won’t work if it’s an act of charity, and it won’t work if the government either compels it or penalizes not doing it.

Here at S.Crow Collateral Corp. we’re implementing a couple of ways of doing this, but we needn’t be the only ones. If more people will put their minds to finding and implementing ways to make money by paying troubled loans, we in the private sector may turn things around.—Stan Crow

How did that tax increase slip through without your hearing about it? Does it make you angry that another one is coming next month? (And, most likely, the month after that?)

I know, you’re thinking this can’t be, or everyone would be up in arms about it.

Yes, they should be, and they would be, if Congress had taken action to do that. Instead, what Congress did was just to let it happen, without doing much of anything to stop it.

How that tax increase happened was sneaky indeed: The U.S. Bureau of Labor Statistics announced on Wednesday that the annualized inflation rate for the 12 months ending in May was 3.6%. That is the same as taking 3.6% more of your income.

It doesn’t stop with your income, either. If you have had any dollars invested in anything over the past 12 months, that investment is now worth 3.6% less than it would have been worth, if there had been no inflation.

So, your income doesn’t stretch as far, and your assets have lost some value, all because of the silent tax known as inflation.

Do you think this was an unintended taking of your money? I can’t read minds to know for sure, but one thing is sure: Because of that inflation over the past 12 months, the huge debt the government is running up is now worth less to our nation’s creditors. It’s why there is a temptation for the government to "inflate its way" out of that debt problem, at the expense of everyone who buys government bonds, U.S. agency securities, or any other investment.

So, let’s say that you held an investment that produced a 3.6% return over the past 12 months. At least you broke even, right? Wrong, because the government will tax that 3.6% return, and leave you in the hole for the year.

Suppose that someone in Congress were to propose to increase everyone’s tax rate next month, and then increase the tax rate even further the month after that, and then increase it even further the month after that, and so on. Do you think the people would say that’s just fine? So why sit back and take it on the chin, when the government does the same thing without bothering with a vote about it?

Does it put your mind at ease, that Federal Reserve Chairman Ben Bernanke thinks these rising prices aren’t a problem?

As Americans we have every right to insist that our politicians pursue policies that will maintain a sound dollar without inflation. Otherwise, what’s the point of saving for the future, or for retirement?

As taxpayers, there’s one more way to fight inflation, for those who are considering selling any capital asset: sell it in an installment sale—particularly a collateralized installment sale—so that you can pay the tax many years from now in those much-depreciated dollars. That is one way to fight back, so that while inflation eats away at everything else, at least it will eat away at the money you pay in taxes, too.

I prepared the accompanying chart from the government’s statistics, because I think the chart clearly shows how serious the problem is. Every American should see it.—Stan Crow

  With the recent less-than-pleasant economic news, there are those who are urging the government to undertake more economic stimulus. So, here’s my handy guide to help the average person to know which economic stimulus proposals are likely to work, and which ones won’t.

 Comments:

1. Economic growth results from growth in investments. By its very nature, an "investment" is the pursuit of profit through the application of capital and resources now. Because investors are looking to maximize that profit, they look for investments which can be expected to produce a return this year, next year, the year after that, and for foreseeable years after that. If government offers some incentive program which will enhance return only in the next six or 12 months, that incentive will do very little to make a doubtful investment look any better. At the least, it’s unlikely that a little boost to return just in the next several months will change a decision not to build a manufacturing plant into a decision to build one. If the boost to return is only short-term, it will make almost no difference in the overall profitability of the investment.

2. The same goes for hiring new workers. The cost of training workers and paying for their benefits is sufficiently great that a short-term incentive from the government will cause only a few potential employers to undertake that cost, unless they were going to add those employees anyway (in which case the incentive is entirely wasted). If, however, the potential employer can forecast steady or even declining costs over the long term, the incentive to hire and train increases substantially.

3. Stimulus programs that are targeted to favored industries accomplish little, because their greatest tendency is to shift activity from one industry or company to the favored company or industry.

4. When a stimulus program puts officials in charge of deciding who may participate and who may not, the program is inherently corrupt: politically, if not monetarily. It makes an honest and unbiased evaluation of the best use of the money almost impossible.

5. The "cash for clunkers" program was actually the opposite of a stimulus, because for the most part it merely shifted the timing of the buying of cars (to buy before the program expired rather than later). Its more serious defect, though, was that it caused the destruction of previously manufactured vehicles which still had remaining useful life. Imagine, for example, what the effect would be if the government were to announce that all new cars that are bought in 2011 will be destroyed by the government in 2016. Because everyone would know that the useful life of those cars would be only five years, their initial value would be substantially reduced and their contribution to economic growth now would be reduced (and manufacturers would have an incentive to produce junky cars to start with, in the knowledge that the cars would soon be junk anyway). Can anyone imagine a program that dumb?

6. Oh, you’re right. That’s what "cash for clunkers" amounted to.

7. Why is it that government efforts to create demand by paying people so that they have money to spend are less effective as a stimulus than governmental cost-cutting (such as by reducing taxes)? One major reason is that investors aren’t blind; they see that the demand is fostered by the government, and they know that they can’t assume that the demand will continue when the government program ends. So, they have little incentive to invest in long-term production to meet a demand that will likely fizzle very quickly. Another major reason is this: businesses rarely get ideas for new products from would-be customers who come in the door to ask for a product that doesn’t exist. Instead, businesses get ideas for new products for which there is no demand at all, but for which the businesses can foresee a demand. As just one of probably millions of examples, no customer created demand for an I-Pad; Apple built it, and the customers came running. That is how economic growth occurs. (That is what is known as the "supply side".)

8. On June 19, 2009, the Federal Reserve Bank of San Francisco’s "Economic Letter" reported on studies which concluded that government spending actually reduces economic growth; that is, a dollar in government spending fails to produce even a full dollar in economic output, to recoup the dollar spent. The Economic Letter reported on studies which showed, in contrast, that cutting taxes has a positive multiplier of as much as 3:1, meaning that for every dollar in tax cuts the economy may grow by three times that. This evidence contradicts the Keynsian doctrine which was long dominant, that government could restore the economy to health by increased government spending. A very big error in that doctrine was that it failed to take into account that taxpayers aren’t blind about government spending, just as businesses aren’t blind about demand fostered by government; taxpayers know that increased spending is very strong evidence that taxes will go up, which means that costs will go up, which means that investments will be less profitable than they would have been otherwise. Less profit means less investment. Oops. Maybe that’s why Keynsians can’t point to any instances in which their beliefs clearly worked.

9.  See why S.Crow Collateral Corp. favors deferring taxes, with collateralized installment sales?  To reduce the cost of investments, and in so doing to increase economic growth.—Stan Crow

On Chris Wallace’s "Fox News Sunday" show on May 29, Chris Wallace interviewed two members of Congress about their differing approaches to dealing with the federal deficit. One of them, Rep. E______, whose name I’ll withhold here to spare the person’s embarrassment, argued in favor of raising taxes (raising tax rates on income of the "wealthy", raising the estate tax, and taxing capital gains as ordinary income) on the ground that the wealthy "haven’t put that money [money they haven’t paid in taxes] back into the economy". Rep. E______ argued that the way to put that money back into the economy is to use taxes to take the money from them.

Where does Rep. E______ think that money is now? Under a mattress? Stacked in thousand-dollar bills on the coffee table? Buried in a five-gallon can in the back yard?

It should be obvious to any sentient person that money that isn’t paid in taxes is put to work in the economy as either spending or investment. Rep. E______’s argument reflects a reactionary, ideological doctrine—not thought—that the only money that accomplishes anything is the money that government takes, controls and spends. It holds that private spending is waste, but government spending is inherently beneficial. From that opinion follows the quite inevitable conclusion: taxes should be as high as possible (as should government spending, of course).

This reactionary, ideological doctrine depends upon denial of another clear truth: that the velocity of money is greater in private hands than it is in the government’s hands. Another way to say that is that money "turns over" much more slowly as it goes through the government’s collection, appropriation and bureaucratic processes than it does in private hands, with private decision-making. Therefore, money spent by the government is generally less beneficial to the economy than is money that is spent privately—a conclusion that is demonstrable without even getting to the question of whether allocation of that spending is accomplished more efficiently through the market than it is through government decree.

When S.Crow Collateral Corp. enables tax deferral through a collateralized installment sale, we are directly helping more money to be put to work in the private sector, for greater economic growth and more efficient allocation of money—money that isn’t hidden, stacked or buried. When we help you to defer your taxes, we help you to put your money to greater use, for you and for the economy as well.

If all of us could have a button on which we could click to express our "like" or "dislike" of statements made by politicians on television, and if the results would immediately show for everyone to see, maybe the amount of political silliness would decline. One would hope so, anyway.—Stan Crow

If we needed any reminder that the economy is still struggling, it comes to us frequently from borrowers whose commercial properties are worth less than the debt on them, and who face foreclosure. By the time we hear from them—such as two different borrowers in just the past two days—they have come to accept the obvious: that they’re not going to be able to retain the property. They still want to save their credit, of course, and, if they’re sufficiently informed, they’re concerned about the tax they may face when they lose the property.

That tax liability is an especially hard blow, because it seems so unjust: the borrower loses the commercial property, and then he or she gets hit with a tax liability when the lender writes off the part of the debt which wasn’t paid from the proceeds of the foreclosure sale. Moreover, the lender is in complete control about when that tax liability arises, because the lender decides when (and whether, depending on the law that applies) to write off the uncollected part of the debt. Whenever it does so, it may send an IRS Form 1099-C to you, reporting taxable income to you in the amount of the written-off debt.

I am pleased to share some good news with you. A version of the "collateralized installment sale" offers a complete solution to the cancellation-of-debt tax problem: a solution that doesn’t merely put off the problem; but ends the problem.

It can save your credit as well, but it won’t save the property for you.

That is, it will accomplish these results, if the bank (or other lender) is willing to be satisfied with whatever amount it can collect by selling the property, without coming back to you to collect the remainder.

In a nutshell, here’s what we do: S.Crow Collateral Corp. buys the property from you on an installment contract, at the amount owed. S.Crow Collateral Corp. then sells the property to the bank or other lender for that amount, which frees the lender to sell the property in its own way and its own time, unrestricted by the rules of foreclosure sales, and free of any redemption right. The price for our sale of the property to the bank is that the bank must assign your loan to us, and we then sell that loan to another lender which we bring into the picture. The terms of the installment contract are arranged to match the terms of the loan (which is no longer secured by the real estate), so that your loan payments—which will continue—will come right back to you as installment payments to you from S.Crow Collateral Corp.

Results: Your debt isn’t written off, you won’t receive that dreaded 1099-C, your property is sold rather than foreclosed, and your debt expense after closing is essentially matched by your new installment income.

(An aside:  I believe that if the lender cancels debt on a property as part of a foreclosure proceeding, the amount that is canceled would be treated as capital gain to the borrower, rather than as ordinary income, because the foreclosure is a sale of the property.  Forgiveness of debt on commercial property in a workout, however, would generally be treated as taxable ordinary income.  If the workout borrower is insolvent or in bankruptcy, however, that ordinary income could be excluded.)

Shall we put this to work for your commercial property?—Stan Crow

Note: A recent conversation between Stan Crow, president of S.Crow Collateral Corp., and Arthur P. Jensen, CPA, considered how S.Crow Collateral Corp.’s "collateralized installment sale" ("C453") transaction process fits into the tax-deferral framework provided by the Internal Revenue Code. Today we present some highlights of that conversation.

Mr. Jensen specializes in advanced tax, financial and estate planning. He is President-Wealth Strategies for The L. Warner Companies in Timonium, MD, and in that capacity advises very high-net-worth business owners and individuals from all industries, with creative tax and financial planning and tax-minimization strategies. He is also president of WealthServe, LLC, a financial and tax-services firm in Ellicott City, MD. He is consistently ranked by CPA Magazine as one of the nation’s "most influential practitioners".

Stan Crow (SC): Thank you for making time for this conversation today. I have high regard for you and for your expertise, and it is a privilege to have this opportunity to discuss a matter that interests both of us: tax deferral.

Arthur Jensen (AJ): You are welcome. Tax deferral is indeed of great interest to me, and therefore your "collateralized installment sale" or "C453" transactions greatly interest me. If I may, I will get right to a question I’ve been wanting to ask you. As you know, I have been pleased to recommend C453 to my clients, and it has been a good experience for them. I’ve been reading in The Latest Installment blog that you have made a change in how you do C453. What did you change, and why?

SC: That’s right. Until early this year, all of our C453 transactions used what we called a "collateral account" as the repository for the cash proceeds of S.Crow Collateral Corp.’s resale of assets which we bought on installment contracts. The collateral account consisted of one or more investments purchased with those cash proceeds with the seller’s consent, and those investments provided the funds to make our installment payments to our seller. The collateral account, on which our seller had a first lien, enabled our seller to have the benefit of investment of the pre-tax sale proceeds, rather than only the after-tax sale proceeds. The interest rate which we paid on the installment contract was variable, depending on how well the collateral-account investment did. The seller’s access to the collateral account was substantially restricted.

Those restrictions on the seller’s access and the administrative burden for the collateral account prompted us to look for a better way. That better way came together in March, when we received from a third-party lender an Offer of Loan Commitment, pursuant to which the lender is willing to lend to sellers in C453 transactions an amount of cash that is nearly equal to the selling price. With that, our seller walks away from the closing with an installment debt from S.Crow Collateral Corp. and non-taxable cash loan proceeds from the lender—who agrees to look only to S.Crow Collateral Corp.’s installment payments as the source of the loan repayments. Because the cash is from a loan rather than from an installment sale, our seller can have unrestricted access to the money, without any of the administrative burden that went with the collateral account.

The loan is separate from C453, however; it is not a part of C453, and the seller may accept the loan or not. A seller who prefers that the money go into a restricted collateral account may still choose that alternative.

AJ: I know that with the collateral account we had to address the question whether the seller could be deemed to be in "constructive receipt" of the money that went into the collateral account. We addressed that question successfully, but does the same issue arise with regard to the loan proceeds?

SC: I don’t see that it does. First, for there to be constructive receipt, the money would have to go from the buyer (S.Crow Collateral Corp.) to the seller, but what the seller receives comes from the lender, not us. Second, S.Crow Collateral Corp. still owes the installment debt to our seller, even though our seller also has loan proceeds. The loan proceeds aren’t credited against what we owe to our seller on the installment contract. Third, the seller is perfectly free to borrow money anywhere and at any time, with or without C453, without raising any question of constructive receipt of the sale proceeds. S.Crow Collateral Corp. introduces the seller and lender to each other, but whether or not the seller and the lender agree on a loan is strictly between them. A C453 transaction can occur whether or not they agree on a loan.

AJ: I think that makes the constructive-receipt issue even easier to deal with than it was with the "old" C453.

SC: I do, too.

AJ: I read what you wrote in The Latest Installment blog on April 20, about the codification of the economic-substance doctrine. With the "old" C453, I recall talking with attorneys who seemed to think that if a taxpayer finds a way to reduce the tax, the IRS would say that the economic-substance doctrine means that you can’t do that.

SC: I’ve heard comments like that, too, and it’s frustrating to me when advisers don’t think more carefully than that. Anyway, with either the "old" C453 or the new one, the economic-substance doctrine is easy to satisfy. That’s because in every C453, there is a real economic change in the parties’ position as a result of the installment sale, and there is a real business purpose to the transaction: one party’s desire to sell the asset, and the other party’s desire to buy it. The question is not whether to sell, but which way to sell. In reality, though, those attorneys and others who made statements like the one you mentioned were confusing constructive receipt with economic substance. They rather intuitively thought that the existence of a collateral account which would provide the money to pay the seller meant that the "economic substance" of the deal was that the seller had constructively received the money even though the seller couldn’t take or spend that money. Besides the confusion between the two doctrines, a big hole in that thinking was that Section 453 of the Internal Revenue Code explicitly says that one can take advantage of installment reporting even if payment of the installment obligation is guaranteed.

AJ: I don’t see an issue for C453 with the step-transaction doctrine, either. Do you?

SC: No, because the step-transaction doctrine is applicable in an instance in which the taxpayer sets up what purport to be a series of separate transactions, but the interim ones actually have no purpose other than to serve the next step. Typically the parties are formally obligated, when one step is completed, to move on to the next step, and then the next, and so on. With C453, there are two simultaneous transactions: the installment sale, and the separate loan (if the seller and the lender agree on the loan, which they need not). The C453 transaction can stand entirely on its own, with or without the separate loan.

It’s true that S.Crow Collateral Corp. also re-sells the asset to the ultimate buyer, and the seller usually could have chosen to sell to the ultimate buyer directly. The seller has every right, though, to choose between two competing offers: one from S.Crow Collateral Corp. for an installment purchase with its particular financing terms, and one from the ultimate buyer for a cash purchase. Sellers have been selling on installment contracts from time immemorial, long before there was any tax code or tax effect at all. To my knowledge, there has never been a tax case which said that an installment sale to an independent dealer who immediately re-sells is ineligible for installment reporting. Possibly that’s because Section 453 itself suggests otherwise!

AJ: With the new form of C453, is there any maximum deal size?

SC: No, and the new C453 offers a really cool way to defer tax on large transactions, without regard to Section 453A’s limitation to $5 million in installment sales per taxpayer per year.

AJ: Thanks for this update. I look forward to more C453 transactions for my clients.

SC: I do, too, and thanks to you, too.—Stan Crow

Everyone who engages in business does so to make money. For the customers of that business, the business managers want their prices to be, or at least to be perceived as being, modest in comparison with whatever value is provided to the customer. For the shareholders or other owners of the business, the business managers want their prices to be seen as optimum, i.e., at whatever level will produce the highest net profit overall.

It’s no different when it comes to companies which market their ways of helping their customers defer taxes on the disposition of capital assets.

For example, accommodators of tax-deferred exchanges charge very low dollar amounts up front. That makes for good marketing, but these accommodators generally don’t go out of their way to point out their other ways to make money on the deal, such as through the "float" on the exchangor’s money while the accommodator holds that money, and such as through cross-selling of title insurance, closing services, and whatever else.

Further, at least I’m not aware of any accommodator of tax-deferred exchanges who discloses to prospective exchangors the fact that exchangors, on average, over-pay for replacement properties. (One study pegs the average over-payment at 7.9%.) Exchangors tend to over-pay, because (1) the money which the accommodator is holding feels like "free" money; (2) the exchangor must spend all of that money, to avoid tax cost, regardless of the actual current value of the replacement property; (3) the rules of tax-deferred exchanges require exchangors to spend at least as much on the replacement property as was received from disposition of the relinquished property; (4) exchangors are under time pressure (the 45-day and 180-day rules) to do something quickly; and (5) exchangors’ bargaining power is reduced by that necessity to buy.

That over-payment (whether it’s 7.9% or some other number) is a very large, but hidden, cost of tax-deferred exchanges.

Then, in addition, exchangors have a carry-over tax basis in the new property (except to the extent of additional money put in), so they lose ordinary-expense tax deductions for depreciation that they could have had in future years if they had simply purchased the property outright. That loss of tax deductions is a hidden, but very real, cost over the period of ownership of that property.

So, altogether, the hidden costs of a tax-deferred exchange can easily hit 10% of the deal—a very different matter from the stated cost of, say, $500 or $700 or whatever.

Hidden costs are rife in a number of other tax-deferral processes, most of which build in ways for the promoters and their rain-makers to make money on the seller’s money over future years, but don’t say so—such as by promising a stated but rather low return to the seller, so that the promoters can keep the excess.

So, is S.Crow Collateral Corp. any different?

Yes, we’re very open and up front about the fact that S.Crow Collateral Corp. retains the entire resale proceeds and intends to make money with that money. That doesn’t cost our seller anything, though, because our seller can have non-taxable loan proceeds (from a separate transaction with a third-party lender), and can make money with that money rather than with the resale proceeds.

Therefore, not counting the money the seller makes by investing the tax money, the overall net cost to a seller for both the installment sale to S.Crow Collateral Corp. and the loan from the third-party lender and is (a) the small difference between the amount of the resale proceeds and the amount of the loan proceeds, and (b) whatever money could be made on that small difference; S.Crow Collateral Corp. has no need for any remuneration whatever from our seller, because we have the resale proceeds to invest. (Associated with the loan and the lender, there may be a modest annual payment-processing fee.)

Then, we make the price on our installment contract with our seller match whatever the amount of the lender’s loan to the seller is, and our installment payments and final payment are guaranteed completely to fund the seller’s repayment of the loan. That way, our seller need not come up with any other money to re-pay the loan.

Is that clear enough? We will keep and invest the resale proceeds and make our money there, so we don’t need to receive from our seller any other compensation, remuneration or profit, at all.

If you are ready to sell an appreciated capital asset, may we arrange for you to receive an offer from a lender, for you to consider? That loan of tax-free money will be the measure of how good the deal will be for you.—Stan Crow

The following question-and-answer series should help you to answer that question:

Q. If my client sells using a C453, who will be my client with regard to investment after the sale?

A. If the seller is your client now, your client will be the same after the C453 sale. If the seller isn’t your client now, the C453 sale will give the seller good reason to become your client and obtain your professional investment advice.

Q. Will S.Crow Collateral Corp. have any role with regard to, any connection with, or any involvement in the seller’s investment after the sale?

A. None whatever.

Q. Will S.Crow Collateral Corp. have any share in the investment return from the seller’s investment after the sale?

A. None whatever.

Q. Will S.Crow Collateral Corp. have any share in the growth in value of the investment?

A. None whatever.

Q. Will S.Crow Collateral Corp. have any say in the how the sale proceeds are invested?

A. None whatever.

Q. Who will be the owner of the investment?

A. Your client.

Q. How will a C453 sale affect how much my client can invest?

A. Your client will have more money to invest, because money that would otherwise go to pay tax on the sale can instead be productively invested.

Q. For how long?

A. As long as 30 years, and maybe longer.

Q. How much will my client be able to invest after a C453 sale?

A. An amount that is substantially equivalent to the selling price.

Q. What will be the source of that money?

A. The investable money will be in your client’s bank account, as the proceeds of your client’s separate sale of some short-term investment (maybe something as simple as a certificate of deposit) which your client acquires and holds while your client and you are working out a long-term investment strategy. The money with which your client purchases the short-term investment can be the proceeds of a long-term loan made at the same time as the C453 sale, by a lender who is introduced to your client by S.Crow Collateral Corp. but which is completely independent of S.Crow Collateral Corp.

Q. What will be the source of money with which my client will re-pay that loan?

A. S.Crow Collateral Corp.’s installment payments of interest and S.Crow Collateral Corp.’s principal payment at the end.

Q. What if S.Crow Collateral Corp. fails to pay all or any part of the amount it owes to my client?

A. The lender will agree to look only to S.Crow Collateral Corp.’s payments, through an automatic payment-processing system, so that your client will never have to pay any amount on the loan out of your client’s other resources.

Q. Is the loan secured by anything else?

A. Not as far as your client is concerned.

Q. Why is the lender willing to lend nearly 100% of the selling price?

A. The lender lends against S.Crow Collateral Corp.’s cash.

Q. Why is S.Crow Collateral Corp. willing to allow its cash to be used to back up the lender’s loan to my client?

A. S.Crow Collateral Corp. receives some compensation from the lender for allowing that. Besides, S.Crow Collateral Corp. knows that as long as it makes the required installment payments, the required loan payments will necessarily be made, too, and the lender won’t make any claim against S.Crow Collateral Corp.’s cash.

Q. If my client intends to re-invest in a like-kind business or investment property, wouldn’t my client be just as well served by a tax-deferred exchange?

A. No, because (1) both an economic study and oft-repeated experience show that exchangors typically over-pay for replacement property when they use money held by an exchange accommodator (it feels like, but isn’t, free money); (2) exchangors select and buy under rather extreme time constraints, with consequent diminished bargaining power; (3) exchangors can’t de-leverage without adverse tax consequences; (4) exchangors forego a step-up in basis on the new property on purchase, and are stuck with a carry-over basis, increased only to the extent that they put in new money; (5) in this market, a substantial percentage of would-be tax-deferred exchanges fail, for financing or other reasons; and (6) exchanges limit your ability to provide the full range of investment advice, because exchangors are limited to buying something like ("like kind") what they sold, regardless whether that’s wise.

Q. If I recommend that my client consider a C453, will that make me in any way responsible for the outcome of the C453 transaction or the tax treatment of it?

A. No. In the first place, you should only advise your client to consider the possibility of a C453; it’s really not your business to recommend one form of sale vs. another. In the second place, your role is with regard to the investment of the proceeds, but the proceeds that will be invested will be drawn from your client’s bank account, and the money in the bank account will in turn come from the sale of a short-term investment as mentioned above, not from the C453 transaction. In the third place, I hope that you don’t give tax advice, unless you’re licensed to do so.

Q. What is the risk that the C453 sale might not be tax-deferred?

A. That’s for your client’s tax adviser to assess, but installment sales have been deferred transactions for 98 years now, under the Internal Revenue Code. This is not some new thing, like the comparatively recent innovation of tax-deferred exchanges.

Q. Should my client "just pay the tax" while tax rates are low?

A. Only if (a) your client’s time horizon is really short, (b) your client intends to sell the asset and put the money under a mattress, and (c) your client believes that inflation will be zero over the tax-deferral period. No one is suggesting that tax rates will or even might rise enough to cost more than (a) the income one could make by investing the tax money in the interim and (2) the tax savings from paying the tax at the end, many years from now, in depreciated dollars because of inflation.

So, what do you think, about C453 as a potential selling method for your client?—Stan Crow

More, because more deals get done when reluctance to sell, because of the tax cost, goes away.

More, because with a collateralized installment sale ("C453") a second transaction (a resale by the C453 dealer) occurs simultaneously, with a consequent additional commission opportunity.

More, because the C453 seller walks away from the deal with non-taxable cash which the seller will want to invest, and which the seller may choose to invest in further commission-related transactions.

More, because the C453 seller doesn’t have to wait for a suitable replacement property to be found, as would be required in a tax-deferred exchange.

More, because the C453 seller may have more pricing flexibility, because of the tax savings.

More, because most other brokers don’t yet have C453 as one of their tools to offer to sellers.

More, because the C453 seller has the alternative of selling the entity which owns the real estate rather than the real estate itself, while still enjoying tax deferral.

More, because a part owner of real estate may sell his or her interest via C453, whether or not the other owners do the same.

More, because a C453 seller who buys replacement real estate is tax-advantaged in that real estate, as compared with an exchangor in a tax-deferred exchange who buys replacement real estate.

More, because a C453 seller can defer the tax from relief-of-debt-over-basis.

More, because a C453 seller can de-leverage on sale without adverse tax consequences, and need not re-leverage when replacement property is acquired.

More, because a C453 seller can take full advantage of market conditions upon re-investment, rather than be limited by market conditions (the seller’s being able to sell right and buy right makes for a happy, returning customer).

More, because C453 is both an exit strategy and a re-investment strategy, so that the universe of potential seller-customers is far broader.

More, because C453 is now blessedly simple to explain to a seller, with no post-closing complications (no trusts, no annuities, no specially created entities, no one else sharing in the seller’s post-sale investment return).

What’s in your toolbox?—Stan Crow

In my post on April 18, I said I would now address how you can arm yourself against the fairly widespread misunderstanding and mis-use of the doctrine of "economic substance", now codified as part of the Internal Revenue Code.

I’ll do that now, with what may well come as a surprise: I contend that if you’re doing what you should do, the codified "economic substance" doctrine is a pro-taxpayer provision, and not a reason to fear that your transaction will be "done in" by the Internal Revenue Service.

From my post on April 18, I’ll repeat just one part: All too many tax advisers rather off-handedly think that the economic substance requirement should be understood as meaning, "If treating this transaction as an ‘x’ transaction rather than as a ‘y’ transaction would result in a higher tax, the IRS has the right to say it really is ‘x’ and to tax it accordingly."

The statute says no such thing. To the contrary, the doctrine as now codified establishes a two-pronged test, as follows:

1. The Objective Test: For the transaction to achieve the desired tax result, the transaction must change in a meaningful way (apart from the income-tax effects) the taxpayer’s economic position; and

2. The Subjective Test: For the transaction to achieve the desired tax result, the taxpayer must have a substantial purpose (apart from the income-tax effects) for entering into the transaction.

(An exception to the latter is those instances in which Congress creates a tax benefit for the explicit purpose of encouraging people to enter into certain transactions.)

Do you see? If your economic position (besides your tax position) will change meaningfully as a result of the deal, and if you have a substantial business purpose for doing the deal, then you’re in the clear, and you may structure the transaction however you and the other party agree, to achieve your tax objectives.

As was said by the Federal Circuit Court of Appeals in Coltec Indus. v. United States, 454 F.3d 1340, 1357 (2006), structuring a transaction in a particular way to provide a tax benefit is legitimate, whereas creating a transaction just to get a tax benefit is not, if the transaction has no other business purpose. If you are creating a transaction solely for the tax benefits, I don’t have much sympathy for you.

I said above that "if you’re doing what you should do," the doctrine is in your favor as a taxpayer. If you’re doing what you should do, it’s the deal, not the tax, that is the driving motivation. When that’s the case, the economic substance doctrine protects your deal. If the objective test and the subjective test are satisfied with substantive reasons to do a deal, then the taxpayer is free to structure that deal for the best available tax benefit. The IRS then has no authority to second-guess the chosen deal structure. (If it could, our freedoms would quickly evaporate.)

In every situation in which S.Crow Collateral Corp. has been asked to consider entering into a transaction with a taxpayer, it has always been a question of this or that, not this or nothing. Therefore, in every one of those situations, the taxpayer had already decided that a meaningful change in his or her economic position was going to occur, and that it was going to occur whatever the tax result was going to be. The reason why the taxpayer came to S.Crow Collateral Corp. was to inquire whether the desired change in economic position could be made better in a transaction with S.Crow Collateral Corp. in lieu of some alternative transaction.

In every transaction in which S.Crow Collateral Corp. is involved, there is a real transfer of ownership of something (real property, a business, a professional practice, whatever) from one party to another, so the parties’ economic positions are very substantially changed when the deal closes. In every transaction in which S.Crow Collateral Corp. is involved, there are substantial reasons to do the deal regardless, although the parties also want to get the best tax deal they can.

Many advisers, thinking rather abstractly, fail to understand that in most situations the question is not whether a transaction will occur; it is a question of which way the transaction will occur, or which of two alternative transactions will occur. They miss the point that the economic-substance doctrine applies to the whether-to-do-a-deal question, but not then to the taxpayer’s choice of which way to do that deal.

I should add a further caution: If you as a taxpayer try to "gin up" your own counterparty to enter into a transaction with you, you run the risk of failing to achieve your tax objective, because you may be too much in control of both sides of the deal. Be sure to deal with a counterparty who is fully independent of, and unrelated to, you: a party who is pursuing that party’s own economic gain and business purposes.

So, my advice for taxpayers is as follows: (1) Do real deals. (2) If your motivation for doing some transaction is real, without regard to taxes, don’t be afraid to structure your transaction in a new and tax-advantageous way, with a fully independent counterparty.

My advice to advisers is as follows: (1) Be sure that your advice takes into account current market conditions; if you recommend a well-tried method (say, for example, a tax-deferred exchange) but current market conditions make it unlikely that the transaction you recommend (such as an exchange) will succeed, what good have you done for your client? Where then is the tax deferral, if the transaction itself fails? (2) Apply the two-pronged economic-substance test as it really is, to the whether-to-do-a-deal question, not the which-deal question. (3) Resist conceding authority to the IRS that it doesn’t have; every time you do that, some freedom is lost. (4) Be willing to examine both what’s familiar and what isn’t, because neither the familiar nor the unfamiliar is presumptively better than the other is.—Stan Crow

The tax-advising professions perform a highly important service to both taxpayers and taxing agencies. Some of the nation’s brightest minds are engaged in this activity, and, overall, their work should lead to an increasingly rational and consistent taxing system.

That’s the hope, anyway.

The risk of a dis-service to taxpayers, taxing agencies and the taxing system increases dramatically when professionals who do not regularly study tax issues presume to pronounce off the cuff on matters which they’ve not previously addressed. If such a professional is a taxpayer’s CPA or lawyer, for example, the client has little choice but to accept the professional’s advice, although the professional may know next to nothing about the particular matter at hand.

Why does the professional wing it? Let me speculate.

I think often it’s because the professional doesn’t want to research the matter without being paid to do so, and he or she thinks the client won’t want to pay for the research time. Or, it may be because the professional doesn’t want to display any lack of knowledge, for fear of losing the client’s respect. Or, it may be that he doesn’t enjoy research work.

Or, the professional may fear being sued if his advice turns out to be wrong.

So why would a professional who fears being sued dare to wing it with tax advice? Because there is one way that will seem safe to do so: In any circumstance in which the professional doesn’t know the answer, he can tell the client to pay the maximum amount that could possibly be due in taxes. That way, the IRS or a state or local taxing agency won’t challenge the taxpayer, and, with the taxpayer facing no challenge, the taxpayer is unlikely to challenge the professional’s tax advice.

All of that is speculation on my part, although I’ve heard tax advisers speak rather cavalierly about their clients’ money. "Well, they can afford it. It’s only $1 million that they’ll have to pay." Or, "I’ve told them that they should just pay the tax. That’s easier."

That said, I think that the biggest reason of all for a casual readiness to advise clients to pay more tax than might well be necessary is a belief that of all the taxing agencies, the IRS has the right to re-structure transactions in whatever way will produce the highest tax liability. The IRS does not have that right, but countless professionals have been cowed into thinking that it does. It’s almost a litany: "If treating this transaction as an ‘x’ transaction rather than as a ‘y’ transaction would result in a higher tax, the IRS has the right to say it really is ‘x’ and to tax it accordingly."

That is a gross distortion of the codified economic-substance doctrine, but for whatever reason—whether or not for the reasons I’ve speculated about above—that distortion is rampant among on-again-off-again tax advisers.

What can be done about it? I don’t know in general, but you can arm yourself with the next edition of The Latest Installment, for some much-needed clarification about the economic-substance doctrine.—Stan Crow

If you owe more on your property—whether it’s business, investment or personal property—than it is worth, and you face a potential tax liability for relief of debt when the lender does not collect the full amount owed, it’s not hard to avoid that tax cost.

I will explain here how that is accomplished, but remember that all of this is applicable only in the event that the lender is willing to take the property back and release you from the debt.

First (see illustration below): Sell the property to S.Crow Collateral Corp. on an installment contract which calls for interest-only payments to you, with the whole principal due at the end of the contract term. We use what we rather loosely call a "collateralized" installment sale contract—and I say "loosely", because, strictly speaking, it’s not collateralized with security. As you will see shortly, however, it’s done in such a way that it’s as good as if it were collateralized with security.

Second: S.Crow Collateral Corp. sells the property to the bank or other lender to which you are indebted, and in return the bank or other lender agrees to assign your debt to us or to another lender whom we designate. Of course, when the debt is assigned the lien on the property is released, because the lender doesn’t want to take the property back from you and not have a free hand to sell the property to some other buyer. The lien is released, but the debt isn’t.

Third: The replacement lender whom we bring into the picture receives the assignment of your debt from your existing lender.

Fourth: The replacement lender and you amend the now-assigned loan agreement, so that it calls for interest-only payments matching the interest-only installment payments from S.Crow Collateral Corp.

Fifth: Both you and S.Crow Collateral Corp. sign escrow instructions with an escrowholder, and pursuant to those instructions S.Crow Collateral Corp. thereafter pays its installment payments into escrow for credit to you.

Sixth: The escrowholder, on your behalf, transfers the money it has received on your behalf (as installment payments from S.Crow Collateral Corp.) to the replacement lender, as loan payments on your behalf. Importantly, the replacement lender agrees to look only to those installment payments to collect on your debt. When S.Crow Collateral Corp. makes the final payment pursuant to the installment contract, that fully pays your indebtedness to the replacement lender.

Result: Voila! There is no tax on relief of debt, because you fully pay the debt.—Stan Crow

Our Flagship Transaction

As our regular readers may know, S.Crow Collateral Corp.’s "flagship" transaction is the "collateralized installment sale", or "C453" for short (named after a section in the tax code). With C453, we buy capital assets of all kinds, for resale. The typical seller to S.Crow Collateral Corp. is one for whom the sale will produce considerable taxable gain, whether from appreciation in value, depreciated tax basis, or debt over basis.  The asset may be unencumbered, or the owner may need or wish to de-leverage without adverse tax consequences. All of that works really, really well.

Our Flagship Relationship  

What really sets C453 so far apart from—and so far ahead of—the competition is our flagship relationship. S.Crow Collateral Corp. now has a standing loan-commitment offer from a lender, pursuant to which our sellers can take full cash out of the deal but still defer the tax on the sale for many years. 

Tax Deferral Stretching Long into the Future

The tax-deferral part is simple and has been in place since the very beginning of the U.S. income tax in 1913: the gain on installment sales is taxed when the principal purchase price is paid, not when the sale occurs. The tax code places no limit on how long the tax deferral can continue, and if the installment payments are interest-only, the tax on the capital gain can be entirely deferred until the end of the installment contract—10, 20, 30 or more years away.

Non-taxable Cash in Hand

The loan transaction is completely separate, and optional. With the loan proceeds, our seller has non-taxable borrowed money instead of taxable sale proceeds.  Our seller may use the loan proceeds for any business or investment purpose, to retire business debt, or whatever.

Automatic Repayment, from Installment Payments Alone

S.Crow Collateral Corp.’s interest-only installment payments will fund all of our seller’s payments (also interest-only) on the loan through an automatic payment credit-and-debit process. S.Crow Collateral Corp.’s final principal payment will fund our seller’s final principal payment on the loan, through the same automatic credit-and-debit process. With that process in place, the lender agrees not to look to our seller’s other resources for repayment of either the loan interest or principal.

No Assets Are Encumbered

The lender is an affiliate of a mortgage lender with whom we have done business for many years, but these loans are not mortgage loans and are not limited to real-property transactions. The loan does not encumber any of the assets of our seller—not even the installment contract itself.

Timing, Sales Commission, Deal Size or Type

Please note:  S.Crow Collateral Corp. purchases for immediate cash resale.  For that reason:

1.    If we buy, the closing of our purchase will not occur until the closing occurs for our resale;

2.    If we buy, any broker’s or agent’s existing sales-commission listing will continue in place until the resale to a final buyer is in place, but the sales commission may increase because of the second sale; 

3.    We are indifferent about the type of property or the size of the deal (although installment sales of more than $5 million per selling owner require a further process not described here); and

4.    We can execute the purchase contract before a final buyer is in place, or at any time before the closing of a sale to a final buyer, without, in either case, delaying, interfering with, or adversely affecting the final buyer.  (In some instances, however, the final buyer’s after-tax, after-purchase position may be improved.)

If you want to sell, but you’re thinking that you will "just pay the tax", you need to re-think.  Unless you intend to spend the sale proceeds immediately in riotous living, paying the tax now is hardly ever the wisest decision, regardless whether the current tax rate is high or low.  That is because (1) your return on investment after the sale, if you defer the tax, should rise by more than the tax rate (for an explanation why that is so, call me), and (2) the tax liability is not adjusted for inflation, but will be paid maybe 10, 20 or 30 years from now in dollars that may be worth much less than they are today.  The latter factor alone should far more than compensate for any future tax-rate increase.

Come on board our flagship. There’s still room for you.—Stan Crow

It may surprise you that I raise this question, since one consequence of S.Crow Collateral Corp.’s business as a dealer in capital assets is an opportunity for our sellers to defer tax payment. You may well think that those who do what we do would either (1) never think about the question, or (2) unthinkingly believe that deferring taxes is right up there with motherhood and apple pie, or (3) feel ill at ease about what we do but proceed to do it anyway.

I expect that there are those who view helping people to defer taxes as being on a par with being a dealer in illegal drugs, who profits from other people’s addictions.

Not surprisingly, I don’t see it that way at all.

Tax Deferral: A Pressure Valve, to Mitigate Unfairness

Maybe there are a few innocent souls who still believe that whatever the law requires is fair. I, too, believe that the pursuit of fairness is a motivation for much of what the law seeks to do.

The federal tax code is a particularly egregious offender against the principle of fairness, however, because of these factors, among others: (1) Its flagrant discriminations in favor of some lawful activities and against others and in favor of some categories of persons or entities and against others; (2) its mind-numbing complexity that makes it impossible for even the experts to agree on what the law requires and what it prohibits; and (3) its propensity to change the rules of the game after investments and business pursuits are already in play in reliance on the previous rules.

Possibly in implicit recognition of the tax code’s violations of the principle of fairness, the code itself contains some pressure valves which taxpayers can use to mitigate the unfairness, to some degree. One of those pressure valves is the code’s limited provisions for tax deferral, so that the burden of the tax can be softened by being spread over time. Therefore, when taxpayers defer some of their tax burden, they are doing what Congress itself envisioned would need to be done.

This concept is analogous to what became known in Anglo-American law as "courts of equity", which were empowered to render judgments that were "equitable" or "fair" in spite of the harsh outcome which would otherwise be required by the law. Courts of equity served as the pressure valve—a concept which has ancient provenance in the common law which came down to us from England.

Tax Deferral: Survival for Small Business

Even if the tax code were easy to understand and were friendly to small business, the financial hurdles which a small business must surmount to achieve success are formidable—as anyone who has started a small business can attest. It’s popular among politicians to proclaim how adoring they are about small business, but those same politicians will try to downplay or hide the effects of their policies on the very businesses they claim to love. When a small business’ margin between success and failure is fairly narrow, as it usually is, the business’ tax cost can be the last straw. To the extent that tax deferral can spread that tax cost over the future life of that business, tax deferral may allow the business the time it needs to become strong. When that happens, that helps both the economy and government revenues to grow.

Tax Deferral: Less Economic Distortion from Excessive Tax Rates

Today’s tax rates distort economic activity in wildly inconsistent and unproductive ways; they greatly complicate compliance and business planning; and they don’t even succeed in raising the revenue which their proponents promised. Many others have said as much. I don’t think anyone else has made my point, however, which is this: tax deferral is a quite effective way to address some of those distortions, by the softening effect of spreading the tax over time, and by allowing business greater room to take entrepreneurial risk. It would be much better if Congress would lighten the load directly, but at least tax deferral helps to spread out the load. Otherwise, the government wouldn’t collect the revenue anyway, because less entrepreneurial activity would occur.

My Wish: That Congress Would Make Our Work Unnecessary

In an ideal world, Congress would simplify the tax code and reduce tax rates on everyone, not just for those people whom Congress wants to favor or for those with whom it wants to curry favor. Fairness would be more generally achieved, small business would prosper, and economic distortions would decline. That would make tax deferral unnecessary.

That’ll be the day.—Stan Crow

This is a case of having one’s cake and eating it, too.

In this transaction which we just closed, the seller faced a substantial capital-gains tax on the sale of an investment property. The seller wanted freedom from property management, didn’t want to go back into real estate, and didn’t want to face the high costs (and risks) that would be associated with owning a fractional interest in real estate managed by someone else.

S.Crow Collateral Corp. provided the solution: a collateralized installment sale paired with a loan to our seller from a third party, with an automatic payment-processing arrangement by which our installment payments assuredly make the loan payments for our seller.

Anyone who sells on an installment basis could seek to borrow money on the strength of the installment contract. That is legally permissible, but the loan amount would normally be at a substantial discount to the amount that is owed on the installment contract, and tax deferral would be lost if the installment contract were pledged or assigned.

With S.Crow Collateral Corp.’s collateralized installment sale, however, our seller can borrow 100% of the amount which we owe to our seller, with no pledge or assignment, but with an automatic payment-processing system which assures our seller (and the lender) that our installment payments really will make the loan payments for our seller.

When done right, our seller achieves tax and financial neutrality for the installment payments received and loan payments paid; the interest received balances the interest cost. Each year thereafter, the payment-processor will report the interest-expense and interest-received numbers (which will match) for our seller’s tax returns.

Our seller then invests the loan proceeds with complete freedom and control, unhampered by the installment contract.

No other approach can match these results: not 1031 exchanges, not contributing property into an "up REIT" or "down REIT", not a "structured sale", not a "deferred sales trust"—nothing.

Are you ready for your cake?—Stan Crow

Every physician and everyone who is an adviser to physicians should get up to speed quickly on their tax, estate and investment planning for the "wave of frantic consolidation in the health industry", as it was put in yesterday’s edition of The Wall Street Journal, by Lloyd M. Krieger.

Mr. Krieger commented on a phenomenon which most of us have observed in our own communities:

"Doctors and hospitals, meanwhile, have decided that they cannot survive [i.e., satisfy the requirements of last year’s health-care reform legislation] unless they achieve massive size—and fast. Six years ago, doctors owned more than two-thirds of U.S. medical practices, according to the Medical Group Management Association. By next year, nearly two-thirds will be salaried employees of larger institutions."

Hit Three Times

No doubt you’ve already seen doctors near you sell their practices, but this trend—this "wave"—is really only just beginning. Those doctors who plan to sell their practices, and those who advise them, need to prepare now, to avoid being hit three times: (1) In how they must conduct their practices to comply with the new legislation; (2) in the tax bill that will face them when they sell; and (3) when they invest the proceeds of sale and plan their estates.

Tax Advisers: Solve the Tax Problem, By Using C453

To overcome the tax hit, there aren’t many alternatives. The best one of which I know is to sell the practice with a collateralized installment sale (called a "C453", after Section 453 of the Internal Revenue Code) to a dealer in capital assets who will simultaneously re-sell the practice to the buyer (the hospital, larger provider group, whatever) for cash. In this way, the selling physicians should be able, after the sale, to invest an amount that is approximately equivalent to the pre-tax proceeds of the dealer’s resale of their practices. (Yes, that’s right. Read that sentence again.)

Estate Planners and Investment Advisers: Plan a Larger Estate and Invest More, with C453

Those physicians who sell with a C453 will have more money to invest than they would otherwise have. There will be new opportunities and mechanisms to implement for estate planning. It would be best to get educated now.

Flexibility for Each Physician

With a C453, it’s not necessary that all of the selling physicians in a multiple-physician practice use a C453 or, if they do, to structure it, or to invest the resulting money, in the same way that everyone else does. (See my comments about "freedom of contract" on February 19.)

The wave is coming. Let’s ride it, not be drowned by it.—Stan Crow

How can one sell an appreciated capital asset, defer the tax on sale, and not have either the asset or the sale proceeds count against one’s eligibility for subsidized long-term care under Medicaid? As in so many other situations, the answer can be found in a collateralized installment sale ("C453") transaction.

A C453 transaction is an installment sale of the capital asset to a dealer in capital assets. Because the C453 is an installment sale, the seller can report the sale as such on IRS Form 6252 under Section 453 of the Internal Revenue Code, and thereby defer payment of the capital-gains tax until the principal is received. Because receipt of the principal can be deferred for whatever period of time is specified in the C453 agreement, payment of the tax can be deferred that long, too—20 years, 30 years, or even longer.

When the dealer buys the asset on a C453 contract, the dealer turns around and re-sells the asset for cash. By agreement, the cash from the resale can be placed into a "collateral account" at a bank or financial-services firm, where the collateral account is safely set aside, invested and managed to assure that the installment payments owed by the dealer really will be paid. The collateral account is in the dealer’s name, but the seller has a lien on that account. Because the pre-tax resale proceeds are invested, the return on investment should be considerably higher than it would be if the seller had paid the tax and then invested only what was left.

So, notice these facts about a C453 sale:

1. The sale is not a transfer for less than value (i.e., it’s not a gift);

2. The installment contract itself is an asset of the seller, but the collateral account which contains the invested money isn’t; and

3. The collateral account isn’t a trust set up by the seller.

All three of those facts may help to protect the collateral account under Medicaid’s "lookback provisions", in the event that the seller needs long-term care and wants Medicaid assistance to pay for that long-term care. (For further information, see www.longtermcarelink.net/eldercare/medicaid_long_term_care.htm#1.)

In Alan Murray’s review in The Wall Street Journal on Thursday of The Comeback by Gary Shapiro, there is this paragraph:

"Mr. Shapiro focuses on innovation, which he argues is (America’s) great competitive advantage, the source of American exceptionalism. It is easy to think of innovation as something that just happens, but it is in fact embedded in a social and political matrix. Innovation, Mr. Shapiro writes, ‘is the fortunate result of our nation’s rich and unique stew of individual liberty, constitutional democracy, limited government, free enterprise, social mobility, ethnic diversity, immigrant assimilation, intellectual freedom, property rights and the rule of law. I can’t deconstruct how each factor makes its individual contribution, but I believe each is vitally important.’ "

During the 40-year period from 1897 to 1937, freedom of contract was held by the U.S. Supreme Court to be substantively protected under the Fourteenth Amendment. That is no longer the case. (For a review of the history of constitutional protection for freedom of contract, see David E. Bernstein, Freedom of Contract, George Mason University School of Law, www.law.gmu.edu/assets/files/publications/working_papers/08-51%20Freedom%20of%20Contract.pdf)

The surest way to increase your net worth is to have more money that is at work producing return on investment. The surest way to have more money at work producing return is to be able to increase your invested capital. The surest way to increase your invested capital is to defer legally the payment of taxes and then to add that money to your invested capital.

That’s a way to turn your nest egg into a golden egg.

Think of it this way: Think of your largest recurring expense and then imagine that the ones to whom you pay that money would say to you, "We’ll continue to provide our products or services to you at no out-of-pocket cost to you for 30 years. At the end of 30 years, you can pay us what you would otherwise have paid us during that 30 years, with no interest cost added on. We may even agree to extend the 30 years." Would you take the deal?

"In a heartbeat," I hear you say, and with good reason, because you know intuitively that (1) putting off an expense is the same as reducing the expense through discounting the future expense to its value today, and (2) you can invest the money now and make more money with it in the meantime.

That’s exactly what you can do, with deferral of the capital gains tax (and in some instances the ordinary income tax). You can use that money to create your own investment fund, be it a distressed-assets fund, an opportunity fund, a value fund, or whatever else. Whatever your chosen investment strategy is, you’re then using almost "found" money with which to invest and out of the expected growth of which to pay the taxes later.

Or, suppose that you have a distressed asset and that you also have another asset which you can sell at a gain. You can sell that appreciated asset, defer the tax, and use the tax money to rescue the distressed asset.

Be careful, though; as Shakespeare wrote in The Merchant of Venice, "All that glitters is not gold" (or as he should have said, "Not all that glitters is gold").

It’s wise to be skeptical, if your skepticism causes you to seek information on which to base a decision.—Stan Crow

An unintendedly illuminating conversation occurred between another lawyer and me last week. I think I came away from it knowing more than before, but what he said suggested that, if anything, he knew less afterward than before.

The conversation pertained to the meaning of two particular Idaho statutes, which I regarded to be very clear in their meaning. He read the same words which I did, but he expressed the view that there might be some hidden or unexpressed limitation or condition that, when known, would change the meaning of the words as actually expressed. He could not identify what might be unexpressed, but he said he wasn’t "at ease" that the words meant what they said on their face.

He and I were not on opposite sides of any issue, and we were working together, not as competitors or adversaries. I was "at ease" with reading the words for what they said, but he could only be "at ease" if a government agency or court would tell him, "Yes, those words mean exactly what they say." He gets paid to be an expert in the law, but he is afraid to take a position as an expert would.

I have observed this kind of thinking for many years, but not often with lawyers. (Lawyers often try to cause words to be construed this way or that, to serve a client’s interest, but the inability on the part of this lawyer to trust his own reading was new to me.) In our system, courts have the last word (unless overridden by new law) on the meanings of words in statutes and regulations, but until that last word is spoken, each of us has as much right to read for ourselves as the next person or any official does.

Because of what I do, where I usually run across this distrust of the meaning of words is in regard to taxes, as governed by statutes, regulations and rulings. It has been hard for me to understand that distrust—especially when the one who is afraid to take a position on the meaning of the words is a person who provides tax advice professionally.

After my conversation last week, I realized that deconstructionism—what was once an esoteric subject of discussion for philosophers (beginning with Jacques Derrida)—now affects even how much we pay in taxes, because so many people are unwilling to trust the meanings of words in the tax law.

If this view of things were to prevail, your life, liberty and property would not be secure, because there would be no fixed line to provide a boundary around them.

I write about this for three reasons:

1. Giving Your Rights Away

I write in the hope that readers will become more aware of deconstructionist tendencies in their thinking. Why do I care? Because the more widespread such thinking becomes, the more we become servants of whoever is in power, rather than free people with protected liberties. If you think as a deconstructionist, you are simply giving away your rights, and you have no one but yourself to blame for their loss.

2. The Law Is What It Is

I hope that you will resist the idea that the law is what officials say it is. We don’t live in Russia, and we shouldn’t act like it. We have the right to insist that the law as adopted be the law which governs.

3. The Good News

I want you to know the good news: deconstructionist thinking is doomed to failure, and necessarily so, because it is impossible to live one’s life as a consistent deconstructionist. If we run a red light, we won’t persuade anyone with an argument that red doesn’t really mean red, but has other unstated conditions and limitations. When we raise children, we teach them to obey the rules we set, and not to seek excuse on the ground that there really are no lines between what is allowed and what isn’t. When we vote for those who will serve in our legislatures, city councils, and Congress, we want the winners to vote in accord with their mandate, rather than to deny all meaning to the voice of the voters. We don’t want someone in power, if they think that "x" means both one thing and its opposite at the same time. These and countless other examples demonstrate that we pursue fixed or stable meaning in our daily lives. It’s impossible to live as a deconstructionist, so we shouldn’t think as a deconstructionist.

Back to taxes: When it comes to how a transaction of yours will be taxed, don’t give away to the IRS the right to say what the words in the law mean. The IRS is no more able to read the words than you and your advisers are. The IRS’ opinion is its opinion. Insist on your right to read and on your right to settled meanings, or lose that right and much else besides.—Stan Crow

Last week I wrote about the new pairing of collateralized installment sale ("C453") transactions with "separate third-party lending that is available to our sellers, if they so choose and if they agree on terms with the lender."

Now I can announce the roll-out of a new opportunity for interested readers to participate in the loan fees which these transactions generate.

Please understand that the loan fee is the lender’s, not S.Crow Collateral Corp.’s, and the decision is the lender’s. Nevertheless, if you bring a C453 seller to S.Crow Collateral Corp. and that seller decides on a loan with the third-party lender, you have every right to ask to share in the lender’s loan fee, just as you have the right, with full disclosure, to ask for a referral fee from S.Crow Collateral Corp. for the C453 transaction (assuming that you are not precluded from doing so by any requirement of your profession).

So, if you know someone who is preparing to sell a capital asset—real estate (whether business or personal), a business, a partnership interest, a professional practice, whatever—and this person wants to defer (and therefore minimize) the capital-gains tax on sale, don’t just sit on your hands about it. Contact us about the possibility, and thereby do yourself and your friend a favor.

I use the word "favor" there in the colloquial sense of an act of kindness, although your action is profit-motivated as well as being a kindness.

That observation is my cue to speak my piece on the point: Engaging in transactions for profit, when both parties are free to participate or not, is itself a kindness.

Here’s why: When seller and buyer freely choose to enter into a transaction together on terms which they both freely accept, then it is necessarily so that each of them judges the deal to be advantageous. That being so, both of them necessarily gain advantage by the exchange of one thing for another. If "A" provides a service or product at a price which "B" deems to be acceptable, then two mutually reinforcing judgments are being made: "A" is deciding that the money is worth more to him or her than retaining the product or service would be, and "B" is deciding that obtaining the product or service is worth more to him or her than retaining the money would be. Both of them get what they want.

Therefore, if you acquaint your friend with the opportunity for a C453 transaction and separate loan and your friend decides that the benefits of the C453 and the loan are worth the transaction costs, then not only have you performed a kindness for your friend, but also you have helped your friend and yourself to profit financially.

That illustration demonstrates the truth that when transactions are freely chosen and not compelled, every participant benefits, and every participant is better off afterward, according to his or her own evaluation of benefits and costs.

Feel liberated, therefore, to pursue your own advantage, because in so doing you will be pursuing your friend’s advantage, too.—Stan Crow

Suppose you are preparing to sell a capital asset—real estate, a business, a partnership interest, whatever—for $2 million in cash and you want to defer the quite-substantial capital-gains tax when you do so. Also, though, you’d like to have that $2 million cash to do with as you please. Is that possible?

Strictly speaking, it’s generally not possible to achieve both of those objectives, because they conflict with one another. The provisions in the Internal Revenue Code for tax deferral (Section 1031 for tax-deferred exchanges and Section 453 for installment sales) don’t let you have the tax deferral if you also have the sale proceeds.

Suppose, though, that you sell the asset for the $2 million on an installment contract and borrow an equivalent amount of money from an independent source, with an arrangement that the installment payments will fund your loan payments. Then you can have the money and still enjoy the tax deferral, if the two transactions are properly done.

We’ve said that much for years. The practical problem, though, has been how to borrow the full amount in these times, and to do so without having to pay more in interest on the loan than you will receive on the installment contract, and without having to take the risk of default by your installment buyer.

S.Crow Collateral Corp.’s collateralized installment sale ("C453") transaction has solved the default risk all along. Now, our new, improved C453 transaction is paired with separate third-party lending that is available to our sellers, if they so choose and if they agree on terms with the lender. The installment payments cover the loan payments, and the post-transaction management of the transaction is much simplified. Furthermore, there’s no loan-qualification issue. The C453 contract is not pledged or assigned, either.

So, strictly speaking, our seller does not have unhindered access to the sale proceeds, but our seller can have unhindered access to a comparable amount of borrowed money to use as our seller pleases.

To our knowledge, no one else has achieved this. However, we don’t want you to take our word for it; if you consider a C453, you should have your lawyer and your tax adviser review and clear every detail of the agreements, so that they can be comfortable, on your behalf, with the idea of "tax deferral with complete liquidity," done this way.

I’d say that nobody does it better, but the fact is that no one else does it nearly as well: not 1031 exchanges, not private-annuity trusts (now largely shut down), not deferred sales trusts, not "structured" installment sales, not insured installment sales, not "self-directed installment sales," not the various ways of trying to have an asset sale be treated as a sale of stock, and not the variety of charitable and quasi-charitable trust transactions.

I’ll be writing more about the new, improved C453, which I contend is the best way to sell capital assets. To learn more, however, you will need to wait for another installment.—Stan Crow

Q. I want to sell my personal residence and have an interested buyer. The problem is that unless there is a way around it, when I sell I will face a capital gains tax on about $2 million in taxable gain. I have been told that if I lease the home to the buyer for a year or two before selling it, the sale can be done as a tax-deferred exchange under Section 1031 of the Internal Revenue Code. Is that right?—Gaining Ground

A. Dear GG: Thank heaven for little URLs, such as the one for this page, which is your resource for a better way to accomplish your objective. Leasing a personal residence to convert it into an investment property to qualify for tax deferral in a 1031 exchange is a frequently chosen course of action, but it is unduly time-consuming and unduly risky, especially considering that a simple and quick alternative—one that doesn’t require waiting a year or two—is at hand.

Market risk exists with the leasing idea, because 1031 exchanges are designed for markets in which prices are rising and in which leverage (debt) can be readily increased or maintained. For complete deferral, Section 1031 requires that the exchangor pay as much or more for a replacement "like-kind" property, and it does not allow any de-leveraging without paying tax accordingly now. In a falling market, that can be very difficult. The market now is not one of rising prices and readily available financing, and who knows about a year or two from now?

One cannot forecast with confidence what the housing market will be like when the time comes for the sale, when the lease expires. If the housing market then is much as it is now, it may be difficult to find a suitable, desirable, like-kind property within the stringent time limits of Section 1031 (45 days to identify, 180 days to purchase).

There’s a further price risk. The combination of the trading-up requirement for a tax-deferred exchange, the prohibition on de-leveraging, and the subtle feeling that money that is held by the 1031 accommodator is then "free" money which one can spend without cost causes exchangors to be prone to pay too much for a replacement property. (Economists have documented the effect.)

Further, you would take the risk that your interested buyer might not then be able to purchase the property when the lease expires. Is it a sure thing that this buyer or another one will have the money and be able to qualify for any necessary financing one or two years from now?

There’s more. Even if you are completely successful with the lease and subsequent exchange, there’s a tax disadvantage that’s often overlooked: your tax basis in the replacement property will be a "carry-over" basis from your tax basis on the home you’re disposing of, so your depreciation deductions on the replacement property will be constrained. As a consequence, just so that you can defer tax at the capital-gains rate you will forego ordinary-expense deductions which you could have had by simply selling (rather than exchanging) and then buying. Why is that a good deal?

A quicker and less-risky alternative is to sell your home now as an installment sale under Section 453. You don’t have to do anything to convert it to investment property, you don’t have to take risk that the buyer won’t pay (ask me how, if you wish), you defer the capital-gains tax, and you have no re-investment requirement whatever, no time limits, no "like-kind" requirement, and no requirement to buy anything. When and if you choose to buy, you will buy in your own good time, at the price that’s right in the market then, with a new basis in the property with which to begin taking higher depreciation deductions.

Now that’s worth singing about.—Stan Crow

In the direct transaction simply between the two of them, that can’t happen. That is reality.

But what if the seller sells—call this "Transaction #1"—to a capital-assets dealer who makes some changes in the structure of the deal and then, in a separate transaction, sells—call this "Transaction #2"—to the ultimate buyer? Ah, now that’s a different reality.

If, for example, Transaction #1 can be structured in a way that reduces the seller’s tax because of the deal, and Transaction #2 can be structured in a way that reduces the buyer’s tax cost in succeeding years, it may be possible for the seller’s after-tax proceeds to be exactly what the seller wants, and for the buyer’s after-tax cost to be exactly what the buyer wants.

A re-structuring transaction such as this is what is called a "price-reconciliation transaction", or "PRT". A PRT resides in a new reality in which two transactions occur, with no inherent reason why they must be alike each other.

Because price discrepancy between seller and buyer may be the single greatest barrier to successful selling and buying today, a PRT analysis should be done virtually every time you or a client of yours considers selling or buying. If you don’t include a PRT analysis, you are just throwing away your money or your client’s money.

A qualified capital-assets dealer should be able to provide such an analysis at no cost or obligation. If you ask for a PRT analysis and the dealer doesn’t know what that is, you may want to turn to someone who does.—Stan Crow

If you are planning to buy an investment property or an interest in such property and you want to reduce the tax on the lease income afterward, S.Crow Collateral Corp. can help you to achieve your objective—but only if you buy the property or interest from S.Crow Collateral Corp. when or after S.Crow Collateral Corp. buys it from whoever owns it now.

Once you buy the property directly yourself, it’s too late for us to structure the deal to reduce your ordinary-income tax.

If we do a transaction such as I propose here, the present owner will be happier, too, for both tax and other reasons.

There are important business reasons for buying from a capital-assets dealer such as S.Crow Collateral Corp., but I didn’t want you miss the leased of these.—Stan Crow

I’m often asked how it is that S.Crow Collateral Corp. can "keep coming up with" new business ideas and applications. Because my answer is not what most people expect it to be, and because I haven’t read quite this answer in any other publication, today I’m going to share with my readers what I regard to be some essential business advice, about how to grow a business.

I begin with a brief reference to some ancient wisdom, credited to Socrates: "Know yourself." At it is put in Book VIII of Plato’s Republic, Socrates tells Glaucon, "Let each one of us leave every other kind of knowledge and seek and follow one thing only, . . . (to) be able to determine which is the better and which is the worse; . . . all else he will disregard. A man must take with him . . . an adamantine faith in truth and right, . . . but let him know how to . . . avoid the extremes on either side, . . . For this is the way of happiness."

In business, I believe that it is essential that the businessperson know who he or she is, and set aside all other directions. Quality novelists can usually tell you what their life theme is, as expressed in their writing. The theme may evolve over time, but the theme is the foundation on which their writing is built. Furthermore, it’s more likely than not that the novelist discovers the theme, instead of simply deciding on a theme.

That’s how it was with S.Crow Collateral Corp., too. We discovered that we were in business as a dealer (as a principal, not as a broker) in capital assets, and that self-discovery opened the door to all that has happened.

How we apply that discovery is this: From time to time we observe another respect in which the market is distorted, inefficient or blocked for whatever reason. We may then casually wonder whether there might be a way in which a dealer in capital assets could enter into that environment and, in doing so, remove the distortion, inefficiency or blockage. Casual wonderment may simmer in the background for an extended time, before analysis takes over.

In the case of our development of collateralized installment sale ("C453") transactions, ten years passed after the first transaction, before we systematized the process. In the case of our process for resolving troubled commercial loans ("C453-PL/REO/SL"), 20 months of constant conscious developmental work followed the initial insight, that a dealer in capital assets could change the whole environment. In the case of our "Home By Six" program for rescuing "underwater" home loans, most of a two-year period was spent with our seeing no possible way, followed by an unexpected insight that changed everything—again, built on an understanding of what a dealer in capital assets does, and upon speculation about how that self-identification might be put to work in yet another context.

When you know who you are, what makes you tick, what you do well, and what you enjoy, adopt that as your theme, and repeat it to yourself and others as occasion arises. That will provide you with a lens through which to see your business. You will look at each new possibility in that light—and see new growth possibilities because of that context.

So, the truth is that S.Crow Collateral Corp. doesn’t just "keep coming up with" new business ideas; we have one basic business theme or self-identification, and we continue to look at new market situations with that theme in mind, to see what might come of it.

Will there be more expansion for S.Crow Collateral Corp.? Who knows? We do know who we are, so that gives us a lens through which to see market opportunities which might pass by others who don’t have the same lens.

(Aside: Onlookers may see the resulting applications without knowing the underlying process, and make the wrong assumption accordingly. They will tend to characterize the results in their context. I think that’s why tax advisers may tend to think that what S.Crow Collateral Corp. does is tax strategies, because that’s their field. What we do often has tax implications—doesn’t everything?—but we set out to buy and sell capital assets in new ways. The tax effects are what they are.)

You, too, can have a theme or identity that is unique to you in some way, and with that you can have a lens which no one else has. If you "seek and follow (that) one thing only," growth may follow.—Stan Crow

Suppose you could sell an appreciated asset (of almost any kind, business or personal), and not pay tax on the gain for 30 years. You can; that’s what a collateralized installment sale ("C453") transaction does.

Suppose you could use the untaxed proceeds of that C453 transaction to buy "underwater" homes advantageously (at market or below). You can; our Home By Six transaction can follow a C453, to make that possible.

Suppose that after you buy the "underwater" homes, you receive attractive cash flow throughout your time of ownership, but the cash flow is largely tax-free to you. You can; the money is taxable to S.Crow Collateral Corp., but most of it is not taxable in your hands, in a Home By Six transaction.

Suppose that when you buy the "underwater" homes, you are able to expense some of the acquisition cost, and thereafter to write off considerably more of the cost over a shorter period than is allowed for real estate as such. You can; that’s part of a Home By Six transaction.

Suppose that when you later sell the homes, you are able to defer the gain on the appreciation in value (above today’s market-or-below cost), and then you repeat the process. You can, in a combination of a Home By Six transaction and another C453 transaction. Or, if you prefer to take it easy at that time, don’t repeat the process, and let C453 be your exit strategy with as much as 30 years of further tax deferral.

Suppose that it’s sort of like an IRA but with no limit on amounts put in and no age limit, and with added tax deferral on disposition. It is.

Suppose that Fannie Mae, Freddie Mac, the government, mortgage lenders, the housing industry, title-insurance companies, property-management companies and escrow companies all benefit, thanks to you. They will.

Suppose that you have your legal, tax and investment advisers look into this with us. Yes, let’s suppose.

Suppose that you know someone else who needs to know about this. You very likely do. You can say, "I just called to say you need to know about this."—Stan Crow

(In the following conversation, "SC" is Stan Crow, president of S.Crow Collateral Corp., and "JD" is "John Dough".)

SC: Let’s say that you know someone whose debt on their home is more than the home is worth.

JD: You don’t have to say it with me; I can say it all by myself: "I know someone whose debt on their home is more than the home is worth."

SC: Okay, let’s say . . . No, I don’t want you to repeat after me, so I’ll put this differently. Is this someone who is in danger of losing the home in foreclosure?

JD: Absent a miracle, yes.

SC: Is the person a friend or relative of yours?

JD: Yes.

SC: Well, I mean which one? Is the person a relative, or is the person a friend?

JD: Relative.

SC: What is the person’s relationship to you?

JD: He’s my son. His name is Lester, or "Les" for short.

SC: Well, Les Dough has less cash than he needs right now, it appears.

JD: That’s why I said he’s short.

SC: Would you like to help Les get through this problem?

JD: Yes, but I have some concerns about how to do so.

SC: What do you mean?

JD: For one thing, I have two other adult children besides Les, and I prefer to treat them all equally and for them to perceive that I am treating them equally.

SC: So, you don’t want just to make a gift of some money to Les and not do something similar for the others?

JD: That’s right, and for many reasons I don’t think this is the right time to give money to all of them. Some of the reasons pertain to their situations, but also I want to put as much money as I can into my own business right now. I will miss some business opportunities if I give much money away at this time.

SC: So, if you do something to help Les, you’d like it to be on a business basis.

JD: That’s right. I could do more for Les that way.

SC: If you enter into a business transaction with Les about his home, do you have any concern about whether he will keep his side of the deal?

JD: I’m sure that he would intend to keep his side of the deal, but if he were to feel that he had to choose between paying me and paying other creditors, I expect that he’d pay other creditors first and then pay me if there’s money left.

SC: Are there any other concerns in your mind about helping Les, apart from the business terms themselves?

JD: I do have one other concern. My wife and I raised all of our children to be independent and responsible, and because of that I think Les would prefer not to see himself as being dependent now on parental help. I think he would rather that any deal be a purely business deal. On the other hand, I don’t see a way in which a deal that’s purely business would be that much help to him.

SC: What if I were to show you a way in which Les’ home could be purchased by S.Crow Collateral Corp.—rather than by you—for enough to pay Les’ debt in full with money provided in the background by you, and with tax advantages and write-offs for you that would go a long way toward compensating you for the cost?

JD: Would those tax advantages cover all of the extra cost over and above the value of the property in today’s market?

SC: The tax advantages alone would probably not quite repay you for all of the extra cost, but with some future appreciation in value you may well make an actual profit on the deal.

JD: Would Les have to move out?

SC: Not if he leases the property from S.Crow Collateral Corp. under our Home By Six program and makes the lease payments as required. They’d likely be less than his debt payments are now.

JD: If Les wants to move out, could he do so?

SC: Yes, subject to the terms of the lease. He might be obligated to cover the lease payments until someone else takes over the lease.

JD: Would Les or another lessee have to qualify for a lease as one would have to qualify for a home loan?

SC: Only to whatever extent S.Crow Collateral Corp. may choose to require that, with your okay.

JD: Would Les know that I’m involved?

SC: Only if you want him to know.

JD: I might want to invite my other son Rich to participate with me in this deal. Would that be okay?

SC: Yes, certainly. Again, though, you’ll want to think about whether to disclose Rich’s involvement to Les. I’m not implying that Rich’s involvement shouldn’t be disclosed. I’m just saying that I think that the dynamics of your particular family may cause you to decide one way, or to decide the other way.

JD: How would a lease on the property affect its value?

SC: Under our Home By Six program, there are incentives for the lessee to maintain the property as an owner would. That’s very important to the property’s value. The lease may actually increase the property’s value as compared with owner-occupied properties, because a leaseable property will be in greater demand as compared with properties for which financing is difficult to obtain. Also, if Congress removes the deduction for home-mortgage interest, the market values of owner-occupied homes will decline somewhat as compared with leaseable homes. Further, part of the concept of our Home By Six program is that a lease period of as much as six years should give plenty of time for the economy—and property values—to recover.

JD: Is it necessary that the lender on Les’ property consent to the arrangement?

SC: No, because the loan will be paid in full, and the lender will be out of the picture.

JD: Are you going to tell me what the tax benefits are and how they work?

SC: Yes, but not at this moment. That will be a private conversation, and will involve, as well, your tax adviser.

JD: What would this deal do to my cash position?

SC: Unless you borrow the money to pay Les’ existing debt (through S.Crow Collateral Corp.), your cash will be tied up to that extent—but your money will be producing an investment return for you, and it may be quite an attractive one, especially on an after-tax basis.

JD: Would the return be less with Les, or more with Les?

SC: It would be more than you could arrange yourself directly with Les, but whether it would be less or more than another investment would depend on the numbers of the particular deal, which we can’t know until we get into the specifics.

JD: Are you ready to talk specifics?

SC: Yes, of course.

The "framework" which President Obama announced today for an agreement to extend the Bush-era tax cuts includes other measures, as well, including a very large increase in the estate tax: from zero today, to 35% on estates over $5 million. (Without the deal, however, the estate tax rate would become 55% on estates over $1 million.)

The framework is not yet law, but I expect that it will be enacted.

Here’s a suggestion, for you to check with your tax and legal advisers: If your estate includes a significant asset which the Internal Revenue Service will likely over-value for estate-tax purposes, consider selling that asset now on a collateralized installment sale ("C453") contract, not to family members but to an independent collateralized installment sale dealer. The contract can place a binding value on the asset now, but the contract can provide for the actual transfer to occur at a later date. You remain as the owner and operator of the asset until that date arrives.

The dealer can later re-sell the asset for a higher price, at which time the resale proceeds will go into a collateral account which will be held and invested by an independent third party such as a bank or financial-services firm whom you approve. The collateral account provides security for the dealer’s installment obligation to you or your estate.

As your tax adviser will likely tell you, the installment contract should not only act as a "freeze" on the value of the asset for estate-tax purposes, but also should be discounted—potentially substantially—for estate-tax purposes. That may result in dramatic savings on the estate tax.

Also, by selling to an independent third party such as a collateralized installment sale dealer, you avoid the issues and arguments you’d otherwise have with the IRS if you were to set up, say, a family limited partnership or other device for passing the asset to family members. Instead of all of that, you pass the installment contract to them.

Of course, the dealer may choose to sell the asset to your family members, but then it’s a deal by a third party, not a deal by you.

Many questions and issues will need to be addressed in the transaction and with your tax and legal advisers, but don’t overlook this potential avenue toward both estate-tax savings and preservation of the viability of your business. Much can be accomplished in a deal with a third party that cannot be accomplished any other way.—Stan Crow

No one is more surprised than I am, that I am able to write this today.

When I was asked the first time, in early 2009, whether S.Crow Collateral Corp.’s transaction strategy for resolving troubled commercial loans could be applied to loans on single-family homes and residential condominiums, I said no.

When I was asked the second time, I said no.

When I was asked the 50th time and the 100th time, I said no.

And I was right.

I now realize, though, that S.Crow Collateral Corp.’s core role as a dealer in capital assets can form the basis for a different transaction strategy—I think we’ll call it "Home By Six"—to overcome the otherwise-insurmountable obstacles that stand in the way of any quick solution to the underwater-home-loan problem.

Hurdle #1 Overcome: The Regulatory/Bureaucratic Mess

Because nearly all home loans are guaranteed to some degree by government-backed agencies such as Fannie Mae and Freddy Mac; are sold by the lender; are securitized and packaged with other loans; and are bought by diffuse investor groups, it’s virtually impossible for an individual borrower to negotiate his or her way out of a problem with a home loan. The government-backed loan-modification program has turned out to be very little help, too.

That is why I’ve always said that the kind of cooperative transactions which we can negotiate and undertake with a bank which holds a troubled commercial loan or property in its portfolio cannot be implemented in the home-loan context; the regulatory and bureaucratic mess ties everyone’s hands.

Home By Six gets around all of that mess, however, because with Home By Six all existing liens on the house or condominium are paid in full. No loan remains unpaid, so there’s no debt to pay, resolve or modify, and no lien to foreclose.

Best of all, maybe, is this: No bank or other lender needs to agree to anything, for this to happen.

Hurdle #2 Overcome: Lack of Willing and Able Buyers, or Lack of Demand

Tax and regulatory policies rely upon assumptions about what the market for single-family homes ought to be, and then, because of those assumptions, favor the prospective home buyer who plans to reside in the home over the home buyer who would buy it as an investment. In today’s market, however, there are too few home buyers who have the money or who can get the financing to buy, for purposes of living in the home.

By and large, investors who could buy the homes are stymied, too, because it doesn’t make financial sense for them to pay more than a property is worth—but banks and borrowers can’t or won’t sell at the actual value, because the debt on the property is considerably higher than that.

Home By Six gets around that hurdle, because with Home By Six an investor can pay more than a home is worth, and seek to make up the difference with tax and other benefits. (Of course, each investor should obtain the advice of a qualified tax adviser before proceeding.)

Home By Six: What It Is

With Home By Six, S.Crow Collateral Corp. buys the house or condominium for the amount of debt on the property. The existing homeowner, or someone else, signs a lease for up to six years (hence, Home By Six), with lease payments that should be less than the amount now required to service the debt on the property. S.Crow Collateral Corp. sells the property, as leased, to an investor and structures that transaction in ways that increase the investor’s after-tax return, well beyond what the investor could achieve if the investor were to buy the property directly.

I could tell you more, but I see no reason to tell our competitors what to do to try to catch up with us.

Home By Six and the Economy Overall

Home ownership has been pushed much too far in the U.S., at a very high cost to the taxpayers in subsidies and bail-outs, and at a very high cost to the economy, as far too many people have effectively been locked into their homes by excessive debt. That lock-in effect has exacerbated the unemployment problem, because homeowners have not been free to move to where the jobs are.

Regulatory policies and the packaging and selling of loans have made it difficult for banks to allow homes to find their true value in today’s market. Moreover, the backlog of homes awaiting sale through foreclosure is depressing home prices unnecessarily.

Because there is no shortage of investors with available money if only the economics of the deal were right, and Home By Six makes the economics of the deal right, Home By Six overcomes those problems.

So, if you are a homeowner whose home-loan debt exceeds the property’s value, you yearn for freedom, and you want (or even if you don’t want) to stay in the home as a lessee, contact us about your situation.

Or, if you are an investor who is looking for a reasonable cash-on-cash return plus tax benefits and future appreciation, contact us about the situations that would interest you.

The home-ownership market needs to move more in this direction anyway, so let’s give it a kick-start.—Stan Crow

Nearly everyone understands that paying the capital gains tax is voluntary in the sense that the tax is due only when an asset is sold for a gain. Nearly everyone understands that the timing of that sale, or whether that sale occurs at all, is something the owner of that asset can control, apart from some emergency.

On the other hand, it is important for particular owners and for the economy as a whole, that owners be able to sell assets as needed—such as when the asset becomes unproductive in one owner’s hands but could be put to a higher and better use in someone else’s hands. Asset mobility, in other words, allows the economy to maximize efficiency and economic growth.

Also, nearly everyone understands—well, nearly every owner of capital assets understands—that the capital gains tax can make a sale so costly to the present owner that the tax deters the redeployment of assets to their most productive uses through sale to someone else. The tax can also prevent the owner from switching into a different investment which that owner could use more productively.

I like to think of investing as a journey along a road that will never end, with the adventure of the travel being the purpose of the trip, rather than being in a hurry to reach the end of the road. Once the journey begins, the object is to continue, not to sell the car and sit down beside the road to do nothing.

So, is there a way continually to improve our resources for the journey, without having to stop to pay the capital gains tax?

If you guessed that my answer to that question is "yes", you guessed right.

A clue to part of the mechanism to do that can be found in the "perpetual" investment instruments which are more common in some other parts of the world than they are in the U.S. However, the "perpetual" investment instrument would have to be essentially a diversified, floating-rate instrument which keeps pace with market conditions and economic growth, for both income and principal. Another key would be to be able to get into such an investment without paying the capital gains tax on the sale of the asset you have now.

Both of those can be accomplished, through a collateralized installment sale at a price that is equal to one’s tax basis in the existing asset being sold (so that there’s no tax on the sale, ever), and to have the installment debt be collateralized by that diversified, floating-rate perpetual instrument, so that your cash flow and opportunity for appreciation in value are commensurate with the gross, pre-tax value of whatever it is that you wish to sell.

What I’ve said here is an introduction to what we call a "PC453". With a PC453, the capital gains tax is not deferred; it just never comes due, because there is no capital gain to be taxed. Nevertheless, your overall return on the installment contract can be commensurate with the full market value of the asset you are selling.

You don’t have to ask, "Are we there yet?" because the travel is the point, not getting "there", and not liquidating and paying the tax.

Let’s have a conversation about the journey—how it begins, what to take along, how to prepare, what to expect, and so on. The adventure awaits you.—Stan Crow

When I was in college in the days before most things, I took an "Introduction to Philosophy" class when I very much enjoyed. One of the reasons why I enjoyed the class was that my fellow students and I fancied ourselves as instant philosophers who could expound intelligently on the meaning of most things. Of all of those conversations, one of the recurring favorites was about this question: Can one achieve happiness by pursuing happiness, or can one achieve happiness only if one is pursuing other purposes, in which happiness can be an incidental feature or result?

In these discussions, prominent place was given to most of the major philosophical themes about which we’d newly learned, and each theme had a student who took that "side" in the conversation.

So, all of these had their place: the pursuit of pleasure, hedonism, pessimism, stoicism, naturalism, pragmatism, humanism, idealism, and variations on all of them.

I came down on the side that the pursuit of happiness was doomed to failure, if happiness was the goal. I argued that happiness was always and only the by-product of pursuing other objectives. I agreed with that part of Epicurus’ philosophy which held that "sober reasoning which searches out the grounds for every choice and avoidance" tends to lead to happiness. If so, I contended, cognitive carefulness should be a higher objective than happiness itself, which should result from that careful thinking.

To the extent that is correct, happiness is an indirect object rather than a direct one. (For a discussion of Epicurus and citations to many views on happiness, see "Hedonist Philosopher Epicurus Was Right about Happiness (Mostly)," on PsyBlog,

http://www.spring.org.uk/2007/12/hedonist-philosopher-epicurus-was-right.php)

If every taxi driver in Athens is a philosopher, I think that I can create one, too—a philosophy of tax benefits. Here’s its central proposition: Tax benefits are most reliably obtained in the pursuit of other, substantive objectives.

This new philosophy of incidentally obtaining tax benefits is in accord with the new tax code section (added by the health-care legislation earlier this year) which codifies the "economic substance" doctrine, to require that (1) a transaction must have economic substance beyond the tax benefits and (2) the taxpayer must have a non-tax business purpose for entering into the transaction. (Query: Did members of Congress know that they were being philosophers?)

So, those "other, substantive objectives" which one must pursue are economic substance and a non-tax business purpose; when those are present, one can enjoy whatever tax benefits flow from the deal.

Too many people have let the tail (tax benefits) wag the dog (doing business). One should always seek to do business wisely, and not let everything be determined by the tax effects. Careful thinking about doing business wisely, then, is the path toward tax-benefits happiness.

Application: If you want to defer the capital gains tax on disposition of a capital asset, a collateralized installment sale to S.Crow Collateral Corp. may be just the right thing for you—if it makes good business sense when everything is considered. If so, then you can enjoy both tax deferral and a wise business deal.

Epicurus would be pleased.—Stan Crow

Q. Do you have a strategy for minimizing the tax on payments received through mineral leases for natural-gas production from the Marcellus Shale formation in Pennsylvania, Ohio, West Virginia and New York?

Here’s my situation. I am leading a group of investors who are about to purchase some farms that overlie the Marcellus Shale formation, which contains significant quantities of natural gas. For reasons that are unique to us, my group is able to buy these particular farms for their value as farms, and we will then have the right to sell or lease the mineral rights while retaining the farms for agricultural purposes. We want to structure our transaction(s) in a way that will minimize the tax on our mineral-rights revenue, which we expect to be very substantial.

Also, it would be helpful if we could purchase the farms in such a way that our sellers would be able to minimize their taxes, too. Our sellers’ families have owned these farms for several generations, and even with some step-up in the past their tax bases are very low in comparison with today’s market values.—L.N.G.

A. My father, who among his several careers was an independent oil producer in Kansas, Nebraska, Colorado and Wyoming, looked forward to the day when oil would be produced on a large scale from the shale in Utah and Wyoming. Now it appears that Pennsylvania, where it all began in the U.S., may take the lead, at least as to natural gas. How fitting is that!

The strategy which I suggest for your consideration is actually much the same for your sellers as for your investor group. Let’s start with your sellers.

If they sell first to a collateralized installment sale dealer as an intermediate buyer, the capital gains tax can be deferred for as long as thirty years, without their taking any credit risk concerning the dealer. In that event, the collateralized installment sale dealer will re-sell the farms to your investor group, and the proceeds of that sale will go into a pledged, legally set-aside "collateral account" for each seller. The money in that collateral account will be held and invested by an independent third party such as a bank or financial-services firm approved by the seller and in accord with investment criteria approved by the seller. The seller will receive the investment income, but it will count as interest on the dealer’s installment obligation. Because the capital gains tax will not be taken out first, the investment return can increase 30%, 40% or more, depending on the seller’s state and federal income tax rates. The seller will pay the capital gains tax in 30 years, but because of intervening inflation the real cost of that in today’s dollars will likely be a small fraction of what the cost would be in today’s dollars, paid today.

Postponing a tax for an extended time is the equivalent of a substantial tax reduction. That means that your sellers will have more money in their pockets if they sell through a collateralized installment sale dealer and on to you, than if they were to sell for the same price to anyone else.

Much the same solution is available for your investor group. If you and your investors hold the mineral rights for at least twelve months, you can sell the mineral rights, rather than lease them, to an collateralized installment sale dealer, who can sell the mineral rights on to a production company. The proceeds of the latter sale go into a unique collateral account to be safely held and invested as mentioned above, but this time by a bank or financial-services firm which you approve, with investment criteria which you approve. Your investors gain the additional advantage of a capital-gain transaction (with all of the capital gains tax postponed) instead of an ordinary-income transaction. The after-tax improvement will amaze you.

A last point: You are wise to be addressing these issues now, because this will permit your investor group to structure the transactions and the buying, owning and selling entity/entities in ways that will best address each investor’s interests, as well as those of the group as a whole. As you go through this process, be sure to consult your legal and tax advisers each step of the way.—Stan Crow

More years ago than I care to admit readily—before most people were born—I attended law school in a really quite wonderful New England city. My attachments there grew stronger with each succeeding year of law school, so much so that I’ve often thought it possible that if completion of law school had required four years rather than three, I might never have returned to Idaho. (That’s really saying something, given how compelling Idaho is!)

Law school was a wonderful experience for me, as was living in New England. I have countless happy memories.

A memory that is more in the amusing category concerns an occasion when I was shopping, early in my law-school career, for various items in the university’s department store. As one might expect for a university department store, there was a section of men’s clothing (much of it bearing the university colors and logos, and others not), sections for women’s and children’s clothing), a section of school supplies, another for household supplies, another for personal care items, another for furniture, another for technology (such as it was then), and the largest (of course) for books used in university classes. As I shopped, I went from department to department to gather the items I needed that day.

Each of these departments was served by at least one clerk at a cash register. I looked for one with the shortest line of customers and took my items there. Although every item was marked with the price, the clerk told me that I would have to pay for each item in its own department, even though the cash registers for two departments might be immediately across the aisle from one another. That meant that I would have to stand in one line for one item, then stand in another line for the next item, and so on, through my collection of purchases.

I asked, "Why do I have to do that?"

She said, as if it were an irrefutable and obvious answer, "That’s the way it’s always been done."

I wanted to say, "What does that have to do with it?" It was apparent, though, that her job was to follow procedures, not to think about better ways to do things. In fact, in her mind, "better" was a non-concept, in the face of long-standing precedent. Also, it never crossed her mind that her answer showed that the university’s department store was not organized to please customers, but to satisfy the store’s chosen organizational scheme.

At the time, I attributed the "that’s the way it’s always been done" answer to a rather quaint New England traditionalism, influenced by living within so much ever-present history—unlike the new, vibrant, ever-changing West.

Well, since then I’ve learned that "that’s the way it’s always been done" not only is prevalent in much of business everywhere, but also is becoming more dominant.

Why? Although I was wrong about the reason those many years ago, I’ll venture to propound some reasons why "that’s the way it’s always been done" is becoming a more dominant theme today.

1. Regulation

Government regulations presuppose that how things should be done is both (a) known and (b) decided—and that what is decided is the definition of what is known. Regulations place a premium on doing things by the book, and place a penalty on not doing so, regardless of what otherwise would be the merits of the matter. Expansion of regulation therefore expands the area within which action is more by rule than by free agency.

2. Fear of reprisal

Rarely is there a penalty for doing things in the way they’ve been done before, but one can be (a) sued, (b) reprimanded or (c) fired, if one ventures to try a new way.

3. Company emphases on predictability and targets

The "Schumpeter" column (http://www.economist.com/node/16888745?story_id=16888745) (named after the Austrian economist Joseph A. Schumpeter, http://homepage.newschool.edu/het//profiles/schump.htm) in the August 28, 2010, edition of The Economist cites a new book, The Other Side of Innovation: Solving the Execution Challenge, by Vijay Govindarajan and Chris Trimble of the Tuck School of Business at Dartmouth. The Schumpeter column says this: "Established businesses are built for efficiency, which depends on predictability and repeatability—on breaking tasks down into their component parts and holding employees accountable for hitting their targets. But innovation is by definition unpredictable and uncertain. Bosses may sing a pretty song about innovation being the future. But in practice the heads of operational units will favour [The Economist is English, after all] the known over the unknown."

Because of the free market’s "creative destruction", as popularized by Schumpeter (http://transcriptions.english.ucsb.edu/archive/courses/liu/english25/materials/schumpeter.html), businesses which get too hide-bound usually fail eventually or are broken up and reorganized. Therefore I really don’t worry too much about "that’s the way it’s always been done" within free enterprise.

Government regulation is another matter, because it almost always favors big, established businesses over small, vibrant, upstart ones. We need to find a way in which regulation will place less premium on "that’s the way it’s always been done", if the United States is to return to strong economic growth.—Stan Crow

 Owners of businesses or commercial real estate often say to me that they’d like to sell, but that they don’t want to "sell into a down market".

When the owner is an investment fund which took in money from investors to buy that asset in the first place, the owner may be reluctant to sell at a loss, because of those investors; as long as the investment fund continues to hold the asset, it doesn’t have to admit to itself or to those investors that any loss exists.

When the owner is a regulated lender that has acquired the asset in foreclosure or relinquishment by the borrower, the lender is likely to be reluctant to sell at a loss because of the effect that loss would have on its reported capital or income, or both.

When the owner is an individual, he or she is just as likely to be reluctant to admit that an investment decision hasn’t turned out well in recent years. By continuing to hold the asset in hopes that the economy will turn around and rescue that investment, the owner can delay (and hope to avoid) that admission of truth, even to oneself.

In a macroeconomic perspective, all of these particular decisions to hold on are delaying economic recovery. That is because these particular decisions are delaying the redeployment of resources into more productive uses, and these decisions are delaying the completion of the market correction that must occur before prices can find a floor from which to rise again.

Also, while each owner makes that decision to hold on, most other owners are making the same decision. Taken together, all of them are stifling the transaction activity that could make it possible for any one of them to achieve what he or she thinks would be a good price at which to sell.

You often hear about the huge sums of money that are "sitting on the sidelines" waiting to be invested. Why do you think that’s happening?

Yes, uncertainty about future tax rates and the regulatory burden are big factors. Another big factor, though, is that those with money to invest are waiting until they know that they can buy at prices that represent known values. They need to see that the correction has occurred. Until then, they wait.

Would-be sellers wait.

Would-be buyers wait.

What do do? Here’s a wise principle: Forget the past and why, how, and at what price you acquired the asset. Whether a sale now would be at a loss is irrelevant to what you should do now. If you had purchased the asset at the price at which it can be sold today, would you sell it today? If so, then by all means sell it today.

To say that another way: If you could put the money to better use today by selling, then sell. If you could put the money to better use, then that’s true regardless whether selling now would mean a loss. If you could put the money to better use today by selling, it doesn’t even matter whether the market is rising or falling; if you opt for the most efficient use of your resources, you won’t go wrong.

Sure, maybe you could hold on for however many years it will be until the economy rescues you, and then you will congratulate yourself that you were such a wise and forward-thinking investor. But how much better off would you be then, if you had quickly redeployed your resources today for greater efficiency?—Stan Crow

P.S. Blatant self-promotion: All of this is doubly true for lenders and borrowers who are trying to cope with troubled commercial loans. With what S.Crow Collateral Corp. can do to clean the slate, holding on to a troubled asset in hopes of better times really doesn’t make sense.

Q: I understand that S.Crow Collateral Corp. can resolve a troubled commercial mortgage loan or loan portfolio held by a bank, without loss for the bank. Can you do the same for a troubled loan or loan portfolio held by a non-bank lender such as a mortgage fund or investor group?

A: Yes, the same results are available for non-bank lenders. I should clarify this about avoiding the loss: From an accounting standpoint, the loss the lender (bank or non-bank) would otherwise face because of the decline in asset values is removed immediately—the lender gets an immediate clean slate—but it will take some time for the financial recovery from that loss to be complete. That financial recovery occurs through financial means (most especially the multiple use of money made available in the transaction) and does not depend on whether not asset values rise again.

Q: What are the advantages for the borrower?

A: They are many, but among the most important are a substantial reduction in the debt and debt-service cost, without the phantom taxable income (or "cancellation of debt" income) that would normally result from that debt reduction.

Q: Will this work for second liens?

A: Yes, but for it to work, all liens must be included in the transaction, or be paid from other funds, or be removed legally. Recovery is available for those liens that are included in the S.Crow Collateral Corp. transaction, and any liens that are not so included must be paid or legally removed, or the full-recovery objective won’t be accomplished.

Q: Can this work for business loans that are not mortgage loans?

A: Yes.

Q: Can this work for loans on single-family residences?

A: Yes, but only if the loan is held in portfolio by the lender, not sold to others or securitized, and not subsidized or guaranteed by any government agency.

Q: Will this work for securitized commercial-mortgage loans?

A: Yes, with additional complications but also with additional benefits. The contract among the investor-owners of the loan may have to be amended, because it’s unlikely that the contract will have anticipated what has to be done here. Among the additional benefits are these: (1) Preservation of the tax benefits for those in the borrower group who traded into the property in a tax-deferred exchange; (2) conversion of the unwieldy tenant-in-common structure that the borrower group likely has, into a limited-liability company; and (3) opportunity for some members of the borrower group to depart, it they wish.

Q: Will this work for short sales?

A: Yes.

Q: Will this work for lender-repossessed or lender-owned assets/properties?

A: Yes.

For the troubled loans in your portfolio, and for repossessed lender-owned assets, now that you have this information, now is "then" for you, and you won’t have to say, "If only I’d known then . . ."—Stan Crow

I’ve been asked: (1) Can the sole shareholder of a "C" corporation arrange for the sale of the company’s assets, and escape double taxation on the gain? (2) Whether or not that is so, can any or all of the tax be deferred past this year? (3) If it can be deferred, should it be?

My answers, in that order, are "yes", "yes" (except for inventory, to the extent sold at a profit), and "it depends on the seller’s time horizon for spending the principal."

With regard to the double-taxation problem—that is, tax at the corporate level and then again at the shareholder level—the place to start is with IRS Notice 2008-111, which provides a set of four tests for the transaction. The tests are ones a taxpayer wants to fail rather than pass, because if the transaction passes all four tests, the taxpayer is unlikely to escape double-taxation treatment.

The tests are not easy to fail, and that’s the problem. (You’ve heard of "too big to fail." This is "too easy to pass.")

The test which provides some maneuvering room is this one: Is 80% or more of the capital stock of company (by vote or value) sold within 12 months before or after the asset sale?

Properly arranged, the company can sell its assets to an installment sale dealer at approximately book value, and do so with an installment contract. The dealer can re-sell the assets to the ultimate buyer for market value. Then the dealer can purchase 79% or less (by vote and value) of the owner’s stock, and do that with an installment contract, too. More than 12 months later, the dealer can purchase the remaining stock.

Both installment contracts can be collateralized with funds that are held and invested by a financial-services firm or bank selected or approved by the seller, so that, in effect, the gross, pre-tax dollars are invested and producing a return.

If this is your situation, be sure to check with your legal and tax advisers, but my position is that, properly structured, this arrangement can avoid the double-tax problem and defer the tax, as well, for as long as 30 years.

The third question was whether the tax should be deferred. Usually when people ask this, they are thinking of the likelihood of tax-rate increases beginning in 2011. With tax increases coming, they may have been advised to pay the tax now rather than defer it.

I disagree, unless you plan to need to spend the principal within the next two or three years or so. If you have a longer time horizon before needing to spend down the principal, then by all means defer the tax, for two reasons: (1) You can earn money on the tax money in the meantime, and (2) there’s a very good likelihood that future inflation will more than save you the cost of increasing tax rates. That’s because taxes are not adjusted for inflation. When you pay the tax many years into the future, you will pay at the rate that is then applicable, but you can expect to pay the tax with dollars that will be worth far less than the dollar is worth today.

Nearly everyone forgets to think about inflation, but if you have the choice of paying $100,000 in tax today in today’s dollars or paying, say, $33,000 in today’s dollars 30 years from now, which do you choose?—Stan Crow

Karen E. Klein's "Smart Answers" column in Business Week yesterday quotes S.Crow Collateral Corp.'s president about a way to finance the growth of a small business, with capital (debt or equity) provided by end users of the business' products or services, or with money raised on the strength of contracts with end users.

This was in response to a query from the owner of a software company which has developed an identity management product.  The owner was exploring the sale of either the software or the company itself, to a larger company which could develop the product further and capture a larger market share with it.

You may read the entire column at http://www.businessweek.com/smallbiz/content/aug2010/sb20100827_275386.htm

—Stan Crow

With the banks holding about $1.9 trillion in commercial real estate debt and the loss of about 50% of the value of that debt portfolio since 2007 (according to Financial Times), many banks very much want to reduce their exposure to commercial real estate. Many other banks must reduce that exposure, because of consent orders or other agreements they have entered into with their regulators.

Further, many banks are being required to reduce their commercial loan-to-deposit ratio, which means either reducing their commercial loans or raising deposits, or both.

At the same time, many of those same banks either need to increase their capital or at least need to avoid reducing the capital they have.

Some of those same banks are being required to increase their profitability, while they are reducing the loans from which their profits had come.

These banks went into lending on commercial real estate lending in the first place, because it was profitable. Now, while they need to reduce their commercial-loan portfolios they also need to try to avoid writing down those loans, because of the adverse effect those write-downs would have on their income, capital and profitability.

Is there a way to accomplish these seemingly inconsistent objectives?

If there weren’t, would I ask that question, right out here in the open?

The key to seeing how to accomplish all of those objectives at once, while enabling the borrower to return to financial health, is to introduce new components into the situation: that is, to re-define the context. The problem can’t be solved by doing what has always been done.

A full discussion of the answer is beyond the scope of this blog, but I can say now that the answer begins with introducing into the situation someone who is willing to purchase the indebted commercial real estate for the amount that is owed (that is, for more than the property is now worth).

How can a buyer afford to do that? Well, don’t expect me to give you the answer here; you work on it. If you come to a dead end, call me.—Stan Crow

The cover story, "The Power Trip," by Jonah Lehrer for the Weekend Journal section of the Saturday/Sunday (August 14-15) edition of The Wall Street Journal (online.wsj.com/article/SB10001424052748704407804575425561952689390.html), said that nice people are more likely to rise to power, but "(t)hen something strange happens: Authority undermines the very talents that got them there."

I’m not a psychologist, but here’s my diagnosis anyway: it’s the "powerful person personality", or PPP.

In my experience—because I often have the role of seeking opportunity to explain something new—the PPP often is expressed this way: "I won’t take the time to hear what you have to say unless you will first tell me what you have to say." Or, "I won’t take the time to learn how it works unless you will first tell me how it works."

PPP often blinds the person to the illogic of those statements. The person with PPP often thinks that his or her position proves that he or she knows everything important that can be known that relates to his or her field, and therefore that it’s unlikely to be worth the time it would take to hear anyone who has less power.

PPP can be become present in anyone. I’ve had my moments myself. It can happen to a head of state, a head of a corporation, an officious bureaucrat, or anyone for whom success and recognition have gone to their head.

Besides being illogical and unattractive, PPP works against one’s own interests, because over time it is highly likely that the PPP will become isolated and out of touch. "Too big to fail" will prove to be very vulnerable indeed.

When I was a child, my parents often said, "Don’t get above yourself." It’s advice that is never out of date.—Stan Crow

If more people played chess, or if they applied what they know of chess when they make investment decisions, their success rate might be higher.

Start with a well-known example: What is the usual result when wheat prices rise? Most wheat farmers decide to grow more wheat to take advantage of the increased price. The problem is that nearly every wheat farmer makes the same decision, so a shortage soon turns into a surplus, and prices fall. The farmers who expected a large profit when they planted don’t do nearly as well as they had expected to do. (The drought in Russia is now causing wheat prices to rise once again, in expectation of a shortage. We’ll see whether that shortage actually occurs.)

Here’s another: Vacancy rates for commercial real estate of a given type reach a low point, so rents rise. Builders, developers and investors observe that fact, and they bring more commercial real estate of that type to market. The only problem from their point of view is that most of them make the same decision, so far too much new space is developed. It’s much more than the market can handle all at once, rents drop, and owners compete for tenants with concessions.

A specific instance came to my attention recently, when two competing owners of storage facilities in a given community realized that they were not meeting the local existing demand for rental storage. So, each one made a reasonable (but wrong) decision: each one built a large amount of new supply to meet the demand, and the combination of the large supply created by each drove prices down to the point that the debt they’d undertaken was no longer sustainable. Each one had ignored the other.

Much the same error is at work when banks "extend and pretend" that their troubled loans are okay, in hopes that the economy will turn around and rescue both borrower and bank. The problem is that when most banks make the same decision, they delay the correction in prices that will be necessary for a turn-around to occur.

What is at work here? It is that each participant in the market acts as if in isolation, without taking into account what other market participants are doing. They are engaging in static thinking; that is, they assume that while they are making a different decision about what to do, most of the other market participants will keep doing what they were doing, and won’t be making the same change.

The federal government’s revenue projections generally make the same mistake. When a change in the tax rates is being considered, the government’s economists forecast the effect of the change, by assuming that taxpayers will not change their conduct accordingly. However, because taxpayers are not dunces, taxpayers don’t sit on their hands when tax rates change. Taxpayers do change their conduct, so the government’s forecast of revenues almost always turns out to be nowhere close to reality.

It is a failure to think dynamically: to realize that the market will change because of the millions of calculations that participants make more or less simultaneously—and more or less alike.

Chess players learn to calculate at least two moves ahead, and participants in today’s market should do so, too. At the least, they should think this way: The market in which I work today is in "x" condition. All of us who work in that market know that. Most of us are likely to calculate that the best way to respond to "x" is to do "y". When nearly everyone does "y", the market will change to "z", which will be quite different from what it is now. In a "z" market, my best move would be __________, so I’ll plan for that now and be ahead of everyone else.

In each market, most participants will move together, and then respond together, thereby changing the market. The winners will be ready for the changed market before others see it coming.—Stan Crow

One of the great drags right now on the market for commercial real estate is the inability of the market to clear: the glut of unsold troubled properties which are either already lender-owned or soon to be turned over to the lender.

Banks (and other lenders) are understandably reluctant to recognize losses, because recognizing losses has an adverse effect on regulatory capital (if the lender is a bank) and income. Rather than take their lumps now with sales at today’s reduced values, banks and other lenders often ask unrealtistic prices for the properties which they take over from borrowers. As a consequence, those properties remain on the lender’s books, in faint hope of a quick turn-around in prices. That unsold inventory prevents the market from finding a bottom, and prevents the very turn-around in prices for which the banks are hoping.

And it’s all so unnecessary.

I try to limit blatant pitches in this blog, but this situation calls for one.

Blatant Pitch to Bankers

"Hey, there, banker: Sell the property to S.Crow Collateral Corp. at the unpaid loan amount, to clear your books without loss. We can get our financing elsewhere (not from you!), we can sell the property on to a short-sale buyer at today’s lower value, and we can invest much of our sale proceeds with you to help with your capital or deposit needs. Some other requirements go with this, but you’ll like them, and so will your regulators. You needn’t continue to sit there with your unrecognized but no-less-real losses."

Blatant Pitch to Would-be Buyers

"Hey, there, buyer: If you have your eye on a lender-owned property and you can’t get anywhere with an offer, through much trial and error we think we’ve learned how to get through. The key is that S.Crow Collateral Corp. makes an offer that’s full-price in the lender’s eyes, without (it took a while to learn this) requiring financing from the lender. You buy from us at a low price, and you, too, have nothing whatever to do with our financing."

And don’t worry; S.Crow Collateral Corp. recoups the differential loss over time. This isn’t charity work.

Get in line, and take a number.—Stan Crow

Maybe you’ve never applied the term "narcissist" to someone with whom you were trying to do a business transaction or trying to sustain a business relationship that was already in place. If so, maybe you’ve never tried to do business with someone who believed that his interests were the only ones that counted.

Well, I haven’t been so fortunate.

Consider an example: Let’s call him "Bill". Bill says that he thinks I’m wonderfully capable, and everything indicates that he is being truthful: that really does seem to be his opinion. In the beginning days of our business relationship, I can do no wrong; in his eyes, I’m perfect. During these early days, his compliments toward me, his encouraging words and his acts of generosity produce a strong sense of loyalty on my part, and anticipation that this business relationship will be enduring and wonderfully beneficial.

Then I begin to see some fragile points in the relationship. When the first area of disagreement arises and negotiation over it is required, I observe an emotional component that I hadn’t seen before. I begin to see that this isn’t just about business; it’s about Bill’s sense of self-importance, which my disagreement with him seems to him to call into question. He seems to think—and may even say—that the important thing is whether our deal makes him look good. Metaphorically, he’s always holding up a mirror to check.

Next I begin to see that this business relationship, as Bill sees it, is one in which I am required to be his ally, but he is not required to be mine. I am expected to defend him to others, but he won’t pay me the same compliment, because doing so would, in his eyes, cost him some of his pre-eminence. I am expected to carry the load for our business transaction or business relationship, and the sole measure of my success in doing so is on-going benefit to him.

Here’s my first take-away from this: If you are contemplating a business transaction or business relationship with someone who is unwilling to commit, right from the start, to the deal in concrete ways that require him or her to participate in the burden as well as the benefit, stop right there. There’s a big red flag waving, and the deal won’t end well.

Here’s my second take-away, from this and other experiences: It is at least as important to know when not to do a deal as it is to know when to do so. Never ignore the red flags. It’s better to miss a good opportunity that it is to take up a lousy one.

What’s your experience?—Stan Crow

About 20 years ago I proposed a financial venture—a new way for the company’s investments to produce a higher return—to one of the nation’s leading industrial firms. The company had no criticism of the proposal but told me that their culture was "never to be first to do anything". They preferred to follow, rather than to lead.

Today that company is a shadow of its former self. In everything it did, it did what others did, rather than innovate. Every division of the company has been sold save one, and the remaining one is a comparatively small service business. The company is no longer an industrial at all.

I believe that outcome is no accident, and that it is a direct result of the company’s decision not to innovate and not to lead.

One could cite many other examples, but that one is a personal one from my own experience.

How is it, then, that America’s financial press, our political leaders, and leaders of America’s biggest businesses regularly expound on what is said to be America’s innate propensity to innovate?

The experience of mine which I related above has been repeated over and over, countless times, as I’ve heard lenders, business owners, commercial-property developers, lawyers, accountants and various others express their unwillingness, or at least reluctance, to innovate or lead. It certainly causes me to question whether, in fact, Americans really do have an innate innovative streak, or at least one that is different from that of the people of any other nation.

Americans are great at imitating, though. I think of the 1031 tax-deferred-exchange business. One taxpayer did the innovation which led to the tax-deferred exchange, and then thousands upon thousands of businesses jumped on the bandwagon, as promoters of those exchanges.

Another recent event which causes me to wonder about at least the future of innovation in America is the passage of national healthcare legislation, much of the premise of which was that there has been too much innovation in health care. The idea is that innovation is costly, and cost-control is more important than is development of new treatments.

It concerns me, too, that innovation in financial instruments on Wall Street now has such a bad name (not entirely undeservedly).

Is America on its way to ceasing to be #1, because of loss of innovation? Or fear of innovation itself? Or fear of stifling regulation? Or lack of confidence that we know what we’re doing?

And about your business: Do you prefer to innovate, or to follow? If you prefer to follow, how do you reconcile that with a desire for America to be #1, the innovative leader in the world? Or do you want innovation, but only as long as someone else does it?—Stan Crow

"It’s not what you know," the well-known expression goes—Google produces about 1,150,000,000 results!—it’s who you know. (I wish that whoever popularized the expression had known at least to get it right, with "whom" you know.)

I understand the rationale of the expression, and it has its element of truth. I can tell you, though, that when someone tries to persuade me of a new business idea or business venture by placing more emphasis on who (he never says whom) he knows rather than what he will do, I figure there must be some weakness in the what. It’s a strong indicator, for me at least, that hearing about the proposal is not worth my time.

It may strike you differently, but emphasis upon one’s contacts when one is trying to sell an idea or venture comes across to me as bragging, or puffery. If I like the proposal and then ask for references, that’s the time to hear about contacts. Unless I’m already persuaded about the idea or venture, I don’t care to know that the promoter attended a White House dinner, for example, or is best friends with Warren Buffett.

If the merit of the proposal isn’t apparent, the promoter’s purported popularity or influence won’t make it any better.

Even with regard to what you know, please let the brilliance of the proposal speak for itself; don’t try to close the deal by telling me you are brilliant because you thought of it or put it together. Your being self-impressed won’t impress me—but it will cause me to think that what you are proposing is of questionable merit.

An exception when whom you know can be more important that what you know, is when what is at issue is an introduction to someone, and what is being sought is a contact of that person to make the introduction.

What about you? Does someone else’s bragging, or someone’s emphasis on the important people he knows, cause you to question the merit of the matter at hand?—Stan Crow

Being a lawyer in my other life, I think I know a loophole when I see one—and I don’t like them any better than other people do.

I don’t know what your definition of a loophole is, but mine is this: A loophole uses something about the words involved, to bring about a result which pretty clearly was not intended when the words were written. Do you remember, "It depends on what the meaning of ‘is’ is"?

If Congress has written a statute which was clearly intended to prohibit "x" but in one way of reading the words "x" can be said to be allowed, that’s a loophole. I wouldn’t want to build a business or investment strategy on a goof-up by Congress in the words it used.

So, when someone wants to talk with me about what is claimed to be a great business idea and I find that it’s based on trying to skirt the intent of the law, that’s the end of the matter as far as I’m concerned. I don’t believe in putting my time or money into something that’s too clever by half.

I want to hear the substance, and I want to know why the proposed transaction or business idea is in accord with the rules, not an end run around them. I don’t mind new applications of the rules, but I want those new applications to be a good fit with what the rules were meant to accomplish.

Do you agree?—Stan Crow

"It can’t miss."

"Nothing can go wrong."

"It always happens this way."

"On current trends . . . ."

As we try to weed out very quickly those investment and business recommendations which aren’t worth taking time to consider, one of my indicators is this: Does the proponent of the recommendation assume that current market conditions will continue unchanged, and base the recommendation on that assumption? Does the proponent assume that some current trend in the market will always be the trend in the market?

Any recommendation which is based on the assumption that the way things are today is the way they will be tomorrow does not take into account the natural variability of about everything in business—let alone what is called the "black swan" event: one which may be unlikely but which, if it occurs, will cause all projections to be wrong in a big way.

The recent financial crisis in this nation was at least in part a result of ignoring the black swan, because many experts concluded that certain risks were so unlikely to occur that they needn’t be taken into account. See "black swan theory", http://en.wikipedia.org/wiki/Black_swan_theory.

To some degree, simply to continue to function day after day, we have to proceed as though there will be no black swans in our path. When it comes to business or investment proposals, however, I like to see that the proponent’s analyses include at least some consideration of even very unlikely "what ifs"—because at least one of those unlikely what ifs (the black swans) may well occur. What are the back-ups? What are the safety mechanisms?

If the proponent is so convinced of his or her idea that he or she thinks there is no need to consider back-ups and safety mechanisms, that’s all I need to know, to turn my attention elsewhere.

Surprises happen. Good ideas and good thinking take that into account.

Have you experienced any black swans?—Stan Crow

When someone excitedly approaches me about a new idea for a business process or activity, it is unlikely to receive serious consideration on my part. For me, the excitement is a turn-off, because it indicates an effort to put across the idea emotionally or by the force of personality, rather than because the idea itself is persuasive.

So, what are some indicators of that excitement? For me, the following are some indicators (in no particular order) that cause me to turn away and move on to something else.

A. Excessive Emphasis

If the proposal or information comes to me in written form, it’s a real turn-off if it’s loaded with exclamation points or other repeated emphases. Worse yet is multiplication of emphases: bold face, bold colors, exclamation points , underlined and with highlighting, all in one sentence or paragraph. Over-doing the emphases doesn’t compliment my intelligence (even my ability to read), let alone the writer’s.

B. Urgency

If the proponent tells me it is urgent that I decide immediately or very quickly, and if that asserted urgency is not because of my own time contraints, then the asserted urgency comes across as simply a high-pressure technique which is designed to bypass thought. That alone is reason for me to bypass the proponent’s idea.

C. Everyone Is Doing It

Any attempt to sell the idea because others are sold on it is another way to bypass thought. It is a way of suggesting that I should join the group so that we can all be excited together. I generally believe that by the time everyone is doing it, the real profit opportunity has gone away, if it was ever there.

D. Immense Profit

If the proponent emphasizes the immense profit which the idea or venture is sure to bring, but the proponent is reluctant to talk about risk, that’s a further indication that the proponent is so excited that he or she hasn’t thought about risk, or has thought about it but doesn’t want me to do so.

Each of us is unique, and maybe your tolerance for excited promotions is much higher than mine is. Even if you can handle it better than I can, these may be helpful cautionary indicators.

Don’t misunderstand me, though; I’m not saying that it is inappropriate to be enthused or optimistic about one’s idea or venture. In fact, I don’t see how one could carry an idea forward without that. It’s just that one should not expect others to buy into it just because of the proponent’s enthusiasm or optimism.—Stan Crow

What is your filter setting that determines what attention you give to new ideas? How do you decide whether to hear a new business idea or to reject it without a hearing?

We become jaded from the bombardment of often-excessive or unverifiable claims for this or that. In self defense, we set our filter on "high", and we don’t let anything through that doesn’t come from an already-approved source.

I do that myself. It’s a rare telemarketer that can get out more than 10 words before I cut them off. Mass postal mailings go directly into recycling, unopened and unread. I never click on ads on Websites. I tune out nearly all radio and television advertising. Because newspaper advertising is quieter, it gets some attention from me—but still short shrift. All of that puts me beyond the reach of most promoters.

So what gets through to me? For the most part, information that comes to me in one of two ways: (1) Through the recommendation of a friend or colleague, or (2) through news and commentaries in the financial and business press.

Even then, my first filter setting for information that does get through to me, is my requirement for a stated economics rationale for the business idea or venture. If the proponent cannot succinctly and coherently tell me what the underlying economics rationale is, I don’t deem it to be worth my time to try to figure out what the rationale is, as a favor to the proponent. After all, any proponent who doesn’t know and understand the underlying economics of the deal is not going to succeed anyway.

One might think that is so obvious as to be unnecessary to say, but apparently it’s not obvious to many of those who have a "great new idea" for this or that business.

When I ask, "What is the principle of economics which makes this work?" the usual silence in response is all I need to know.

We don’t want to have our filters set so high that we don’t see or hear about new business ideas that really are game-changing. Still, we don’t want to waste our time. So, a pre-eminent filter setting for me is to ask, "What is the principle of economics which makes this work?"

Also, when I am the one who is the proponent of the new idea, I consider answering that question to be a first priority.

What do you think?—Stan Crow

"Oh, sure," you may say, "if I could pay my loan in full, why would I do a short sale in the first place?"

Well, let’s start at the beginning. You may have paid much more for your commercial property than it’s now worth, and you may owe on it much more than it’s worth. It may not be providing enough income to cover for much longer the payments on the debt. You might be able to sell the property, but not for enough to pay the debt. And, you can’t do a short sale unless your lender consents, which, so far, it hasn’t agreed to do, because of the loss the lender would incur.

You’ve been hoping that the economy would turn upward fast enough and soon enough to rescue you, but that’s not happening, and it might not happen, some experts say, for six, seven, or even ten years yet.

Let’s say, though, that your property is worth about half what you owe, and that it would still be a good investment for someone who could buy it for what it’s now worth.

If so, here’s what you can do: Under many circumstances, S.Crow Collateral Corp. can buy your property for the amount you now owe on it and re-sell it to an ultimate buyer for what the property is worth now. With what we pay you, you pay your existing loan in full. Yes, that means we’d take a loss on the deal, but once your existing debt is paid in full, we know how to help your lender make enough additional money to pay us back for the loss we incur when we over-pay you for your property.

Moreover, when we re-sell the property to an ultimate buyer, there’s some possibility that there may be some cash which you can take out of the deal.

The result overall: (1) You pay your debt in full, preserve your credit, and maybe walk away with some cash; (2) your lender is made whole, and more besides; (3) the ultimate buyer gets a quick deal now at an attractive price; and (4) S.Crow Collateral Corp. is made whole over time, from your lender’s extra income that results from the deal.

Maybe you’ve been like Wilkins Micawber, the character in Charles Dickens’ novel David Copperfield, www.online-literature.com/dickens/copperfield/.  Micawber continually asserted his confidence that "something will turn up." If you read this posting again, you should realize that for you it just has.—Stan Crow

Following Monday’s post about opting out of what may be a decade of stagnant values for commercial real estate, the question is asked: Does that mean that S.Crow Collateral Corp. can do something to cause values to rise?

No, it doesn’t, and we can’t calm hurricanes or prevent earthquakes, either.

While we can’t cause market values to rise, in many circumstances we can restore you to a position of having equity in the asset—commercial real estate or a business, for example—and that is as good as an increase in the asset’s market value.

Let’s take an over-simplified but rather typical example. (Remember story problems from your school days?) Let’s suppose that you purchased a business or commercial real estate that was then worth $25 million, and you took out a loan of $20 million to do so. So, at the time of your purchase you had equity of $5 million (ignoring transaction costs).

Let’s suppose further that the business or property is now worth $12 million and can no longer service the $20 million debt. The income from the business or property could reliably service a debt of $10 million or less. If you were to sell for the $12 million value, you’d take a $13 million loss, and you might still be pursued by your lender for the unpaid $8 million—a very deep hole indeed.

Now, though, you bring S.Crow Collateral Corp. into the picture, with a signed offer by us to buy your business or property for the amount you owe (which I’m assuming is still $20 million). With your loan about to be paid in full, your lender offers to lend $7.8 million to you (65% of the $12 million present market value), and solely with that $7.8 million you purchase the business or property back from us, in a transaction that is closed simultaneously with your sale to us for $20 million.

When the deal closes, because the business or property is worth $12 million, you suddenly have equity of $4.2 million, almost replacing the $5 million equity you once had. Furthermore, now you have bought low rather than high, and you have a very reasonable prospect of enjoying further increase in value, whether or not the value ever returns to the $25 million you originally paid, and without waiting a decade.

That is how you can opt out of a decade of stagnant market values. It may reduce your property taxes immediately, as well, and that savings will go right to your bottom line.

What’s in it for your lender? Well, your lender faces the prospect of about the same loss you do, and your lender doesn’t have any better hope than you do, that the market value will rise enough to recoup its $20 million, without waiting maybe five to 10 years. Further, if your lender takes ownership of the asset, your lender will face high costs to take over something which isn’t necessarily part of the lender’s skill set. Your lender may face rehabilitation costs, upgrading expenses, hiring management, and so on.

In contrast, when you show your lender your offer from S.Crow Collateral Corp., your lender will have a way to be paid in full, immediately.

Then, when the lender makes the new loan to you and you pay that money to S.Crow Collateral Corp., most of that money will be invested right back with the lender. Among other things, that serves as further incentive for the lender to make the new loan to you.

The combination of payment of your old loan in full, the new loan to you at an amount you can afford, and the new investment back with the lender increases your lender’s income immediately.

That’s important, because that increased income for your lender is what will generate the money that makes this all work. You see, when S.Crow Collateral Corp. buys at a high price from you and sells back to you at a low price, we take a substantial loss: loss that otherwise would be on your books and your lender’s. The lender’s increased cash flow makes it possible for the lender to re-pay our investment in the lender some years down the line, at a price that will make us whole. In the meantime, S.Crow Collateral Corp. has to go elsewhere to finance that loss, but we can do that, with appropriate agreements with your lender.

In situations of tenant-in-common investments or securitized loans, some additional components must be brought into the picture, such as to prevent the TIC investors from losing their tax deferral when these transactions occur. (If S.Crow Collateral Corp. does not get involved and the TIC investors lose the property, the deferred taxable gain on their previous tax-deferred exchanges will be recognized and the tax will be owing, even if the present TIC investment is a total loss.)

So, we can’t cause market values to rise, but isn’t this about as good? In some ways better?

Finally, I suggest copying and printing this post. Save it. Show it to people whose wisdom and expertise you trust. Test it. Then enjoy the fruits.—Stan Crow

A new report by National Real Estate Investor (see excerpts, below) is causing consternation among those who are involved in the commercial real estate sector of the U.S. economy, whether as owners, investors, lenders, appraisers, brokers, title insurers, closing and escrow companies, or whatever else. That’s because the report exposes what may be a decade of stagnation in that sector of the economy.

Lenders who are expecting rising commercial real estate values to rescue them from troubled properties may have a long wait. So may investors in tenant-in-common properties nationally. So may title insurers and others. And so, especially, may 1031 accommodators of tax-deferred exchanges.

The government is not helping matters, by its tacit encouragement of "pretend and extend" treatment for troubled commercial loans. That will drag out the process which the market absolutely cannot avoid, of working its way to knowable values.

For those who want to opt out of a decade of stagnation and move into profit quickly, the key is a private-sector financial process which accomplishes the following:

1. It pays in full commercial real estate loans that no longer make sense in light of today’s lower values;

2. It opens a commercial real estate lending facility for new loans in conservative relation to today’s lower values;

3. It increases, rather than decreases, the income of commercial real estate lenders;

4. It decreases, rather than increases, the risks of commercial real estate lending; and

5. It provides owners with instant equity in their commercial properties, instead of no equity and being "under water" on their loans.

Is this possible? Yes, it is, with the correct blend of certain non-real estate financial activities with commercial real estate lending—activities which have most people in the industry have thought to be unconnected with each other.

We’re here to connect them.—Stan Crow

nreionline.com/finance/news/pimco_commercial_real_estate_prices_0616/:

Avoiding Being Ravaged by Taxes, for Those Who Are Successful Now

Almost every day we deal with some people who are enjoying the rewards of many years of hard work. Those who don’t know them may think it was always easy for these people, but, in most cases, what they now have did not come easily—or with any certainty that it would ever come. Now, their greatest financial concern is preservation of what they have achieved—most especially, protection from being ravaged yet again by taxes.

Avoiding Being Ravaged by Commercial Debt, for Those Who Struggle Now

Some days it’s a roller coaster around here, because at one and the same time, while we are working with persons whose concern is avoiding having success be taxed away, we’re also working with others who feel that they are standing on the edge of a precipice because of the collapse of their investments or business in today’s economy—often after a long career of success in those investments or that business. For these, their greatest financial concern is, similarly, to preserve at least some of what they have achieved, but now the fear is of being financially destroyed by debt rather than by taxes.

In our use of collateralized installment sales and their variants in both of these situations, I have observed that these are not two different types of people. Life may be treating them differently right now, but most people who are successful now haven’t always been, and most who are struggling now haven’t always been.

For those who are struggling now because of commercial debt, my goal is to play a part in helping them to return to the success they once knew—to turn their "necessity to glorious gain", in the words of William Wordsworth, from "The Happy Warrior":

—Stan Crow

If the Property Is Fine, But You Want Out

Many of those who purchased tenant-in-common (TIC) interests in investment properties to complete a tax-deferred exchange under Section 1031 are feeling ticked off with an investment which they no longer want. That’s especially true, if they want to get out but don’t want to have to exchange into yet another property or yet another TIC interest—but they continue to want to defer their accumulated taxable (but as-yet-untaxed) gain.

An attractive rescue plan can be a collateralized installment sale, so that your tax is deferred under Section 453, the installment-reporting section of the Internal Revenue Code, rather than under Section 1031 for exchanges. Under Section 453, there is no re-investment requirement at all, as a condition of continuing your tax deferral. With a collateralized installment sale, you sell to a dealer who re-sells to the ultimate buyer, usually for cash. The dealer places the pre-tax cash proceeds into a "collateral account" which is safely set aside and invested in accord with your criteria, in financial instruments, stocks, bonds, whatever. You receive a return based on the investment of the pre-tax amount in that collateral account, rather than only the net after tax. Check with your tax adviser, but we think this is a clean way out of TIC investments.

Furthermore, it typically doesn’t require ageement by the other TIC investors for you to do this.

If the Property Is Burdened by Too Much Debt, in Relation to the Property’s Value Now

If the property has declined in value and now is loaded up with too much debt, a process which is based upon a collateralized installment sale can make it possible for the existing debt to be paid in full and be replaced by a new loan in a lower amount that the property really can handle.

This process typically requires the agreement of all of the TIC investors, but they are likely to be tickled to agree.

The loss which the lender avoids is passed to the books of the collateralized installment sale dealer, who recoups the loss with payment from the lender some years later, in part from the extra investment earnings the lender enjoys because the troubled loan was paid in full, and in part from other investments that are made possible by the transaction between the lender and the collateralized installment sale dealer.

The loan-resolution process involves some rather sophisticated financial and investment activities for which an explanation is beyond the scope of this commentary—you might roll your eyes at me—but that explanation is available to all of the TIC investors and their advisers, managers and representatives.—Stan Crow

A certain dairy farmer has 100 dairy cows. He instructs his manager to be certain that all 100 are milked every day. When the dairy farmer returns from a three-day trip he discovers that the cows have not been milked. He asks the manager why, and the manager responds, "I decided that it makes no sense to go to the work of milking any particular cow, because each cow is only a very minor part of the total. You can get along okay without the milk from one cow. As each cow came through the milking shed, I thought, ‘I don’t need to milk that one.’ Then I thought the same about the next one, and the next, and therefore, very sensibly, I did not milk any cows."

The dairy farmer replied, "I can get along okay with you, too. You’re fired!"

The Fallacy of Division

What was wrong with the manager’s logic? As logicians know, the manager committed the logical "fallacy of division," that is, he asserted that what is true of the whole is therefore true of a part of the whole. (Also, the manager’s logic was convenient; he really didn’t want to milk any cows, so his illogic fit perfectly with his own laziness.)

The fallacy of division prominently figures in discourse about politics and public policy, but politicians and purported public-policy experts seem to be unable to recognize it in themselves or to recognize, label and rebut the fallacy when it occurs in others.

Examples

Whatever one may think about the merits otherwise of off-shore drilling for oil, for example, it is an example of the logical fallacy of division, when politicians and policy wonks argue that off-shore drilling in, say, the Gulf of Mexico is unimportant because it is said to meet only a small percentage of America’s oil consumption. (Drilling in the Gulf represents a much more substantial percentage of American’s oil production, but never mind that.) Stated that way, then every part of America’s oil production is minor, so an advocate against oil drilling anywhere can argue that whichever well or oil field is at issue at the moment is not really essential.

In the same way, opponents of nuclear power plants can and do argue against the next one. Opponents of a weapons system for the armed forces can and do argue against the next one.

In the same way, proponents of an additional tax or regulatory requirement can and do argue for the next one, because it’s said to be only a minor additional burden. In that way of reasoning, there need never be an end to adding taxes and regulatory burdens on business.

It’s Not Just the Other Side

A thoughtful reader may note that the examples I’ve used so far fit with my beliefs, such as that the presumption should be against adding burdens on doing business. The same logical fallacy of division can be used, however, by people who generally agree with me on the merits. Example: People who are generally on my side on issues may argue that it’s okay to authorize government to intrude on privacy in yet another way, because the additional way is only a minor addition.

Look at the Whole

What am I saying here? I’m saying that the issue regarding a proposed policy cannot logically be decided on the basis of whether that policy position is minor in comparison with the whole. Instead, it should be decided by looking at the whole, including the proposed policy position, to determine whether the whole makes sense. Otherwise, we begin to justify dumb things just because they make an already-dumb situation only a little bit dumber.

If you watch for the fallacy of division, you’ll run across examples nearly every day. Let’s label those examples for what they are, and let’s not let the speakers get away with logical nonsense.

Or, to say it another way, let’s milk it for all it’s worth.—Stan Crow

My story is a contrast to that told in the Robert Anderson play, "I Never Sang for My Father", which was staged in New York in 1968, starring Hal Holbrook as the son who felt guilty for not having loved his father. (Gene Hackman played that role in the 1970 movie version, with Melvyn Douglas as his father. The play was staged again in New York this year.)

I did sing for my father—quite literally—but my point here, as Father’s Day approaches, is to express my gratitude to him, for one of the greatest gifts he gave to me: his persistent optimism in the reality and potential of opportunity.

His optimism in the reality and potential of opportunity is all the more remarkable, because he lived through the Great Depression, World War II and the Korean War. During his career as an entrepreneur in small business, he was poor, he was prosperous, he was poor again, and he prospered again. He said to me, "Do your best", and, "You can be what you want to me." Indeed, he said, "You can be President, if you want to be."

Yes, part of that was his confidence in ability, which as a biased father he thought he saw in me. The greater part of that, however, was his confidence that there is an order of things, in which doing one’s best ordinarily—although not always—brings its own reward. Why? Because opportunity is real, and it is full of real potential for the one who sees it and pursues it.

There are those who might say that it was easier then, when taxes were lower and regulatory hurdles were lower. There is truth in that, but my point is that my father, and many like him, believed in the reality and potential of opportunity in spite of some of the greatest challenges that the world had ever faced.

So, here’s to Dad! I sing his praises again, in gratitude for a priceless gift which he made real in me: optimism in the reality and potential of opportunity.—Stan Crow

I said a couple of days ago that I would comment further about what is called a "Deferred Sales Trust^TM" (or "DST", for short), see www.myept.com marketed by an outfit called "Estate Planning Team" (EPT).

I don’t see it as my role to try to criticize (or publicize) the competition, but when people want to know how a DST differs from a collateralized installment sale, it’s appropriate to answer honestly about what those differences are.

Here’s one which should be emblazoned on a cautionary banner for every person who is considering selling an asset in a DST transaction: the DST promoters invite what I believe is a conflict of interest for the professionals who are advising the seller.

At www.myept.com/Attorneys the promoters say this, to attorneys:

"In addition to increasing your legal fees, by joining EPT you may be eligible to earn reoccurring solicitor's fees on each closed DST case. When a DST closes, the proceeds generated from the sale of the asset must be professionally managed by the DST Trustee. If your state bar allows you may earn a percentage of the investment manager's fee in the form of a solicitor's fee. These fees are paid to you every year that the assets are managed within the DST. Each state bar has its own view on solicitor fees. Contact your state bar to ensure that there are no state rules or ethical opinions that prohibit attorneys from receiving solicitor fees."

If you are a prospective seller, think very carefully about it, if your attorney advises you to use a DST transaction. You may just want to ask your attorney whether he or she will be compensated by EPT for recommending to you that you use a DST transaction.

Do you want your attorney to recommend a course of action because your attorney believes that is the best course of action for you, or do you want your attorney to have a personal monetary interest in recommending one course of action (a DST sale) as opposed to an alternative?

Whether or not a particular state’s bar association deems such a payment to your attorney to be an ethical violation, it doesn’t take a uniquely astute ethical sensitivity to see that the quoted statement above is an overt invitation to an attorney to have a personal monetary reason to advise you one way rather than another. In fact, the quoted statement above seems to me to indicate a willingness (by someone, anyway) to push the ethical envelope.

Okay, so suppose the person who recommends a DST transaction to you is a certified public accountant. Do the ethical concern and potential conflict of interest exist there, too?

Well, see this, at www.myept.com/CPA%27s---Tax-Professionals:

"As a member of the Estate Planning Team you may also be eligible to earn re-occurring solicitor fees [footnote about checking on the rules of the professional’s jurisdiction] on each closed DST case if your resident state allows. When a DST closes, the proceeds generated from the sale of the asset must be expertly invested by the DST Professional Trustee. These fees are paid to you every year that the assets are managed within the DST by the selected investment advisor.

"In the event your resident state prohibits fee sharing, you may request that EPT direct you to a securities broker/dealer and registered investment advisor that will sponsor you to obtain a Series 65 registration/Investment advisor representative registration which would enable you to be paid on-going compensation generated from monies invested from DST fee based money management."

For whom is your CPA working, if your CPA is paid by the DST promoter through the earnings on the investment of your sale proceeds?

In those jurisdictions which allow these side payments, at the very least the professional should disclose to you that the professional is being paid by the promoters whose transaction the professional urges you to undertake. Even if the professional discloses that to you, how certain can you be, that his or her advice is based solely on what is best for you?

Oh, yes, lest there be any doubt: in a collateralized installment sale transaction, S.Crow Collateral Corp. does not pay money on the side to your attorney or CPA. We can arrange the transaction so that the after-tax cost to you of other transaction costs is reduced, but you pay your attorney and CPA. We don’t.—Stan Crow

It's a little embarrassing at parties, when people excitedly clamor to learn about the various ways to defer taxes, or about how we resolve troubled commercial loans.—SC

Because they are so widely marketed, I’m often asked about what are called "Deferred Sales Trusts^TM", see www.myept.com, marketed by an outfit called "Estate Planning Team". Those who ask me about deferred sales trusts, or "DSTs", for short, usually want to know how they differ from collateralized installment sales, and whether DSTs achieve the tax deferral that is advertised as their primary benefit.

I see a red flag, when I read on the Estate Planning Team’s home page that DSTs are "an IRS tax code compliant strategy to defer capital gains tax on the sale of highly appreciated property", and when I read, at www.exeter1031.com/news_PLR_deferred_sales_trust.aspx, that on March 10, 2009, the Internal Revenue Service "issued a highly anticipated Private Letter Ruling today that addresses the tax deferral strategy called Deferred Sales Trusts™."

Well, I’ve read that Private Letter Ruling, and it doesn’t mention DSTs even once. It deals solely with these questions: (1) Whether a trust in which the trustee was unrelated by blood to the installment seller but was in business with the installment seller was a "related" party for purposes of installment reporting under the tax code; and (2) whether, when and how unrecaptured gain because of depreciation deductions must be recognized.

The ruling declared as a caveat that it expressed no opinion on anything other than the specific questions asked, it may be used only by the taxpayer who requested it, and it may not be used or cited as precedent.

Among the glaringly unanswered questions is this: Is it relevant how the trust came into being, and who created it? The ruling is silent about that, because the facts in the taxpayer’s request for the ruling didn’t say. And what about the economic substance doctrine, now codified by Congress?

The biggest red flag, though, is simply in the representation that DSTs are "an IRS Code compliant strategy". It seems to me that such a representation makes the sponsors virtually the guarantors of the promised tax outcome. Given the unique circumstances of each taxpayer and the risks of varying outcomes of tax audits, that’s not a representation I would care to make, especially in a carte blanche fashion such as that.

So, right at the start, a substantial difference between a collateralized installment sale and a DST is that a collateralized installment sale is a sale to a dealer who buys to re-sell, not to a promoter of a trust company which represents what your tax outcome will be. We believe that a collateralized installment sale can bring both non-tax and tax advantages to our sellers, but we urge our sellers to obtain their own tax and legal advice for their particular circumstances. Every collateralized installment sale transaction is unique, and it’s not some one-size-fits-all, mass-produced, mass-marketed strategy.

The operative word here is caution.

I’ll have more to say about this soon.—Stan Crow

Dealburt’s Retirement

S.Crow Collateral Corp. announces the retirement of Dealburt, our long-time editor of The Latest Installment. Dealburt has been the alter ego of Stan Crow, who now takes over the editorial responsibilities for The Latest Installment, first hand. For possible alter-ego analogies (or contrasts or similarities?), one may think of "Bunbury" in Oscar Wilde’s play, "The Importance of Being Earnest," or "Harvey" in the play of that name by Mary Chase. (James Stewart later starred in a film version of "Harvey", and both Art Carney and he starred in television versions.) We thank Dealburt for his great service and wish him a long and enjoyable retirement.

Regulatory-Risk Aversion and a Slower-Growth Economy

I believe that economists and commentators have largely missed a very significant factor that will have much to do with whether the U.S. economy returns to strong growth, or merely muddles along (or worse). That factor is this: Will we continue down the path of becoming a "regulatory-risk" economy, in which businesses large and small are increasingly unwilling to make any move until they receive a permission slip from some government official or agency?

From personal observation, I can say this: The reason why business people are substantially immobilized from trying new activities or methods without governmental permission is that without that blessing they believe they can’t be certain whether doing the new thing would get them into trouble.

Government by Agencies and Officials

Underlying this uncertainty is the perception that the federal government is becoming, more and more, a government by agencies and officials rather than a government of laws.

It’s not that there’s a shortage of statutes on the books—far from it. It’s that the usual practice now is for government agencies and officials to be granted—either by statutory text or by accretion—so much discretion in making decisions that what really counts, as far as business people are concerned, is often not what the law actually says, but what some official may later decide the meaning, scope and particular applications of the law are, whether or not foreseen by the legislators.

To this uncertainty about what the official or agency may decide that the law means, one can add uncertainty about how long it would take to find out and the cost of lawyering up even to ask the question. Then one can understand why there is a growing regulatory-risk aversion on the part of business people today.

I Was a Regulator Once

I once served on a regulatory body, many years ago. As a free-enterprise guy, I was caught by surprise, when I began to think that I could accomplish great things with the imposition of additional regulations. When I was the one who wrote the regulations, I found it easy to mandate that other people do things the way I thought best. When I realized, somewhat late, what was happening to me, I resigned that position, having learned an invaluable lesson.

The propensity to regulate (the government’s side of things) is the direct cause of regulatory-risk aversion (the private-enterprise side of things).

It’s a Big Deal

Our economy is struggling now against many headwinds, but regulatory-risk aversion is one which, as far as I can tell, most economists have not taken into account. They should. It’s a big deal.—Stan Crow

Important announcement: With the hurdles now overcome, we are pleased to announce our criteria for resolving troubled commercial loans, as follows:

1. Loan status: The loan is a troubled commercial loan, that is, the property is worth less than the amount owed, and the payments on the loan are not current or may soon not be current;

2. Lender: The loan is owned by a bank (1) which has a "troubled asset ratio" preferably not above 50% (see http://banktracker.investigativereportingworkshop.org), (2) which is not under any cease-and-desist or consent order by its regulator, and (3) which now holds the particular troubled loan in its loan portfolio without having sold or securitized it;

3. Minimum amount: The unpaid balance on the troubled loan or group of loans is $1 million or more;

4. Timing: At least 30 days remain before foreclosure;

5. Bankruptcy: No bankruptcy proceeding is pending regarding the borrower;

6. Relationship between lender and borrower: The borrower is a valued borrower whom the lender would like to retain as a customer, and the relationship between them is amicable;

7. Access: The borrower has access to the bank at the senior executive officer level; and

8. Debt service: The borrower will be able to meet the debt-service obligation for a new loan, newly underwritten by the bank in relation to the new, lower value of the property.

Please note carefully: Subject to contingencies on both sides (including a particular financial transaction between S.Crow Collateral Corp. and the bank), and subject to satisfaction of the above criteria, and subject to mutual agreement upon terms and conditions that are approved by the borrower and by S.Crow Collateral Corp., the latter will agree to purchase the property from the borrower at the amount the borrower now owes on the property, so that the borrower can pay the bank in full. S.Crow Collateral Corp. will then immediately sell the property back to the borrower at a lower price which is made possible by a new loan from the bank to the borrower and which the borrower can service. The arrangement for the new loan is solely between the borrower and the bank.

S.Crow Collateral Corp.’s financial transaction with the bank increases the bank’s Tier 1 capital and enables the bank to replace the existing troubled loan with U.S. Treasuries or U.S. agency securities. That takes the pain out of the deal for the bank, so that it can be willing to lend new money to the borrower and be comfortable with doing so.

S.Crow Collateral Corp. does not represent the borrower in obtaining a new loan or settling the existing one, because S.Crow Collateral Corp. is not an adviser or agent for anyone. Instead, S.Crow Collateral Corp. acts solely on its own behalf, as a principal, and therefore does not charge either the borrower or the bank any fee for any service. We make our money as a counterparty in the transactions in which we participate.

If you are the lender or the borrower in regard to a loan which satisfies the criteria stated above, you are welcome to contact us.—Stanley D. Crow, President, S.Crow Collateral Corp.

The situation:  Now that I’m ever-so-slightly older and thinking more about my retirement, I’m becoming quite concerned about my investments. If I were to sustain a big investment loss now, I wouldn’t have time to recoup, and I wouldn’t have employment earnings to help me to do so. The state of the economy seems very agitated right now. What can you tell me to ease my concerns?

Editor's Comment:  I can give you a solid footing on which to minimize your risk of investment loss. What’s more, I can do so without even giving you any advice about the investments themselves.

Here it is: Invest with dollars that haven’t been taxed yet, to increase substantially your margin against investment loss.

Let’s assume that you have the opportunity to sell a capital asset for $1 million, that your tax basis is zero, and that the combined state and federal capital gains tax rate is 30%. Let’s compare selling for cash at the end of 2010 vs. selling with a collateralized installment sale at the end of 2010. Let’s assume that either way the sale proceeds are invested (directly by you, in the case of a cash sale, and via a collateral account if it’s a collateralized installment sale) in January, 2011, in something that immediately loses $200,000. Let’s assume, further, that either way the new investment is sold right after the loss occurs. You then receive what’s left, either directly or because the collateral account is closed and the installment contract is paid. (Ignore transaction costs either way.)

Why do you get $60,000 more with a collateralized installment sale? If you begin with a cash sale for $1,000,000, that amount is immediately taxed, at a cost to you of $300,000, and when you lose $200,000 on the next investment you never get back any of the tax on the $1,000,000. With a collateralized installment sale, however, the government bears 30% of the loss for you, because the $200,000 you lost was never taxed as income to you in the first place. With a collateralized installment sale, you never receive $1,000,000 to be taxed; you receive $800,000, and the tax on that is $240,000 instead of $300,000, and the government absorbs the other $60,000.

It gets even better, though, if instead of immediately terminating the collateral account after the $200,000 loss you delay payment of the tax on the $1,000,000 collateralized installment sale for 30 years, as follows:

You improve your position by $670,000 just by choosing a collateralized installment sale: a very substantial buffer for possible investment losses! (Some contingencies are not addressed here, of course.)—Stan Crow

The situation: As a congressman, and especially because of my committee assignments, I see just about everything that people try, in an effort to avoid or minimize tax. Sometimes because of promoters who sell transaction packages, and sometimes because of under-informed tax advisers, this or that tax-avoidance strategy will be foisted on well-meaning taxpayers as the cure-all in every situation. Over and over, from what I hear, promoters tell people, "Sign these forms and follow these instructions, and you can defer/avoid/minimize tax." The promoters give the impression that the tax outcome is just a matter of using the "right" forms, which, no coincidence, the promoters can sell.

The promoters typically attach a trade name to their forms. They publicize that tradename as though reality and intention don’t matter, and as though tax outcomes were only a matter of labels. They advertise that trade name until eventually the IRS works its laborious way to them and exposes the subterfuge for what it is.

Then, when that happens, it’s not unusual for the promoters to adopt a new trade name, change this or that little feature of the forms, and then start all over with a re-named strategy that, once again, purports to be the formulaic solution for every taxpayer. Again, they will run ahead of the IRS for a while.

It’s entirely appropriate for taxpayers to minimize their tax cost within the bounds of the law. Believe it or not, I’m actually in favor of letting everyone minimize their taxes, as long as they play by the rules. When they mess up, though, it’s unpleasant for them and unpleasant for me, when I have to hear them complain that they were misled. Can you do anything to help to caution people to stay away from promoters’ formulaic tax schemes?—Congressman

Editor's Comment:  Much trouble has resulted for many taxpayers who have been told, "Just sign this," to reduce their taxes. Often the resulting trouble for the taxpayers occurs when the IRS audits them, but probably the greater problem is the mess that is made of how the taxpayers conduct their daily business and receive their income.

Much of the problem is caused by promoters who seem to believe that one size fits all, when, really, that’s hardly ever accurate. Just as every person is unique, every person’s business situation is unique, and every business transaction should be uniquely fitted to that person and that business situation. Only in that way can the best outcome for both business and tax purposes be envisioned, let alone achieved.

If I can achieve nothing more than help people to learn to stay away from tax-strategy promoters and to turn, instead, to constructing real business transactions with real opposite parties with real business benefit for the particular situation quite apart from the tax effect, then I will have the great sense of satisfaction that comes with a job well done—and the taxpayers will have the best prospect of achieving the greatest tax efficiency, as well.

Remember this good advice: one size fits one.—Stan Crow

The situation: I have two questions which relate to creativity. The first pertains to my business. Because of changes in the industry in which I do business, I need to re-evaluate the business model for my company. So far, every time I try to do that I come up with the same things I’ve always done, and they’re not working all that well. How can I break out of that mold and do some really fresh thinking?

My second question pertains to your business. You regularly discuss taxes, and quite often you have creative ideas for minimizing taxes. This strikes me as an anomaly; taxes seem to me to be at the far end of the spectrum from creativity. How can taxes, which are so very rules based, have anything in common with creativity? (Of course, I want to minimize my tax burden, just as about everyone else does, so I can cope with anomalies if necessary!)—Business Owner

Editor's Comment: You are right to begin with your business model, because a business model can either cause or prevent success—or it can cause success at one time and then prevent that same success when conditions change. As you have discovered, your business model can get moldy.

Anyway, out of many possibilities, I’ll suggest a few that may help you begin to think in a fresh way.

1. Use your right brain, or borrow one.

Creativity comes more from the right side of your brain than from the left side. The left side is more linear. It thinks from point A to point B to point C. The right side, on the other hand, may omit A, B or C, or may re-arrange them. The right side tends toward bold ideas and bold action, such as sliding down the banister instead of walking down the stairs. The left side, being linear, tends to build on known information and to follow it to a logical conclusion. The right side, being somewhat improvisational, may start with a conclusion and ask the left side, "Why not?"

At least in my own experience, creativity has almost always begun with a "why not" sort of question, and the left side of my brain is then given the task of building a structure accordingly, sometimes working from the answer backward to the underlying point of beginning, the point at which I am looking for a solution.

If you tend to be more left-brain oriented, and the right side of your brain is dormant or weak, find someone who is your opposite. Begin a series of conversations with that person about your situation. It may even be better if that person doesn’t know beans about your business or how it works, because that person’s role is to come up with questions for you to consider, that you might have never considered because they’re so off the wall.

2. Use your left brain, or borrow one.

If, on the other hand, it’s your left brain that is the under-nourished side, engage in the same sort of conversations with someone who is your opposite: someone who can build a coherent structure for those ideas which attract you but you can’t see how to implement them.

3. Get over a dismissive attitude about your counterpart.

Strongly left-brained people tend to think right-brained people don’t know anything worthwhile in the areas that count (e.g., mathematics, logic, engineering, accounting, many areas of the law, company policies, government bureaucracies, organizational imperatives). Strongly right-brained people tend to think left-brained people don’t know anything worthwhile in the areas that count (e.g., beauty, art, expression or understanding of feelings, intuition, inter-personal relations). Get over it, because, in my experience, at least, creativity comes from extended and on-going interchange between someone who is strongly left-brained and someone who is strongly right-brained. Whichever you are, you aren’t better. You need the other.

4. Reason from principles, not from particular details.

Even left-brained people such as me can do this. Creativity can blossom when it is given a wide horizon, and that means it should start with principles before it addresses a particular problem. What is the reason why I have this business? What do I want to achieve with it? What will make me feel good about myself with this business, and what won’t? Just as philosophers seek (at least, should seek) truth, goodness and beauty, what is true about my business? What is its goodness? Where does it, or can it, achieve beauty?

Be prepared for surprises as you examine such questions. You may decide that you don’t like some aspects of your business, even if they seem to be quite successful.

5. Use categorical reasoning.

Here I turn to taxes, to illustrate my meaning. I am not using "categorical reasoning" in the pejorative sense of being closed in one’s thinking. What I mean here is that very often the problems one encounters are problems of category: a category that is wrongly chosen, or chosen simply by habit, or chosen simply because of the name you have attached to what you do. If we assign a problem to category "x" and it really would fit better in category "y", we are likely to use entirely the wrong approach and get entirely the wrong outcome.

Taxes are almost entirely questions of category. Is this revenue ordinary income, or is it capital gain? Is this activity a business, or is it a hobby? Is this business selling this property as a dealer or as an investor? Is this asset an item of supplies, or an item of inventory? Is this transaction a sale, or is it a loan, or is it a lease? The tax result will depend on the category to which the thing is assigned, and, surprisingly enough, you may have a considerable degree of flexibility in choosing the category, because you can choose how you do what you do.

This does not at all justify fakery or calling something what it isn’t. Often, however, you can choose to do something the way that it has always been done, in category "x", but you also have the freedom to do the thing in quite a different way and therefore be in category "y". If you like the outcome of category "y" better, then look for a way to structure what you do accordingly.

The categories are givens. What you do is not.—Stan Crow

The situation:  My wife and I own a large fruit-growing business, through a limited liability company we formed. We have received an offer of $60 million from someone who wants to buy the LLC. Our tax basis is $10 million, and we have no debt to speak of. I’m aware of the limit on tax deferral through installment sales, to $5 million of installment sales per taxpayer per year. Do you have something that would be applicable, to defer the tax on the entire $50 million gain?—Grower

Editor's Comment:  Actually, there are a variety of ways in which to solve your tax problem. A very interesting one is to use a perpetual collateralized installment-sale contract. Here’s how it works: Sell the LLC to a collateralized installment sale dealer on a perpetual (that is, permanent) installment contract for $20 million, with $10 million paid to you immediately. With your wife and you as sellers and with $10 million paid up front, you can defer the entire tax on your $10 million gain.

The dealer will re-sell the LLC to the ultimate buyer for $60 million in cash. The dealer will pay $10 million of that to you immediately, and owe you $10 million on the installment contract, for which the dealer will place $50 million (ignoring transaction costs here) into a "collateral account" at a bank or financial services firm you approve, with the $50 million as security for the $10 million owed to you and your wife.

The term of the installment contract will be, say, 100 years (which counts as perpetual), which means that you personally will never be paid either the $10 million owed to you or the other $40 million in the collateral account—but you will receive income on $60 million (the $50 million perpetual investment portfolio backing the installment contract, plus your investment of the $10 million you receive up front), without ever having a capital gains tax to pay. And, by standard financial analysis, the right to perpetual income on $60 million is worth $60 million. You could say that enjoying the fruit of the tree forever is as good as owning the tree itself, and better, if there’s no capital gains tax.

So, you will receive the benefit of the full $60 million, with no capital gains tax, ever.

In contrast, if you were paid the $60 million now and you paid, say, 50% of that in tax (if you’re lucky), what would you do with the other $30 million? Invest it, of course, when instead you might have had the benefit of having invested all $60 million.

So, would you rather have $30 million invested or $60 million invested?

Here’s the clincher, though: Let’s suppose you decide sometime that you want to invest in something else, and you need the $50 million. Then you sell the income stream to someone else, and thereby collect the principal—when and if you choose to do so.—Stan Crow

P.S. The collateralized installment sale dealer will be taxed on a $40 million gain, if the dealer doesn’t have balancing deductions.