Rolling over installment sale proceeds

We have a client who sold real estate in an installment sale in 2019. In lieu of receiving the rest of the cash due to him, he wants to invest it in the buyer's LLC (partnership).

Can this be done on a tax-deferred basis under 721 like we normally see in rollover equity deals?

Yes, if the partnership did not issue the note.

I'll be interested to see if OP meant that the buyer is the LLC/partnership and issued the note, or wants to invest it in the buyer's LLC (partnership).

Sorry, let me clarify (I also didn't have the fact pattern correct).

An LLC purchased the real estate an issued the installment note to the seller (seller is my client).

The individual who owns that LLC also owns another LLC that operates a business that will be housed in the real estate he just purchased. He is selling membership interests in the operating business LLC. My client/seller wants to use the remaining money due to him on the installment note to invest in the operating LLC.

Can he invest the remaining money due to him into the operating LLC and defer the remaining gain on the RE installment sale?

That's about what I thought. I'm going to bed. Maye gatortaxguy will save me the trouble before tomorrow.

He could buy membership interests from the owner of the buyer LLC (assuming it is not a disregarded entity), paying via his "mirror" note. Exactly how to do it depends on the facts and the securities laws; but if the two notes are not contractually tied together in any way, there would be no disposition.

An alternative would be for him to use his wholly-owned S corporation to acquire the membership interests in exchange for a mirror note guaranteed by him.

I'm way long out of touch with developments in installment sale rules, but I kind of remember that a transfer of an installment note receivable under such sections as 332, 351, 721 and others is not treated as a disposition that triggers the reporting of the balance of the installment gain. Maybe that all changed, I don't know. Probably no longer so, but someone out there knows.

Hi, Nilodop,

You are correct that a contribution of an installment note under 721 does not generally trigger the gain. But if the transfer is to the obligor, the exemption does not apply. Here we have a 721 transfer to a different taxpayer, so I think he could transfer the note in exchange for a membership interest without triggering the gain. 704(c) would avoid shifting the income.

You are correct that a contribution of an installment note under 721 does not generally trigger the gain.. I'm pleased to hear that. The reg. seems also to say so:

(2) Where the Code provides for exceptions to the recognition of gain or loss in the case of certain dispositions, no gain or loss shall result under section 453(d) in the case of a disposition of an installment obligation. Such exceptions include: Certain transfers to corporations under sections 351 and 361; contributions of property to a partnership by a partner under section 721; and distributions by a partnership to a partner under section 731 (except as provided by section 736 and section 751).

. I don't know why, then, that I'm uneasy with it. Maybe because 453(d) (referenced in that reg.)is no longer what it was when the reg. was published. I haven't traced what the old 453(d) said or why it's gone. Have you?

No, but I remember long ago researching this and being surprised that the note was not triggered on 721 or 351. So I occasionally use this tool...

I don't know why, then, that I'm uneasy with it.

I see where gator has properly referenced 704(c), but no mention that this provision will specially allocate the deferred gain on the note to the contributing partner as it is realized. Does the "reconciliation" of this gain provide you more comfort in this instance?

Does the "reconciliation" of this gain provide you more comfort in this instance?. Sure, if we know there is no gain on the transfer of the installment note to the partnership. I did not get that far, Maybe because 453(d) (referenced in that reg.)is no longer what it was when the reg. was published. I haven't traced what the old 453(d) said or why it's gone. Have you?

Let me state it differently. If the former 453(d) provided that the transfer of the note in a 721 transaction did not trigger gain, and the cited reg. relied on that former 453(d), when was that subsection changed, and how and why was it changed, and is the reg. now obsolete?

Reg was proposed in 2014 that would make the 721 transfer taxable. It's still only proposed. It would also change this "old?" rule.

26 CFR § 1.721-1 - Nonrecognition of gain or loss on contribution.
CFR
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§ 1.721-1 Nonrecognition of gain or loss on contribution.
(a) No gain or loss shall be recognized either to the partnership or to any of its partners upon a contribution of property, including installment obligations, to the partnership in exchange for a partnership interest.

From the intro to the proposed regs.:

Under Rev. Rul. 73-423, 1973-2 CB 161, the exceptions in § 1.453-9(c)(2) to recognition of gain or loss under the installment sale rules do not apply to the transfer of an installment obligation that results in a satisfaction of the obligation. Thus, the revenue ruling holds that the transfer of a corporation's installment obligation to the issuing corporation in exchange for stock of the issuing corporation results in a satisfaction of the obligation. In that case, the transferor must recognize gain or loss on the satisfaction of the obligation to the extent of the difference between the transferor's basis in the obligation and the fair market value of the stock received, even though gain or loss generally is not recognized on section 351 transfers.

. https://www.federalregister.gov/documen ... bligations

Of course, the proposals are effective for transactions

after the date these regulations are published as final regulations in the Federal Register.

Article back in 2014:
https://www.journalofaccountancy.com/ne ... -loss.html

So would you follow old (final) or new (proposed) rules?????

And I haven't traced what the old 453(d) said or why it's gone. Have you?

You are correct that a contribution of an installment note under 721 does not generally trigger the gain. But if the transfer is to the obligor, the exemption does not apply.. True, and I wonder if the ransfer to a related entity of the obligor gives the same result.