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Monetized Installment Sales

Technical topics regarding tax preparation.
#1
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A client is looking to sell his business and has brought some material he has received from an intermediary selling him the idea of a monetized installment sale.

Essentially, he would sell his business to another party under an installment contract then go and secure a loan for roughly the same amount. The proposed transaction, pushed by the intermediary (assume a sale price of 2 million), would include the buyer depositing 1.5 million with the intermediary and the seller using 500k from the loan to loan to the buyer so the buyer can give the intermediary an additional 500k. The intermediary then pays the seller according to the contract. The seller does not have any recourse if the intermediary defaults other than to sue the intermediary corporation (at which point I would assume they would not have any assets). Additionally, the loan the seller is supposed to secure to "monetize" the transaction would actually require that the note not be secured by the installment contract as that would violate the installment portion of the transaction per the Code.

Furthermore, the entire transaction, being sold by the intermediary is based on this one field agent advice memo - https://www.irs.gov/pub/irs-lafa/20123401F.pdf

I have read the memo and believe the proposed transaction fails in almost every aspect (according to relied upon memo) and seems like a total scam given that the intermediary will receive a fee of 5% of 2,000,000 AND the entire sale amount to "invest" and pay the seller according to the terms of the contract.

Does this appear to almost certainly be a scam to anybody else or am I just not up to speed on this type of thing?
 

#2
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Bump. Anybody heard of this?
 

#3
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Yes. This is a legitimate strategy for deferring long term capital gains taxes. The way it's stated in this thread is inaccurate, however.
 

#4
Wiles  
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I doubt many here have any experience with these. Neither do I.

But interested if anybody has any caveats or horror stories to share about these.
 

#5
Wiles  
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One of the things I am struggling with is the seller is borrowing money from the lender and the seller is owed money from the dealer. The seller is "protected" because the amounts borrowed/lent are the same and the interest rates are the same. But what happens if the dealer defaults on the seller?

I am told there are guarantees built into the deal that create a 3-party arrangement. In other words, the lender and the dealer now in contract together. It sure feels like that runs afoul of Section 453.
 

#6
sjrcpa  
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My horror story. Seller thought he would make a lot of money through the various investments he made with the cash loan proceeds he got. He lost it all. Come time to recognize the gain, he had nothing. He is still making monthly payments to the IRS, This monetization was done privately and was upheld in an IRS audit (but the IRS agent was not the sharpest).
 

#7
Wiles  
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That's pretty bad. In my case, my clients will very likely be dead before the 30 years are up. So, let's hope their kids are prudent.

I have a question about this arrangement. Here are some approx. numbers:
* Client is selling real estate for $1.6 million. They will transfer property to the dealer and carryback a $1.6 million note from the dealer. Dealer will sell the property.
* The lender will lend them ~$1.5 million, which is the $1.6 million minus a 6.5% fee for structuring this arrangement.
* At the end of 30 years, the dealer will pay off the lender note with the $1.6 million. My client will report the deferred gain on the $1.6 million.

My question is can my client deduct the $100K for structuring the monetization arrangement? What is that? It doesn't feel like a cost of the sale transaction.
 

#8
Wiles  
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Now that my client has gone through the transaction, I have my facts straight.
* The property was sold for $1.6M. After normal closing costs of $90K, the net sales price was $1.51M.
* The monetized installment sale arranger is charging $75,000 (5%) and owed my client $1.435.
* My client has received a loan from the lender for $1.435M, but they charged $22,000 (1.5%) in fees. So the net cash in my client's pocket was $1.413M.
* In 30 years, both loans will mature. My client will receive their $1.435M installment sale funds and pay off the $1.435M loan.
Last edited by Wiles on 2-Jul-2020 3:09pm, edited 1 time in total.
 

#9
Wiles  
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I have a question on the above transaction. On the Form 6252, I assume I show the $1.6M as the total sales price and report the $90K of normal closing costs and the $75K of fees paid to the arranger as selling expenses. Is that correct?

This would then mean my client realized $165K of principal payments during the year and must report gain accordingly.

My client is not happy about this. He is paying tax on money he never "received".
 

#10
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The real question with these monetized installment sales, is whether the interest on the monetization loan will qualify as investment interest, and therefore be deductible. Because the interest paid on the installment sale will be taxable.

There are also a couple of Tax Court cases where these were upheld.
 

#11
sjrcpa  
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I had one go through audit about 20 year ago. IRS allowed investment interest expense. Although I will say the auditor was not very sharp and didn't really understand the transaction.
 

#12
Wiles  
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For my client, they did use the money to make investments. Half of the money went to the "real" buyer of the property to finance the purchase. The rest went into their brokerage account. They are not getting a full offset on the interest income because of the high standard deduction that they would have got anyway.

I am shaking my head. They paid 6.5% fees on the whole amount and ended up carrying back half to the real buyer.
 

#13
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Wiles wrote:I am shaking my head. They paid 6.5% fees on the whole amount and ended up carrying back half to the real buyer.


This stinks of letting the "tax tail" wag the dog.

The transaction creates economics to overcome rather than maximizing the economic arrangement. *smh*
~Captcook
 

#14
Wiles  
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Wiles wrote:I have a question on the above transaction. On the Form 6252, I assume I show the $1.6M as the total sales price and report the $90K of normal closing costs and the $75K of fees paid to the arranger as selling expenses. Is that correct?

This would then mean my client realized $165K of principal payments during the year and must report gain accordingly.

My client is not happy about this. He is paying tax on money he never "received".

The arranger's counsel is telling me this presentation is wrong. I should show the $1.435 as the sales price and no selling expenses and no gain in Year 1.

They say my client assigned the property to the arranger for $1.435M, the total amount of the promissory note. The arranger then sold the property to the eventual buyer for $1.6M. The arranger will report the gain on the transaction.

All I have received from the client is an escrow settlement statement showing the $1.6M as the sales price and the seller being the arranger as the Qualified Intermediary for my client. I said, please show me something that says my client sold the property to the arranger for $1.435M.
 

#15
Wiles  
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This is a bump.

Is there any justification for using the net sales price on the Form 6252 as the sales price, so that the selling expenses paid out of escrow do not create realized gain in Year 1?

I received the following from the client's attorney:
The net sales proceeds were sent directly to the Dealer. This is consistent with the installment agreement whereby the Taxpayers sell the property to the Dealer for the amount the Dealer receives from the escrow company. Any costs of the sale are attributed to the Dealer since the Taxpayers sold the property. Taxpayers were not in receipt or constructive receipt of the funds.
 

#16
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The "Substance over Form" principal makes me think this is a sham transaction that would never hold up in tax court.
 

#17
Wiles  
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https://scrowcollateral.com/M453-Executive-Summary.pdf
Overview: The Structure and Process of a Typical M453 Transaction

As a dealer in capital assets, S.Crow Collateral Corp. purchases the asset—it can be virtually any capital asset, whether it’s a business, investment or personal one—from the owner-seller, on an unsecured installment contract which calls for payments of interest only by S.Crow Collateral Corp. to the seller for 30 years, followed by payment of the entire purchase price at the end of the term.

Most often, the seller has already found an ultimate buyer for the asset before S.Crow Collateral Corp. becomes involved. Most often, the ultimate buyer is prepared to pay cash, or a considerable portion of the price in cash, and the seller prefers to defer the tax on the cash proceeds. With that in mind, the seller brings S.Crow Collateral Corp. into the deal, to be an intermediate purchaser from the seller. The purchase price in the installment contract in an M453 transaction is typically equal to the resale price, but with provision for a discount at the end of the 30 years if S.Crow Collateral Corp. fully performs.

At the same time as the purchase, S.Crow Collateral Corp. re-sells the asset to the final buyer to whom the seller had planned to sell directly. S.Crow Collateral Corp. receives and retains the sale proceeds which the final buyer pays. (That’s why S.Crow Collateral Corp. doesn’t charge a fee to the seller; S.Crow Collateral Corp. retains all of the resale proceeds, so it wouldn’t make sense to charge a fee on top of that.)

Although there are two sale transactions—the installment sale to S.Crow Collateral Corp. and the resale to the final buyer—there is only one transfer of title or ownership; the deed or other instrument of transfer will pass directly (in a “directed” transfer) from S.Crow Collateral Corp.’s seller to S.Crow Collateral Corp.’s buyer, without going through S.Crow Collateral Corp. Therefore, the final buyer will receive the same instrument of transfer from the same party with the same representations and warranties, on the same day and for the same price as would have been the
case if S.Crow Collateral Corp. had not been involved.

Both the installment sale to S.Crow Collateral Corp. and its resale to the final buyer are closed simultaneously, pursuant to mutually agreed closing instructions provided to the closing agent

In summary, the Seller is selling to S.Crow Collateral. The purchase price is equal to the installment loan principal. The Seller incurs no selling expenses on this sale and receives no principal in Year 1.
 

#18
Keyad22  
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Did anybody report such a transaction on the tax return?

My client is offered "Monetized Installment Sales" NOW!

Is it legal? Will it be challenged by IRS? How to report it? On form 6252 with no gain for 29 years?

Is it risky? Have you ever heard any default case on Monetized Installment Sales?

Thank you!
 

#19
sjrcpa  
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IRS Guidance Chief Counsel Advice 202118016
 

#20
Wiles  
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