I think HenryDavid is saying this: We go to sell for $12m, but then inform the buyer that we want to retain the lease income. Buyer then says, “Ok, I’ll just pay you $10m instead of $12m.” One way to view the substance of this transaction is that we are deemed to have sold for $12m, but then immediately, are deemed to have cut a check back to the buyer for $2m. I believe this “deemed check back to the buyer” is the “prepaid rent” idea Henry puts forth – we have to compensate the buyer for the fact that part of his property will be occupied by a cell tower and the buyer won’t collect any rent associated therewith. Subsequently, and over a period of years, we collect $2m in “rent” from the 3rd Party (the cell tower company). This is all very logical.
Another possibility is that we really didn’t sell, in reality or in substance, “all rights” that encompass the entire “bundle of rights” associated with fee simple ownership. Shortly before the transaction, the seller carved out the lease (which involves two elements – providing occupancy and, in exchange, collecting rents). Under this scenario, we really didn’t sell “everything” to the buyer for $12m, nor did we cut a deemed check back to the buyer for the $2m. Rather, we sold $10m of value to the buyer by virtue of carving out the $2m beforehand. That is, with respect to our “bundle of rights,” we retained one of them. We didn’t sell all of them and then buy one of them back (with a deemed check). One issue we’d have here is that the IRS could assert that we sold $10m of value to the buyer (which is really undisputed – I think we’d agree that we sold at least that much to the buyer) and we also sold $2m of value to the cell tower company, who will pay us that $2m over time on an installment basis. (Or, we sold all $12m to the buyer and we’ll be paid $10m from the buyer up front and another $2m from the buyer via assignment of future rents…but I doubt this scenario holds water, because buyer would be legally obligated for the full $12m, which most likely isn’t the case. Or, we sold for $12m to the buyer and then lent him back $2m, which he’ll repay via rent assignment…but I doubt this scenario holds water either for the same reason). In any event, this isn’t entirely problematic in terms of past tax return reporting on the seller’s part. Seller would have booked the $10m sale either way. And as to the $2m, seller is picking it up as rental income instead of as gain on sale. One issue would be apportionment of basis – if some part of the seller’s basis should have been carved out and allocated to the lease when the property was sold way back when. But anyway…the problematic part is that if the $2m was a deemed sale, that would be IRD and we wouldn’t have a basis step-up.
Note that for the seller to “retain” the lease income, the buyer has to be onboard. This cell tower is located on the real property that will be owned by the buyer. This isn’t just a matter of collecting lease income. Occupancy still has to be provided to the cell tower people. And that will be physically be provided by the buyer, even though in substance, the seller “paid for it.” Thus, two elements here, as noted above. But maybe this doesn’t matter, at least for Sec 1014 purposes. Maybe it doesn’t matter if the right to occupy was deemed purchased by the seller from the buyer up front (by virtue of a deemed check back to the buyer a la an overall sublease arrangement) or if it was a retained right all along. It wouldn’t matter because at the death of the seller, it’s the same right, no matter how it was acquired.
I think the bigger issue here, with respect to Sec 1014, is whether or not the $2m would have been cast as a sale to the cell tower company (most likely the cell tower company) instead of a lease, way back when the seller sold the property.
Note that I’m trying to isolate the 1014 issue here as opposed to seeing how this various scenarios would have played out for prior income tax reporting purposes…and then comparing those results to how the taxpayer actually reported things. It’s a pretty safe bet, though, that the preparer treated things as a retained right as opposed to a right acquired via purchase from the buyer with a deemed check.