In the meantime, the intermediary has cash for its long-term use – that is, until the due date of the intermediary`s instalment obligation to the taxpayer, which coincides coincidentally with the due date of the lender`s loan to the taxpayer – of the amount of the lump sum payment received from the buyer in payment of the sale price of the property. There are four main participants in a monetized installment sale: Depending on the instalment payment method, the amount of each payment that is treated as income to the seller for a tax year is the portion (or portion) of the instalment payment received that year that the gross profit from the sale (essentially the realized profit) relates to the total contract price. It is likely that a well-structured monetized installment sale can, in many circumstances, completely defer (and thus significantly reduce) capital gains tax on the sale of an estimated asset. For this reason, and because every seller must do their due diligence before engaging in a monetized installment sale, it is important that the seller seeks their own legal, tax, and investment advice. In cases where the payment of the purchase price is delayed accordingly, the Seller has not completed the conversion of its property into cash or cash equivalent; Instead of having the economic security of the money in his pocket, the seller instead assumed the economic risk that the remaining balance of the sale price would not be received. It is this economic principle that underlies the method of reporting instalment payments. [xviii] While monetized installment sales are used to shift taxable profit while maintaining quasi-liquidity, a related transaction can be used to achieve other purposes. For example, a structured sale based on private letter decision 150850-07 is common when the seller wants to defer tax, but receives a guaranteed income stream from a high-quality payer such as an insurance company or other highly rated financial institution. [Citation needed] Nevertheless, the monetized rate sales contract described above is essentially identical to one or both of these earnings recognition trigger events.
[xxvi] Article 453A(b)(1) and (5) of the IRC. Instalment obligations excluded from the scope of this provision shall include those resulting from the sale of immovable property used or produced in the trade or pursuit of agriculture. [x] Notification of payment does not apply to a sale that results in a loss to the seller. The loss is reported in the year of sale. To date, the IRS has not directly addressed the previous agreement. That being said, there is only one counsel on the ground (FAA 20123401E) [xxxii] – which represents unprecedented legal advice given to IRS staff by the Office of the Chief Legal Counsel (“OCC”) – that considered the application of the “substance on form” and “step-by-step transaction” doctrines to a factual model that included some of the elements described above. It seems that many in the “monetized rate selling” community point to this FAA as a support for their transaction structure. Under Section 453 of the Internal Revenue Code, the treatment of instalment sales allows a seller to defer recognition of a portion of the profit from the sale of an asset if the seller is required to receive at least one payment after the taxation year in which the sale takes place. In a monetized installment sale, the seller transfers tax collection to installment sale payments while “monetizing” the installment payment through a separate, tax-free loan. Congress recognized long ago that it may not be appropriate to tax the full profits made by a seller in the taxation year of the sale if the seller has not received the full purchase price of the property sold; in particular, if the Seller is to receive payment from the Buyer in a taxation year following the year of sale, whether in accordance with the terms of the purchase and sale contract[xvi] or on the basis of a promissory note issued by the Buyer to the Seller in whole or in part of the purchase price. [xvii] It should also be noted that a seller can choose from the instalment payment report and thus choose to declare his full profit in the year of sale. Article 453(d) of the IRC.
We could see such choices for 2021, when the tax rate on long-term capital gains will rise significantly. [xxi] Reg. Article 15a.453-1(b)(3). [xxii] Receipt of a promissory note from the buyer that is payable or easily negotiable on demand is also considered payment because the seller is able to easily convert it into cash. [xxiii] A promise to pay in the future. [xxiv] A standby letter of credit is treated as a third-party guarantee; it is a non-negotiable, non-transferable letter of credit issued by a financial institution and can be invoked in the event of default – it serves as security for the payment obligation. The amount remaining to the seller after the restoration of the adjusted base – that is, the excess of the amount realized through the adjusted base – represents the realized profit. This profit is usually included in the gross income of the selling taxpayer for the taxation year of the sale and is subject to federal income tax. (v) it also does not apply to the disposal of certain assets; for example, trade receivables, inventories, depreciation and negotiable securities. These are ordinary income items that are recognised in the ordinary course of business or items that represent cash equivalents.
A sale of real estate in which at least one payment must be received after the end of the taxation year in which the sale takes place is called an “installment sale”. [xix] For tax reasons, the profit of such a sale is declared by the seller according to the method of payment in instalments. [xx] The OCC acknowledged that the transaction formally included an installment sale and a loan that monetized the installment bond. The question before the OCC was whether it was essentially a sale for cash, since the taxpayer received the amount of the cash sale price of the loan proceeds shortly after the sale of the asset, while deferring the recognition of the profit and the payment of the resulting tax. Security of money. To the extent that payment in instalments from the intermediary to the seller is secured by a cash account, the taxpayer-seller is treated as the beneficiary regardless of the seizure rule. [xxx] Usually, if you sell a property that is subject to an instalment bond and then mortgage the bond, you trigger the recognition of the instalment gain. The only time this deposit rule does not come into play is for the sale of farmland. A quick online search provides the following argument from the promoters of GIS transactions – since the loan is not secured by the note, it is not a pledge and, if it is not a pledge, the receipt of the loan proceeds does not trigger the recognition of profits.
In order not to be deterred by the differences between the facts and circumstances of the FAA and those of the quadripartite structure described above, several proponents presented the FAA to taxpayers as an approval of installment sales monetized by the IRS. [xi] In response, Congress amended the installment sales rules[xxv] to provide that if a debt is secured by an instalment debt, the net proceeds of the secured debt will be treated as a payment received for the instalment debt at a later date when (a) the debt becomes a “secured debt,” or (b) the proceeds of such debt receive from the seller. [xxvi] Due to the absence of restrictions on farm wealth, installment sales in general and monetized installment sales in particular were popular with publicly traded companies that sold their Timberland assets. As is often the case with “too good to be true” strategies, sponsors often draw attention to themselves through somewhat aggressive marketing. This was certainly the case with monetized installment sales, which caught the attention of the IRS. Since a monetized installment sale is subject to these standard verification levels, it is important that all components of the transaction (i.e. The instalment sale and subsequent loan) are structured in accordance with the usual documentation and business conditions. It should also be noted that a seller can choose from the remittance reports and thus choose to declare his full profit in the year of the sale. This was certainly an attractive option before 2018, where the seller could have NOLs expiring under § 172 IRC. In recent years, promoters have marketed so-called “monetized installment sales,” which would supposedly allow a seller to benefit from installment selling treatment while actually receiving the proceeds in cash in the year of the sale. .