Small Business Taxes & Management^TM--Copyright 2023, A/N Group, Inc.

The Department of the Treasury and the IRS have issued proposed regulations identifying certain monetized installment sale transactions and substantially similar transactions as listed transactions--abusive tax transactions that must be reported to the IRS. The intent of the transaction is for the seller to receive installment sale treatment and not report gain on the transaction until receipt of a balloon payment some time in the future. However, through a loan from a third party the seller does immediately receive the cash amount of the sales price less intermediary fees. The IRS claims the intermediary has not legitimately purchased the property because it does not enjoy the benefits nor bear the burdens of ownership and the transaction lacks economic substance.

Material advisors and certain participants in these listed transactions are required to file disclosures with the IRS and are subject to penalties for failure to disclose these transactions. The IRS listed monetized installment sales this year as part of the agency's Dirty Dozen list of common tax scams and schemes.

Monetized installment sale transactions generally include the following elements:

• A seller of appreciated property, or a person acting on the seller's behalf, identifies a buyer who is willing to purchase the property in exchange for cash or other property.
• The seller enters into an agreement to sell the property to an intermediary in exchange for an installment obligation, which provides for interest payments from the intermediary to the seller.
• The seller then purportedly transfers the property to the intermediary, although the intermediary never actually takes title or takes title to the property only briefly before transferring title to the buyer in exchange for the buyer's cash or other property.
• The seller also obtains a loan with an agreement that provides for interest payments from the seller to the lender that equal the amount of interest that the intermediary pays the seller under the installment obligation.
• Both the installment agreement and the loan provide for interest due over the same periods, with principal due in a balloon payment at or near the end of the term of the installment agreement and loan. The sales proceeds received by the intermediary from the buyer, reduced by certain fees, are provided to the lender to fund the loan to the seller or transferred to an escrow account of which the lender is a beneficiary.
• The lender agrees to repay these amounts to the intermediary over the course of the term of the installment obligation.
• The seller then treats the sale as an installment sale under section 453 on a federal income tax return for the year of the purported sale and defers recognition of gain until the year in which the seller receives the principal balloon payment.

For more information, see proposed regulations REG-109348-22.

--Last Update 08/04/23