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205. Why Congress Provided for Monetized Installment Sales

204. Here's How to Do a Financial Analysis of the Probability-weighted Benefit and Tax Risk with M453

203. If a Seller Uses a Monetized Installment Sale (M453), Can the Resale Be an Installment Sale, Too?

202. Solve the Double-Tax Problem for Earnings of C Corporations with a Long-Term Installment Sale Coupled with a Monetization Loan

201. When You Can, and When You Canít, Change a Deal after the Fact, for Better Tax Treatment

199. Are We Really Able to Hear Each Other? Or Are We Locked in by What We're Sure We Know?

198. C453 is Presented in Meeting of Professionals, Principals and Advisors Connecticut

197. An Insured Can Defer the Tax on Sale of a Life Insurance Policy, But Partly on One Ground, and Partly on Another.

196. Liquidate a ďCĒ Corporation with Minimal Tax Cost, with C453

195. Hereís a Strategy for Your Benefit if Your LLC Partners Donít Need Tax Deferral when Your LLC Sells

194. With C453, Help Yourself and Your Favorite College, University or Other Charity, Too

193. The Doctor, the Tardis, Time Travel and Taxes

192. Find Out Whether a 1031 Exchange or a C453 with a Monetization Loan is the Better Choice for You

191. U.S. Bankruptcy Court Approves C453 for Sale of High-Value, Low-Basis Asset

190. With Higher Tax Rates, Our Business Enjoys a Substantial Uptick, Both Overall and in Deal Size

189. Can C453 Be Used for Sale of a Business to an ESOP?

188. "Who Gots It Don't Want It": 1099-MISC Income and Schedule D Income

187. Defer Tax on Commission Income, and Increase Your Disposable Cash Flow

186. IRS Chief Counsel Blesses Tax Deferral through an Installment Sale Coupled with a Monetizing Loan

185. Can a Residential-subdivision Developer Obtain Capital-Gain Treatment on Lot Sales? And Defer the Tax, Too?

184. A 1031 Exchange Scandal: Who Cares about the Taxpayer?

183. Can C453 Repeatedly Achieve Tax Deferral for the Same Money, As in Hopscotch?

182. Business-Normal Practice to Know Your Counterparty: Coherence, Reasonableness, Verifiability and Understandability

181. Keep Your Romance Alive, with Some Help from C453

180. C453 Can Avoid a Tax Hit on Disposition of Assets on Divorce, and Simplify Division as Well

179. Liquidate U.S. Investments and Invest the Gross Proceeds Internationally, without Having to Pay U.S. Taxes First

178. Sell Capital Assets without Current Tax Cost; Make Tax-deductible Gifts to Charity; Reduce Tax as Well as Defer; and Substantially Increase Cash Available for Other Uses

177. An Occasion for Sadness: When Advisers Let 1031 Exchanges Fail, or Cause Them to Fail

176. Does an Installment Sale Defer the Tax on Recapture of Accelerated Depreciation? No. Can the Tax on Recapture of Accelerated Depreciation Nevertheless Be Deferred When an Installment Sale Occurs? Yes.

175. Should You Choose a 1031 Exchange, or a Collateralized Installment Sale?

174. When to Use a Collateralized Installment Sale (C453) with, or in Place of, a Charitable Remainder Trust (CRT)

173. Hear about Collateralized Installment Sales on Smart Money Talk Radio Nationally on Monday, January 28

170. Will the New 3.8% Investment Tax and the Higher Capital-Gains Tax Actually Increase the Government's Revenues?

168. The New 3.8% Medicare Tax Can Be Deferred in Installment Sale Transactions.

167. Four CPE Credits for CPAs, January 15

166. Twelve Days of Christmas Tax Readings

165. How an Installment Sale Reduces Estate-Tax Liability

164. With Tax Deferral, You Needn't Rush to Sell Before the Tax Increase on January 1

163. Not in Good Health, a Taxpayer Finds a Solution to the Dramatic Increase in the Estate Tax Coming on January 1.

162. Transfer a Family Business to the Next Generation During the Parent's Lifetime, Retain an Asset for Income, Give the Transferee a Stepped-up Basis, Defer the Gain on Sale, Support the Parent with Deductible Rent, and Finance the Transaction, Too

161. Use C453 to Eliminate Estate Tax and, with Life Insurance, to Transfer Assets and Cash to the Next Generation

160. The Price of Economic Uncertainty: 1% to 2% Higher Unemployment

159. A New Reason Why S.Crow Collateral Corp. Isn't Just Another Intermediary: Standing Advance Loan Commitments and Credit Enhancement for Our Sellers and Potential Sellers

158. How Markets Differ from Gambling and Pyramid Schemes

157. Here's a New Way to Achieve the Equivalent of Tax Deferral.

156. Don't Fence Me In: When Government Makes an Entrepreneur Feel Claustrophobic

155. Action Now Can Help You Cope with the "Tax Cliff" at the End of This Year.

154. A Case Study: Deferring the Debt-Over-Basis Tax (and Tax on Other Gain) when Encumbered Property Is Sold

153. Would You Like to Move to a Low-Tax State, without Paying an Exit Tax?

152. Here's a Better Solution for the Tax System and the Economy: A Graduated Retail Sales and Services Tax

151. Thinking Dangerously: When Docile Taxpayers and Their Advisers Give Away Legal Rights

150. For Doctors Who Sell Their Practices to Hospitals: Watch for Hidden Risks, Costs and Traps

149. An IRS Ruling and Collateralized Installment Sales

148. New Scientific Research Looks at How the Human Brain Deals with Taxes

147. The "Jevons Paradox", "Sustainability", Gasoline Prices, and Opting for Growth Rather than Decline

146. Why Our Sellers Want to Say to Us, "Please, please, don't pay, or at least don't pay now!"

145. How Does a Collateralized Installment Differ from a Deferred Sales Trust?

144. The IRS Has Issued Detailed Guidance on "Economic Substance". Let's Learn It and Use It.

143. Why Lenders Like to Lend to Those Who Sell to S.Crow Collateral Corp.

142. About Tax Advisers Who Think Installment Sales Equal Cash Sales. Sure, and I-95 Equals I-90.

141. Let's End the Confusion about the Tax Treatment of "Real" Transactions.

140. New Information, New Understanding and New Tools, Available Now, Avoid Regrets Later

139. Does Your Tax Adviser Read the Law, or Merely Read or Hear What Others Say the Law Is?

138. Avoid Tax at the Entity Level on Sale of a Business, Regardless of the Legal Form of the Entity

137. When Your Company Moves up in the Marketplace, the "Lake Erie" Criteria Help the Shareholders Select the Company's Board Members.

136. What Can Be Done for Tenant-in-Common Investors in Commercial Property Facing Foreclosure?

135. Can the Tax on Depreciation Recapture on the Sale of Equipment Be Avoided or Deferred?

134. Say It Isn't So: Political Risk Is Affecting American Business and Americans' Freedoms

133. No Dollar Limit Applies to Tax Deferral on Installment Sales of Agricultural Properties or Rights

132. How a Business Owner's Creative Thinking Led This Week to a Solution for Sale of His Business

131. CPI Rises to 3.9%, and Treasury Sees the Heaviest Bidding in 13 Years for TIPS; Maybe There's a Connection?

130. Today's Producer Price Index Report: Inflation Hits 0.8% in September (a 10% Annualized Rate)

129. For a Better Understanding of the Tax Code, Try Looking First at the Forest, Before Looking at Each Tree

128. Will the Now-Fainting 1031 Tax-Deferred Exchange Industry Ever Come Back?

127. The Flavor of the Week, Based on Customer Requests, Is the Looming Tax Cost of Commercial-Property Foreclosure.

126. Try to Be Calm about This News, But the Tax Problem on the Sale of a Business Is Solved.

125. The Federal Reserve Succeeds in Its Fight Against Deflation--But Inflation Rises.

124. Alert! Defer the Tax on Your Sales Commission Income, with DEFCOMM.

123. So, How Is That Advice That You Gave in 2007 Working Out?

122. Today's Market Rout, and When You Have Assets Which You Could Sell, But Not at a Price Anyone Is Willing to Pay

121. Selling Property at Auction Can Trigger Tax, Even if You Don't Net Any Cash--unless You Combine the Auction with a Collateralized Installment Sale.

120. Just the Facts, Ma'am: How to Minimize Tax-audit Fear.

119. How Can One Shelter Interest Income from Tax? Or Convert It to Capital Gain?

118. Follow These Practical Guidelines to Preserve Tax Deferral for Your Installment Sale, If You Borrow Money at the Same Time

117. The Government Has Painted Itself into a Corner Because of Debt, and Can Do Very Little to Help the Economy. The Private Sector Has Some Options Left, However.

116. Did You Hear about the 3.6% Tax Increase Just Now Quietly Announced? Or about the Further Tax Increase Coming Next Month?

115. How an Average Person Can Tell Effective Economic Stimulus from Ineffective Stimulus

114. Here's the Silliest Argument Yet, in Favor of Raising Taxes--and It Was Made With a Straight Face.

113. So, You Have a Property That's about to be Foreclosed. How Can You Save Your Credit, and How Can You Avoid Tax on the Excess Debt?

112. A Nationally Prominent CPA Joins in Conversation about Tax Deferral and Collateralized Installment Sales

111. Are There Hidden Costs Associated with a Collateralized Installment Sale? With Other Tax-Deferral Methods? What Is the Real Cost?

110. Will an Investment Adviser Prefer That a Client Sell in a Collateralized Installment Sale ("C453"), or in Some Other Way?

109. Will a Real Estate Broker Make More Money, or Less, with a Collateralized Installment Sale?

108. The "Economic Substance" Doctrine Is a Safe Harbor for the Tax Treatment of Your Transactions, So Use It.

107. Professionals Who Wing It, and Give Distorted Tax Advice

106. You Can Easily Avoid Tax on Relief of Debt. Here's How.

105. Set Sail Now--and Get Set to Sell Now--with Our Flagship

104. How Do You Feel--or What Do You Think--about the Whole Idea of Tax Deferral? Is It a Wholesome Activity?

103. A Done Deal: Seller Sells a Capital Asset and Defers Tax for 30 Years, But Has Equivalent Cash. How Can This Be?

102. "Wave of Frantic Consolidation in the Health Industry" Calls for Tax, Estate and Investment Planning, Now

101. Plan for Long-term Care, While Preserving Your Wealth with a Collateralized Installment Sale

100. How Do Pigeons, Innovation and Freedom of Contract Relate to One Another?

99. The Golden Egg: Create Your Own Investment Fund with MoneyThat Otherwise Would Be Required for Taxes

98. Subtle Deconstructionism Affects Legal and Tax Advisers, and You, Your Pocketbook and Your Freedoms

97. #2 in a Series: Announcement: You Participate in Loan Fees, And Everyone Benefits

94. #1 in a Series: Announcing: Tax Deferral with Complete Liquidity

93. Thank Heaven for Little URLs: One That Circumvents Tax-Deferred Exchange Problems

92. How Can the Seller Sell at 2007 Prices, While the Buyer Buys at 2010/11 Prices?

91. Buying a Property? Want to Reduce the Tax on the Lease Income after You Buy?

90. A Key to Growing Your Business: Use Your Knowledge of Yourself (Your Theme) As a Lens to See Opportunity

89. Better than an IRA: Pre-tax Money Buys "Underwater" Homes at Market or Less and Produces Income Not Taxable to You. Then You Finish by Deferring the Tax on Resale.

88. A Conversation about Saving a Particular "Underwater" Home Loan

87. Put Your Defense in Place Now, against the Estate Tax Beginning January 1

86. At Last: A Private-Sector Solution Shows up, for Underwater Home Mortgages

85. Are We There Yet? --Not Now, Not Later, if "There" Means Paying the Capital Gains Tax

84. A New Philosophy of Tax Benefits: How to Obtain Happiness and Tax Benefits, Too

82. Minimizing the Tax on Marcellus Shale Mineral Rights Income

81. "That's the way it's always been done."--How Government and Business Really View Innovation

80. Selling into a Down Market: Why Sellers and Buyers Should Stop the Waiting

79. "If only I'd Known Then What I Know Now": Q&A about Commercial Loan Portfolios, While There's Still Time.

77. Defer the Tax on the Sale of Your Business, and Pay the Tax Later in Cheaper Dollars

75. S.Crow Collateral Corp. in Business Week

76. How Can Your Bank Profitably Reduce Its Exposure to Commercial Real Estate?

74. Avoid the Power Trip: Don't Get Above Yourself

73. Two Moves Ahead: Playing Dynamically to Win in Today's Economy

72. Take a Number, for Bank-owned Commercial Properties: How the Bank Can Sell High, and You Can Buy Low

71. Reading the Warning Signs: Is Is Worth Trying to Do Business with a Narcissist?

70. On Being #1: A Largely Unobserved Incoherence about Innovation and Leadership, in American Business

69. Part 5: Is It a Gimmick, or Is It Worthy of My Time to Hear? It's *Not* Whom You Know

68. Part 4: Is It a Gimmick, or Is It Worthy of My Time to Hear? About Loopholes vs. Substance

67. Part 3: Is It a Gimmick, or Is It Worthy of My Time to Hear? About Black Swans, and Surprises

66. Part 2: Is It a Gimmick, or Is It Worthy of My Time to Hear? How Excited Is the Proponent?

65. Part 1: Is It a Gimmick, or Is It Worthy of My Time to Hear? The Role of a Stated Economics Rationale

64. In a Short Sale of Your Commercial Property, Why Not Pay Your Loan in Full?

63. We Can't Cause Market Values to Rise, But We Can Increase Your Equity Immediately

62. Let's Opt Out of a Decade of Stagnation in Commercial Real Estate Prices

61. It's a Roller Coaster around Here, As We Work with Those Who Are at the Top, and Those Who Were at the Top

60. A Rescue for TIC Investors in Troubled Properties or Who Just Want Out without Being Taxed to Get Out

59. The Ever-Present Logical "Fallacy of Division" in Public Discourse Makes a Dumb Argument Sound Good

58. I Sang for My Father: For Optimism in Opportunity

57. Red Flag #2 about DSTs: Invitation to a Conflict of Interest

56. About Clamor at Parties, to Learn about Tax Deferral or Resolving Troubled Commercial Loans

55. How Does a Collateralized Installment Sale Differ from a Sale to What Is Called a Deferred Sales Trust?

54. 1. Dealburt Retires. 2. "Regulatory-Risk" Aversion Will Reduce Economic Growth.

53. Ready for Prime Time: Our Criteria for Resolving Troubled Commercial Loans

52. What's the Easiest Way to Minimize Your Risk of Investment Loss? Postpone the Tax on the Previous Investment.

51. One Size Fits One: Because Every Situation Is Unique, Every Transaction Should Be Unique, Not a Formula

50. The Creative Process, Categorical Reasoning, and Tax Minimization

48. New: A Perpetual Collateralized Installment Sale: Permanent Tax Deferral in Unlimited Amounts

The Latest Installment

A Nationally Prominent CPA Joins in Conversation about Tax Deferral and Collateralized Installment Sales

May 9, 2011

Note: A recent conversation between Stan Crow, president of S.Crow Collateral Corp., and Arthur P. Jensen, CPA, considered how S.Crow Collateral Corp.’s "collateralized installment sale" ("C453") transaction process fits into the tax-deferral framework provided by the Internal Revenue Code. Today we present some highlights of that conversation.

Mr. Jensen specializes in advanced tax, financial and estate planning. He is President-Wealth Strategies for The L. Warner Companies in Timonium, MD, and in that capacity advises very high-net-worth business owners and individuals from all industries, with creative tax and financial planning and tax-minimization strategies. He is also president of WealthServe, LLC, a financial and tax-services firm in Ellicott City, MD. He is consistently ranked by CPA Magazine as one of the nation’s "most influential practitioners".

Stan Crow (SC): Thank you for making time for this conversation today. I have high regard for you and for your expertise, and it is a privilege to have this opportunity to discuss a matter that interests both of us: tax deferral.

Arthur Jensen (AJ): You are welcome. Tax deferral is indeed of great interest to me, and therefore your "collateralized installment sale" or "C453" transactions greatly interest me. If I may, I will get right to a question I’ve been wanting to ask you. As you know, I have been pleased to recommend C453 to my clients, and it has been a good experience for them. I’ve been reading in The Latest Installment blog that you have made a change in how you do C453. What did you change, and why?

SC: That’s right. Until early this year, all of our C453 transactions used what we called a "collateral account" as the repository for the cash proceeds of S.Crow Collateral Corp.’s resale of assets which we bought on installment contracts. The collateral account consisted of one or more investments purchased with those cash proceeds with the seller’s consent, and those investments provided the funds to make our installment payments to our seller. The collateral account, on which our seller had a first lien, enabled our seller to have the benefit of investment of the pre-tax sale proceeds, rather than only the after-tax sale proceeds. The interest rate which we paid on the installment contract was variable, depending on how well the collateral-account investment did. The seller’s access to the collateral account was substantially restricted.

Those restrictions on the seller’s access and the administrative burden for the collateral account prompted us to look for a better way. That better way came together in March, when we received from a third-party lender an Offer of Loan Commitment, pursuant to which the lender is willing to lend to sellers in C453 transactions an amount of cash that is nearly equal to the selling price. With that, our seller walks away from the closing with an installment debt from S.Crow Collateral Corp. and non-taxable cash loan proceeds from the lender—who agrees to look only to S.Crow Collateral Corp.’s installment payments as the source of the loan repayments. Because the cash is from a loan rather than from an installment sale, our seller can have unrestricted access to the money, without any of the administrative burden that went with the collateral account.

The loan is separate from C453, however; it is not a part of C453, and the seller may accept the loan or not. A seller who prefers that the money go into a restricted collateral account may still choose that alternative.

AJ: I know that with the collateral account we had to address the question whether the seller could be deemed to be in "constructive receipt" of the money that went into the collateral account. We addressed that question successfully, but does the same issue arise with regard to the loan proceeds?

SC: I don’t see that it does. First, for there to be constructive receipt, the money would have to go from the buyer (S.Crow Collateral Corp.) to the seller, but what the seller receives comes from the lender, not us. Second, S.Crow Collateral Corp. still owes the installment debt to our seller, even though our seller also has loan proceeds. The loan proceeds aren’t credited against what we owe to our seller on the installment contract. Third, the seller is perfectly free to borrow money anywhere and at any time, with or without C453, without raising any question of constructive receipt of the sale proceeds. S.Crow Collateral Corp. introduces the seller and lender to each other, but whether or not the seller and the lender agree on a loan is strictly between them. A C453 transaction can occur whether or not they agree on a loan.

AJ: I think that makes the constructive-receipt issue even easier to deal with than it was with the "old" C453.

SC: I do, too.

AJ: I read what you wrote in The Latest Installment blog on April 20, about the codification of the economic-substance doctrine. With the "old" C453, I recall talking with attorneys who seemed to think that if a taxpayer finds a way to reduce the tax, the IRS would say that the economic-substance doctrine means that you can’t do that.

SC: I’ve heard comments like that, too, and it’s frustrating to me when advisers don’t think more carefully than that. Anyway, with either the "old" C453 or the new one, the economic-substance doctrine is easy to satisfy. That’s because in every C453, there is a real economic change in the parties’ position as a result of the installment sale, and there is a real business purpose to the transaction: one party’s desire to sell the asset, and the other party’s desire to buy it. The question is not whether to sell, but which way to sell. In reality, though, those attorneys and others who made statements like the one you mentioned were confusing constructive receipt with economic substance. They rather intuitively thought that the existence of a collateral account which would provide the money to pay the seller meant that the "economic substance" of the deal was that the seller had constructively received the money even though the seller couldn’t take or spend that money. Besides the confusion between the two doctrines, a big hole in that thinking was that Section 453 of the Internal Revenue Code explicitly says that one can take advantage of installment reporting even if payment of the installment obligation is guaranteed.

AJ: I don’t see an issue for C453 with the step-transaction doctrine, either. Do you?

SC: No, because the step-transaction doctrine is applicable in an instance in which the taxpayer sets up what purport to be a series of separate transactions, but the interim ones actually have no purpose other than to serve the next step. Typically the parties are formally obligated, when one step is completed, to move on to the next step, and then the next, and so on. With C453, there are two simultaneous transactions: the installment sale, and the separate loan (if the seller and the lender agree on the loan, which they need not). The C453 transaction can stand entirely on its own, with or without the separate loan.

It’s true that S.Crow Collateral Corp. also re-sells the asset to the ultimate buyer, and the seller usually could have chosen to sell to the ultimate buyer directly. The seller has every right, though, to choose between two competing offers: one from S.Crow Collateral Corp. for an installment purchase with its particular financing terms, and one from the ultimate buyer for a cash purchase. Sellers have been selling on installment contracts from time immemorial, long before there was any tax code or tax effect at all. To my knowledge, there has never been a tax case which said that an installment sale to an independent dealer who immediately re-sells is ineligible for installment reporting. Possibly that’s because Section 453 itself suggests otherwise!

AJ: With the new form of C453, is there any maximum deal size?

SC: No, and the new C453 offers a really cool way to defer tax on large transactions, without regard to Section 453A’s limitation to $5 million in installment sales per taxpayer per year.

AJ: Thanks for this update. I look forward to more C453 transactions for my clients.

SC: I do, too, and thanks to you, too.—Stan Crow


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Stanley Crow, our Editor

The Latest Installment addresses situations, questions and issues which are brought to us in the course of the consideration, negotiation or execution of transactions. We don't use the real names of parties to transactions, and we may edit the statement of the question to try to tell the story better. Please feel free to comment, or to take issue, or to raise your own question or situation. If you do the latter, please do not relate any confidential information.

The Latest Installment blog is edited by Stanley D. Crow, who is president of S.Crow Collateral Corp.

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