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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.
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
June 24, 2011
The news from the Congressional Budget Office on Wednesday was rather dismal:
"Recently, the federal government has been recording budget deficits that are the largest as a share of the economy since 1945. Consequently, the amount of federal debt held by the public has surged. At the end of 2008, that debt equaled 40 percent of the nation’s annual economic output (a little above the 40-year average of 37 percent). Since then, the figure has shot upward: By the end of this year, the Congressional Budget Office (CBO) projects, federal debt will reach roughly 70 percent of gross domestic product (GDP)—the highest percentage since shortly after World War II."
That 70% number is a shocking one—and it’s 10% worse than the CBO projected just one year ago, for 2011.
Those who still believe in Keynsian economics are in a tight spot, because Keynes advocated increasing spending in recessionary times, without raising taxes, on the ground that a fiscal policy like that would stimulate the economy back toward recovery. Keynes’ followers, including the present administration, want to maintain elevated spending levels, all right, but they know that the debt is getting out of control. So, for the sake of keeping up the spending, they want to raise taxes, too—an improvisation that violates their Keynesian doctrine.
Those who believe in supply-side economics want to deal with the debt problem by cutting spending and by preventing any tax increases, so that the private sector’s capacity for growth will lead to production, investment and spending in the private sector rather than in the government.
Regardless which view is right, it’s clear that the federal debt has grown so high so fast that the things the government can no longer do the things it might do if it were starting from a position of strength. It’s nearly powerless to help—but it will do a great deal of damage if it doesn’t begin to reduce the debt.
According to the CBO, failure to solve the debt problem will have adverse consequences such as these:
"Rising debt would increasingly restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises. As a result, the effects of such developments on the economy and people’s well-being could be worse." [One could add, rising debt would reduce the nation’s ability to control inflation, to influence world events, to protect the shipping lanes from piracy, to protect the nation from cyberespionage, to pursue America’s interests around the world, to maintain our infrastructure here at home, and on and on.]
"Growing debt also would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates. Such a crisis would confront policymakers with extremely difficult choices."
Nevertheless, the private sector still has some options to contribute to a recovery.
One of those is because of Section 453 of the Internal Revenue Code, for the installment reporting of capital gains on sale of capital assets. That tax deferral encourages the re-deployment of capital assets to more productive uses. By far, the best way for that re-deployment to occur is with a collateralized installment sale, combined with a third-party lender’s loan to the installment seller, under an arrangement by which the installment payments assuredly fund the seller’s loan payments. (Shameless promotion: We do collateralized installment sales, and we do them really well.)
Another private sector action would be broad-based resolution of the problem of "underwater" loans. For that to occur quickly, there’s going to have to be some way of putting private-sector money to work repairing troubled loans, not to take advantage of the trodden-down debtor, but to pay the debt. It won’t work unless it’s done purely as a freely-chosen business deal in pursuit of mutual profit. It won’t work if it’s an act of charity, and it won’t work if the government either compels it or penalizes not doing it.
Here at S.Crow Collateral Corp. we’re implementing a couple of ways of doing this, but we needn’t be the only ones. If more people will put their minds to finding and implementing ways to make money by paying troubled loans, we in the private sector may turn things around.—Stan Crow
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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.