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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

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

March 27, 2012

A piece by Lloyd M. Krieger about a year ago (February 23, 2011) in The Wall Street Journal said this:

"Doctors and hospitals, meanwhile, have decided that they cannot survive unless they achieve massive size—and fast. Six years ago, doctors owned more than two-thirds of U.S. medical practices, according to the Medical Group Management Association. By next year, nearly two-thirds will be salaried employees of larger institutions."

Today the consolidation is continuing at a rapid pace. The trend is motivated by a variety of well-known factors, but it is having some unforeseen consequences for the doctors themselves. As far as I know, some of those unforeseen consequences have escaped the attention of doctors, their advisers, and health-care observers.

I saw some of this in the situation of the sale of a large medical clinic in the Midwest, to a regional hospital. Rather late in the process, S.Crow Collateral Corp. was asked to consider purchasing various doctors’ interests in the clinic and in the clinic’s real estate, and then to re-sell those interests to the hospital, so that the doctors could take advantage of tax deferral through an installment sale under Section 453 of the Internal Revenue Code. Based on that clinic sale and others, I identify some risks, costs and traps of which doctors should be aware.

#1: Over-delegation, Momentum and Detachment

Doctors quickly become accustomed to delegation of responsibility; it’s the only way in which they can maintain a substantial practice. It can seem natural, therefore, for the doctors in a large clinic to delegate to one or two or three of their number, or to their office manager, the responsibility of developing the agreement of sale to the hospital, to a larger clinic, or to an insurance company’s subsidiary.

The tendency, once the delegation has occurred, is for the doctors to think that the whole matter of the sale of the clinic is taken care of, and that all that remains is for the doctors to sign whatever is presented to them when the deal is ready to close.

Whoa! What a mistake that can be! With a broad delegation and lack of on-going involvement, the doctors create room for momentum which can become almost impossible to stop, correct or reverse.

Positions are taken in the negotiations. Alliances form, such as between the doctors’ negotiators and the legal and tax counsel who are supposed to be looking after the interests of all of the doctors, not just those of the negotiators. Somehow, some doctors are treated better in the proposed deal, than are some of the other doctors.

The longer the negotiation process takes, the greater will be the resistance on the part of the person or committee that was put in charge of the matter by the doctors, to make any change or correct any deficiency. On the doctors’ side, the time pressures of practice, concern about relationships within the clinic, and not wanting to aggravate the doctors’ future employer (the hospital) can create a strong incentive to grin and bear it, rather than press for the deal as it should have been.

#2: Wearing Down

Although momentum and wearing down may seem to be opposites, they can go hand in hand, to the detriment of the doctors. The longer the negotiation process continues, the less patience the doctors are likely to have with the process. Doctors generally want to get on to other things. Whether or not the delays, revisions, delays, more revisions, and so on are meant for this purpose, they tend to wear the doctors down. The doctors can become so frustrated with the process that they’ll agree to almost anything, just to get on with their lives.

#3: Doubling Down on Taxes

I’ve seen it happen, that a hospital insisted that the price it was going to pay for the doctors’ practices be structured as employment compensation, which would therefore be taxed to the doctors as ordinary income rather than as capital gain. Even more egregiously, I’ve seen it happen that the hospital insisted that the pseudo-employment compensation be taxed to the doctors entirely in the year in which the deal is done, but the payment would be withheld by the hospital for several years so that the hospital could penalize any doctors who might leave the hospital’s employ early. How the doctors’ attorney agreed to that I don’t know, but it happened.

Maybe part of the idea was a belief that doctors are accustomed to being so highly taxed that they would put up with anything. To me it seemed abusive.

#4: Mis-use of a Section 1031 Tax-deferred Exchange

Poorly advised doctors generally don’t know that they have an alternative to a tax-deferred exchange under Section 1031 of the Internal Revenue Code. So, to try to fit within that section and reduce their tax cost on sale of the practice, they often try to allocate most of the selling price to the real estate which the clinic has used, and to allocate very little of the selling price to the practice itself. Their thinking is that they can defer most of the tax on the sale that way, and then they can re-invest in other real estate later, within the 1031 rules.

The problem is, the 1031 rules don’t allow fudging on the allocation of the purchase price. Treasury Regulations §1.1060-1(b)(8) makes it clear that in "partial non-recognition exchanges" such as the sale of a medical practice the fair market value of the different assets is controlling—not just an allocation that is agreed to by seller and buyer.

Besides, if the hospital is a non-profit, no one should expect an agreed allocation of the purchase price to be controlling for tax purposes.

If you fudge on the allocation, don’t expect to get away with it.

#5: Over-paying on the Re-investment

So let’s say that you go ahead with a 1031 exchange on the sale of your practice, and you don’t fudge on the allocation of the purchase price. Here’s my warning: You’re very likely to over-pay for whatever investment you buy in place of the real estate you’re selling.

To illustrate, suppose that Congress were to pass a law which imposed a 15% tax on the sale of new automobiles beginning 180 days after date of passage, and the only way you could avoid the tax (besides not buying a car) would be to place an order for it within 45 days and buy it during the 180 days.

What do you think would happen to the price of cars during that 180 days? Well, the price would rise, because car manufacturers and dealers would have new leverage over buyers during that period; anyone who is considering buying a car would be under pressure to order within the 45 days and buy within the 180 days, so prices would rise.

Well, that’s what happens with 1031 exchanges, too; the same piece of real estate will typically cost more if it is being sold to someone under a time constraint. One economic study pegged the price surcharge—which is hidden but nonetheless real—at 7.9% on average.

So, to defer a 15% tax, you’re willing to pay 7.9% more for replacement property?

#6: Would You Buy That Replacement Property If It Weren’t for Tax Deferral?

If you wouldn’t, then why in the world are you letting yourself be pressured into buying it, just to put off the capital gain on your sale of the real estate?

#7: Missing Out on a Collateralized Installment Sale

If you’re not careful, by detachment and default you can completely miss out on the one clear and straightforward strategy to maximize your advantages and minimize your costs when you sell your practice: a collateralized installment sale.

A collateralized installment sale adds no time pressure, no re-investment constraints, no complications for the purchasing hospital, and no jumping through hoops to make "x" appear to be "y". You defer all of the tax on sale, and do so for as long as 30 years.

#7: Missing Out on Non-taxable Cash to Invest Now

If you sell your practice with a collateralized installment sale, you will be eligible to borrow nearly an equivalent amount of money from a third-party lender, in a limited-recourse loan that you cannot be required to pay above and beyond what S.Crow Collateral Corp. pays to you on the installment contract.

So, if you’re a doctor in this situation, pay attention. Don’t detach. Control momentum. Use a collateralized installment sale. Then invest what you want, when you want, how you want, with no hidden price increases to overcome.

If you’re a patient, you would do your doctor a big favor, if you pass along this information.—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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