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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
August 27, 2012
Every legitimate transaction has risk and potential. If you’re the seller, maybe you’re selling at the peak price—or not—and maybe what you’re selling will be worth much less (or more) than your buyer expects it to be. If you think your buyer is over-estimating the value, or if you think that for some reason your particular buyer may not be able to capture the value that’s there, that doesn’t mean that something isn’t right about the deal; it just means that your expectations about the future aren’t the same as your buyer’s expectations.
Your buyer may think you are under-estimating the value, or your buyer may have information that you don’t have (or money that you don’t have) that may enable the buyer to squeeze more value out of the asset than you know how to do. Again, nothing about that fails to pass the smell test.
The smell test always comes to my mind when I hear of pyramid schemes, of which there is no end. The core error of pyramid schemes is that their success depends on the future willingness of a continually increasing number of other people to want to buy the same thing after I buy it. Because everyone who knowingly buys in has the same expectation, the rate of increase in the number of buyers must be an exponential rate to infinity—and that’s an inherent impossibility.
That’s completely different from the stock market. In the stock market, a buyer of one share usually assumes that the share will be able to be sold later to someone else, but the ability to sell to that someone else will not require either an increasing number of shares or an increasing number of buyers.
What makes markets is the willingness of buyers and sellers to come together on price and terms regarding an asset, in spite of their almost certainly differing expectations about that asset and their differing abilities to make use of that asset. On the other hand, anything that requires an exponential-to-infinity rate of growth in the number of participants is gambling, not a market. It is gambling that I can get in and out before others catch on.
(Sometimes pyramid schemes don’t openly fly under their true colors, as the Madoff scheme didn’t. If you’re promised a rate of return that is several multiples higher than rates lenders are charging on loans in the same or a similar arena, and if how that rate of return will be produced is kept secret from you, and if your investment is not guaranteed or backed up in some other way, why are you even thinking about it—even if it’s legal?)
As it is with pyramid schemes, one person’s gain in gambling must mean another person’s loss. In a real market, both parties to the deal may gain, as their abilities to make use of the asset or the money invested in it may differ.
None of this is to say that either party to a transaction should feel obligated to disclose to the other party the minimum price one would accept or the maximum price the other would pay. Anyone can mistakenly pay too much or receive too little. Both parties believe they know the asset with which they’re dealing, and both parties believe it has real value that doesn’t depend on an infinite number of buyers. What can be made of the asset is subject to differing opinions and differing abilities, and those differences make a market.—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.