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205. Why Congress Provided for Monetized Installment Sales
201. When You Can, and When You Can’t, 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
196. Liquidate a “C” Corporation with Minimal Tax Cost, with C453
194. With C453, Help Yourself and Your Favorite College, University or Other Charity, Too
193. The Doctor, the Tardis, Time Travel and Taxes
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
184. A 1031 Exchange Scandal: Who Cares about the Taxpayer?
183. Can C453 Repeatedly Achieve Tax Deferral for the Same Money, As in Hopscotch?
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
177. An Occasion for Sadness: When Advisers Let 1031 Exchanges Fail, or Cause Them to Fail
175. Should You Choose a 1031 Exchange, or a Collateralized Installment Sale?
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
160. The Price of Economic Uncertainty: 1% to 2% Higher Unemployment
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.
153. Would You Like to Move to a Low-Tax State, without Paying an Exit 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
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
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
132. How a Business Owner's Creative Thinking Led This Week to a Solution for Sale of His Business
130. Today's Producer Price Index Report: Inflation Hits 0.8% in September (a 10% Annualized Rate)
128. Will the Now-Fainting 1031 Tax-Deferred Exchange Industry Ever Come Back?
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?
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?
115. How an Average Person Can Tell Effective Economic Stimulus from Ineffective Stimulus
109. Will a Real Estate Broker Make More Money, or Less, with a Collateralized Installment Sale?
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
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?
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?
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
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
71. Reading the Warning Signs: Is Is Worth Trying to Do Business with a Narcissist?
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?
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
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
54. 1. Dealburt Retires. 2. "Regulatory-Risk" Aversion Will Reduce Economic Growth.
53. Ready for Prime Time: Our Criteria for Resolving Troubled Commercial Loans
50. The Creative Process, Categorical Reasoning, and Tax Minimization
48. New: A Perpetual Collateralized Installment Sale: Permanent Tax Deferral in Unlimited Amounts
January 9, 2013
I’ve been asked: Can the new 3.8% Medicare tax be deferred by using an installment sale? The answer is clearly yes, and here’s why that is so. The general rule is stated in Section 453(a) as follows: "Except as otherwise provided in this section, income from an installment sale shall be taken into account for purposes of this title under the installment method." For purposes of our analysis now, we can state the general rule this way: "Income from an installment sale shall be taken into account for purposes of this title under the installment method." That means that when a sale is an installment sale, the measure of the income that can be taxed is that income which is taken into account under the installment method. So, the question becomes this: For purposes of the 3.8% Medicare tax, is the amount of the income that can be taxed the same as the amount of income that is calculated under the installment method? Look again at the rule: "Income from an installment sale shall be taken into account for purposes of this title under the installment method." Therefore, the place to begin to answer the question is to determine whether the the Medicare tax is within the same "title" of the United States Code as the one containing the capital gains tax, because "for purposes of this title", the section says, income from installment sales will be taken into account "under the installment method". Both Section 453 (the installment-reporting section) and Section 1411 (which provides for the new Medicare tax) are contained in Title 26, which, indeed, contains the entire Internal Revenue Code. So, according to Section 453, for purposes of Title 26 (including Section 1411) all taxation of income from installment sales will be on income that is taken into account "under the installment method". According to Section 453(c), income from installment sales will be "recognized for any taxable year" pro rata as principal payments are received. If no principal payments are received in a given year, no part of the gain from the sale is recognized for that year. Under the general rule as stated in Section 453(a), that is necessarily true for both the capital-gains tax and the new Medicare tax. This conclusion is further suppported by the text of Section 1411 itself. Section 1411(c)(1)(A)(iii) defines "net investment income" for purposes of the 3.8% tax, as it relates to sales of capital assets, as meaning "net gain (to the extent taken into account in computing taxable income) attributable to the disposition". The phrase, "to the extent taken into account in computing taxable income", is an obvious reference to Section 453’s test, "taken into account for purposes of this title under the installment method". Section 453’s installment-reporting method tells what amount is taken into account in a given year, and that amount is used by Section 1411 for purposes of calculating the "net investment income" to which the 3.8% tax applies. Therefore, when income from a sale is deferred and not recognized because of an installment sale, it is deferred and not recognized as "net investment income" which would otherwise be taxed at 3.8%. I should note, also, that what I’ve referred to here as the "Medicare tax" is only called that because the revenue which the Internal Revenue Service collects from it is said to be dedicated to support Medicare. The name of the tax, though, as actually stated in Section 1411, is a tax on "net investment income". Please note: Deferral of the "Medicare tax" will be addressed in my CPE course for CPAs next week. See last week’s post, below, for details.—Stan Crow
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.