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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 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

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 “C” Corporation with Minimal Tax Cost, with C453

195. Here’s a Strategy for Your Benefit if Your LLC Partners Don’t 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

When You Can, and When You Can’t, Change a Deal after the Fact, for Better Tax Treatment

January 21, 2015

Without my trying here to delineate all of the boundaries, let’s get one example of “when you can’t” out of the way right now.  What you better not try to do is to back date something so that you can pretend that you did it then rather than now.  The pretense is cheating.  Don’t do it.

On the other hand, for an example of “when you can”, suppose that you entered into a transaction on, say, January 1, 2013, and now either you or the other party (let’s call her Jill) wishes, or both of you wish, that it had been done differently.  You may wish that items A, B and C had been done differently, and Jill may wish that items D, E and F had been done differently.  Jill and you talk it over, the two of you find some room to agree on some changes, and the two of you discuss what the effective date for the changes should be.  Both Jill and you decide that it would be better for both of you if the effective date of the changes would be the beginning date—January 1, 2013—rather than now, two years later.

So, Jill and you sign a new agreement, you date it now, and you say in it that the changes you’re making will be effective from the beginning (more than two years ago) rather than now and rather than some date in the future.  To the extent that requires one of you to pay money, transfer an asset, or provide other performance, that is done now.

If this requires that the parties amend their 2013 tax returns to reflect the agreement as it now is, the parties do so.

Should the tax treatment of the transaction change accordingly, even retroactively, in response to the changes which Jill and you make and in response to the amended tax returns?

I say yes, because, in general, the tax law takes transactions as it finds them.  In other words, it is generally the case that the tax law doesn’t say that you must do this or that; it says that if you do this or that, then the tax effect will be such-and-such.  An amendment to an agreement can change the tax effects for the parties.  If it changes the tax effects retroactively (and the tax year is still open), that should still be true, because the tax law takes the agreement as the parties have made it to be.

My conclusion follows from a contract-law principle which comes down to us from time immemorial, that the parties to an agreement are at liberty at any time to change or replace their agreement with a new one.  They can agree, for example, to change the payment time(s), the amount(s) to be paid, the interest rate, what is included or excluded from the agreement, either or both parties’ consideration or performance requirements, the representations and warranties, and so on.  The can make the change retroactive to a certain date (but likely not earlier than the original contract date), and they can make it prospective only as of a certain date.  They can even change the character of the agreement, from a sale to a lease or option or vice-versa, or from a royalty to a commission or vice-versa, or from a franchise to a license or vice-versa, or from debt to equity or vice-versa, and so on.  They can amend an agreement, they can replace an agreement, or they can rescind an agreement and start over.  Whatever their transaction is, it is their construct, and they can re-construct it if they so choose.

Let’s look at another counter-intuitive example with which I dealt this week.  The question was whether a 1031 tax-deferred exchange that is about to fail can be rescued, even to the extent that debt on the property that was paid off when the exchange began can now be considered as having been refinanced rather than simply paid.  (The importance of the question derives from the fact that the pay-off of debt from money paid by the buyer to purchase the property will be treated for tax purposes as cash paid to the seller, whereas debt that is refinanced by the seller has no immediate tax cost.)

 

 

 

On December 15, 2014, Jack entered into an exchange agreement with Jill, a 1031 accommodator, and simultaneously transferred the property (the “relinquished” property) to Warren.  Warren paid $5 million, out of which $2 million was used to pay Jack’s debt on the property.  Jill, as accommodator, now holds the remaining $3 million (ignoring transaction costs).

Jack’s 45-day period in which to identify replacement property to buy will soon run out, and Jack now realizes that his would-be exchange is going to fail.  That means that the tax deferral which was the purpose of the exchange agreement with Jill will be lost.

Jack asks for S.Crow Collateral Corp.’s help.  So, S.Crow Collateral Corp. offers to Jill to assume her position in her exchange agreement with Jack, upon Jill’s payment of the $3 million to S.Crow Collateral Corp.  Jill is willing to do that, but asks about the $2 million that went to pay Jack’s debt.  “Won’t that $2 million will be immediately taxable to Jack if the exchange doesn’t go forward?” she asks.

I respond that in the context of 1031 exchanges, the tax law treats the accommodator (Jill) as the buyer of the relinquished property from the exchangor (Jack, who is the seller of the relinquished property); it treats her as the seller to the one (Warren) who purchases and retains the relinquished property; and it treats her as the seller to Jack of the replacement property if the exchange succeeds.  (For tax purposes, treating Jill as the buyer of the relinquished property from Jack and as the seller of the replacement property to Jack is necessary, because otherwise there would be nothing to exchange between Jack and Jill.)   For real estate law purposes, Warren is thought of as the buyer of the relinquished property, but for tax purposes Jill is, even when she does not go into title.

So, when S.Crow Collateral Corp. assumes Jill’s position in the exchange agreement with Jack, S.Crow Collateral Corp. becomes the successor buyer, just as if S.Crow Collateral Corp. had been the accommodator from the beginning.  That means that the $2 million that was used to pay Jack’s debt was S.Crow Collateral Corp.’s money (just as, as between Jack and Jill, it had been Jill’s money; for tax purposes, Jack was dealing with Jill, not Warren). 

It’s true that when the sale of the relinquished property closed and the debt was paid, that $2 million was indeed thought of, by everyone, as money paid to or for Jack, because it was used to pay his debt.  For tax purposes, though, the $2 million is treated as having been paid by Jill, because Jill is the buyer from Jack.

Let’s suppose that Jack and Jill decide to amend the exchange agreement to provide these outcomes:

·         That the $2 million will now be treated as having been a temporary loan by Jill to Jack;

·         That Jack is required to refinance the $2 million elsewhere;

·         That Jack is required, from that refinancing, to reimburse Jill for having paid $2 million for Jack; and

·         That, therefore, Jill will pay Jack $5 million for the relinquished property.

Let’s suppose that Jack immediately borrows $2 million from a third-party lender and, with that, reimburses Jill for the $2 million she paid to pay off the debt Jack had had on the relinquished property.

When those changes are made and Jack obtains that loan and reimburses Jill, I submit that Jack is not taxable for the $2 million that was used to pay his debt on the relinquished property, because it is now true that he borrowed (refinanced) the money to pay that debt, even though the refinancing occurred after the debt on the relinquished property was paid.  (Talk about counter-intuitive!)

Accordingly, S.Crow Collateral Corp. can assume Jill’s position in the exchange agreement, amend the agreement with Jack as Jill could have done, and agree to pay Jack for the relinquished property the purchase price of $5 million 30 years from now.  He achieves tax deferral under Section 453 for an installment sale rather than for an exchange under Section 1031, but deferral is deferral, so Jack is happy.  Jack takes out a monetization loan from the lender with which S.Crow Collateral Corp. works, in an amount nearly equal to the $5 million, and he uses proceeds from the monetization loan to reimburse S.Crow Collateral Corp. for the $2 million that was spent to pay Jack’s debt and that otherwise S.Crow Collateral Corp. would have received from Jill when S.Crow Collateral Corp. assumed her position in the exchange agreement.

Jack has nearly $3 million to invest however he chooses.  If he finds replacement property that he likes for a price he likes, he may use the loan proceeds to buy it and have a stepped-up basis.  If his exchange had proceeded and he had found replacement property in time, he would have had only a carry-over basis in the replacement property.  With a purchase after an installment sale, he can begin depreciation deductions all over again, but he could not do so with an acquisition to complete an exchange.

So, he enjoys complete tax deferral on the disposition of the relinquished property (that disposition is now an installment sale rather than an exchange) and a much-improved tax position on the replacement property when he finds it.  Not bad, for amending after the fact.—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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