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The Latest Installment

The Converse Error Fallacy: The Argument that Because a Cash Sale Is Valid a Monetized Installment Sale Isn’t

October 7, 2021

Imagine an argument that goes like this:

 

Major premise:  A cash sale is a valid way of disposing of an asset.

Minor premise:  A monetized installment sale is not a cash sale.

Conclusion:  Therefore, a monetized installment sale is not a valid way of disposing of an asset.

 

Likely you’re thinking, “No one would make an argument like that!”

 

I would agree with you, if it weren’t for the fact that I’ve heard and read that very argument being made, year after year, over and over.  The words used may vary a little, but the point is always the same:  The person who makes that argument believes (or at least wants others to believe) that a monetized installment sale (or any installment sale) can only be valid if no cash sale is available.

With just as much logic, one could instead make the following argument:

 

Major premise:  A monetized installment sale is a valid way of disposing of an asset.

Minor premise:  A cash sale is not a monetized installment sale.

Conclusion:  Therefore, a cash sale is not a valid way of disposing of an asset.

 

That argument is no more crazy than the first one is.

 

A person (let’s call him or her the “Owner”) who owns an asset (let’s call it “Blackacre”) could have the following range of choices about what to do with it:

1.  Owner could decide to dispose of Blackacre:

     a.  In a cash sale at market value;

     b.  In a cash sale at a discounted price, to a beneficiary or charity;

     c.  In a cash sale with a remainder interest or life estate;

     d.  By a gift deed to a beneficiary or charity;

     e.  By a long-term lease, with or without an option to purchase;

     f.   By deed to the winning bidder in an auction;

     g.   In a raffle

     h.   By platting and subdividing and then selling lots separately;

     i.   By transferring Blackacre to a business entity in return for stock or a membership interest;

     j.   By transferring Blackacre to a testamentary or inter vivos trust;

     k.   By an installment sale in return for investment return over future years; or

     l.   Whatever else.

2.  Owner could decide not to dispose of Blackacre but instead to borrow money, either with Blackacre as security or not.

3.  Owner could decide to hold Blackacre until Owner’s death.

4.  In Owner’s Last Will and Testament, Owner could provide for disposition of Blackacre through any of the ways in a-l above.

 

All of that is to say that Owner has a whole range of valid choices about what to do to dispose of Blackacre, and when and how to do so.  According to the first imaginary argument stated above, though, Owner’s only valid choice is to sell and to do so for cash.  Because that conclusion is so obviously ludicrous, it is likely that the person who makes the argument does so because of the result the person wants rather than because of the facts or any transactional necessity.

 

Any seller is free to choose to sell with an installment sale, whether or not monetized, and whether or not the installment buyer retains or resells the asset.  An installment sale is just one of the possible choices, and the availability of a cash sale in no way precludes the seller from choosing any other way.—Stan Crow

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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