Monetized Installment Sale

The IRS has now stated that a monetary instalment sale does not work

Monetized installment sale : Monetized installment saleThe IRS gave the proponents of Monetized Installment Sales some bad news earlier this month.

The IRS recently produced an analysis by the Office of Chief Counsel that outlines six, count them six, ways in which the transaction does not work as the proponents say.

The announcement will not halt the industry, but it will likely provide solace to practitioners who have been advising that the approach is defective.

How MIS Is Supposedly Implemented

The Monetized Installment Sale (MIS) appears to be a fantastic offer, and I recommend searching the word on YouTube for a plethora of enthusiastic explanations.

You’ll come across what Ruth Benjamin of Financial Tax Strategies refers to as “introducers” there.

An introducer is likely to discover you if you mention a large capital gain going up to your barber or at the coffee hour after church. They are indefatigable, according to one of my sources.

In a nutshell, here’s what happened. The seller, buyer, dealer, lender, and escrow agent are the five parties involved. The buyer and the seller have made an agreement.

The dealer steps in and purchases the property from the seller in exchange for a 30-year note with 5.7 percent interest payable to the escrow agent.

The dealer then sells the item to the buyer for the agreed-upon cash sum.

There is a 5% reduction on the principal at maturity if the dealer performs on the note.

The lender enters the picture on Day 2 or so and lends the seller 95% of the proceeds for a 30 year note with only 6% interest to be paid by the escrow agent.

The escrow money will also be used to pay down the notes thirty years from now.

S. Crow Collateral quoted me at a 6-percentage-point rate.

There are some costs associated with this. After all, introducers need to make a living as well, therefore the seller will take home roughly 93 percent of the profits.

The seller’s basis in the asset and whether they may deduct the interest paid by the escrow agent to the lender determine how good a deal this is.

Although the currency is clean, it may not be for tax purposes. That depends on how the funds are allocated.

The seller has all the money they are ever going to get on Day 2 or so, but they have kicked the capital gains tax can thirty years down the road.

Off-the-record observations suggest that it is possible that the can will never be picked up.
The Hypothesis

Despite the fact that there are many introducers, I am only aware of one company that serves as a dealer.

Stanley D Crow formed S. Crow Collateral Corp (Crow) in 2011. Ruth Benjamin said there is only one other company, but she wouldn’t say which one it is.

She appreciates the fact that they are willing to take smaller transactions than Crow.

Crow has a number of materials on its website that explain and defend the deal.

A memo from the IRS top counsel (20123401F) is among them, and it appears to justify the transaction.

I wasn’t convinced, and I wasn’t the only one. What Are Monetized Installment Sales, According to Attorney Lou Vlahos?

The MIS, according to, effectively breaches the rule that a commitment of an instalment obligation triggers the gain.

No, the seller-taxpayer does not make a formal pledge of the intermediary’s instalment commitment, and the intermediary’s duty to the seller is not technically “secured” by cash or cash equivalents.

Nonetheless, one or both of these gain-recognition-triggering occurrences are substantially the same as the monetized instalment sale mentioned above.

Mr. Vlahos also pointed out something I had overlooked. The property in CCM 20123401F was farm property, hence it was not subject to the pledge regulation.

When I contacted the IRS, I received the following response from spokesman Bruce Friedland:

The Internal Revenue Service is aware of the transaction and does not feel it provides the tax benefits requested.

The stated guidance allows for the monetization of an instalment note acquired in a farm property sale, which is excluded from the pledge requirements that require gain recognition upon monetization of an instalment obligation.

In addition, there has been a substantial amount of litigation surrounding Crow’s defiance of IRS summonses.
The New Arrival

Now we have something more concrete, though it is still far from authoritative.

It’s a “Emailed Chief Counsel Advice” dated October 31, 2019 – CCA 2019103109421213. It is scheduled to be released on May 7, 2021.

Because there are various promoters and sub-promoters, not every point is valid in every situation, according to the e-mail.

The author agrees that the promoters’ notion on which the arrangement is based is faulty. The following are the main points.

There is no true debt. There is no such thing as a true unsecured nonrecourse loan with no collateral. A “borrower” has no obligation to repay it.

The escrow secures the obligation, providing an economic benefit to the seller and making the payment taxable.

Under the pledging rule, the obligation is secured by the dealer note, resulting in presumed payment.

The note is not subject to instalment treatment because the intermediary is not the genuine buyer.

The receipt of proof of indebtedness secured by cash will be viewed as payment.

It is possible to discern NSAR 20123401F, which is akin to the “Holy Grail” of MIS. It doesn’t involve a middleman, and, as Lou Vlahos pointed out, it involves farmland, which is free from the pledging requirement.

Response

I spoke with Stanley Crow, the founder of S Crow Collateral and a 1967 Harvard Law School alumnus, according to his bio.

(Harvard Magazine has an advertisement.) He claimed that his company does not engage in any of the activities listed in the CCA, and that the IRS was referring to his competitors.

He wouldn’t comment on the company’s IRS lawsuit, and he wouldn’t tell me who the competitors are.

When asked, he said that a response might be posted on the company’s website.

My question to the IRS about why the email guidance was released over a year and a half after it was sent went unanswered.

Additional Coverage

Check out my essay Monetized Installment Sale – Risky Business on Think Outside The Tax Box if you want to learn more about MIS and get some CPE at the same time.

JDSUPRA – Cash In Hand, Tax Deferral, Monetized Installment Sales: Louis Vlahos of Rivkin Radler, whom I cited above, has a really good analysis on JDSUPRA – Cash In Hand, Tax Deferral, Monetized Installment Sales: Louis Vlahos of Rivkin Radler has a really good analysis on JDSUPRA – Cash In Hand, Tax Deferral No, you can’t have everything.

Nick Gruidi, Joseph Wiener, and Eric Brauer are among those who have Be wary of various delay methods on the RSM website as income tax rates rise.

CCA 202118016 serves as a caution to taxpayers to carefully examine tax deferral schemes that appear to be too good to be true and seek professional tax guidance.

A Skeptical IRS Comment on Monetized Installment Sale Transactions is available at Dykema.com.

The IRS announced the creation of a new Office of Promoter Investigations (“OPI”) on April 19, 2021.

The IRS’s dedication to pursuing promoters and countering abusive tax avoidance operations is demonstrated by the founding of OPI.

The IRS has been watching the MIS transaction structure for several years, and the issuance of the 2021 IRS Memorandum appears to indicate that OPI will be closely scrutinising both past and future MIS transactions.

Sellers who are seeking a MIS transaction structure based on promoter advice should proceed with caution.

The risk of being caught up in an IRS crackdown on MIS promoters is now greater than ever.

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