Monetized Installment Selling – IRS Finally Says It Doesn’t Work
Promoters of monetized installment sales received bad news from the IRS earlier this month. Theirs published an analysis carried out by the Office of the Chief Counsel in describing six, count them six, ways the deal does not work as the promoters claim. The release won’t stop the industry in its tracks, but it will likely be a relief to practitioners who have indicated the technique to be flawed.
How GIS Works
Monetized Installment Selling (SIG) seems like a really good deal, if you want countless enthusiastic explanations about it, I suggest you search for the term on Youtube. This is where you will meet this Ruth benjamin of Financial tax strategys refers to “introducers”. If you have a big added value coming up and you talk to your hairdresser or at coffee time after church, an introducer is likely to be found. According to one of my sources, they are tireless.
Here is the version in brief. There are five parties – seller, buyer, dealer, lender, and escrow agent. The seller has an agreement with the buyer. The dealer steps in and buys from the seller in exchange for a 30 year note, only 5.7% interest payable to the escrow agent. The dealer then returns to the buyer for the original negotiated cash price. If the broker executes on the note, there is a 5% discount on the principal at maturity.
On or about the second day, the lender comes in and loans the seller 95% of the proceeds for a 30-year note, with only 6% interest payable by the escrow agent. The identical payment for the thirty-year tickets therefore also goes through the escrow account.
The 6% rate is what I was quoted by S. Crow Guarantee.
There are fees involved. After all the introducers also have to make a living, the seller will ultimately rake in about 93% of the proceeds. The quality of the transaction depends on the seller’s base in the asset and whether the interest paid by the escrow agent to the lender can be deducted.
The money washes, but it might not be a wash for income tax purposes. It would depend on how the money is spent. More importantly, on about the second day the seller has all the money they’ll get, but they’ve waived capital gains tax thirty years from now. Unofficial observations indicate that the can be expected to never be picked up.
Although there are a lot of introducers, I only know of one company that acts as a dealer. It is S. Crow Collateral Corp (Crow), founded in 2011 by Stanley D Crow. Ruth Benjamin told me that there was only one other company, but she didn’t want to identify it. She likes that they take smaller offers than Crow. On its website, Crow has a number of documents who explain and defend the transaction. Among them there is a IRS Chief Counsel memo (20123401E) which appears to support the transaction.
I was not convinced and I am not alone. Lou Vlahos lawyer in Monetized installment sales: what are they? argues that MIS, in fact, violates the rule that pledging a payment obligation triggers winning.
No, this arrangement does not constitute a formal pledge by the seller-taxpayer of the intermediary’s installment obligation; and, no, the intermediary’s obligation to the seller is not formally “guaranteed” by cash or cash equivalents.
Nonetheless, the monetized installment sales arrangement described above is essentially the same as one or both of these triggering earning events.
Mr. Vlahos also noted something that I had missed. The property discussed in CCM 20123401F was agricultural property, which exempts it from the pledge rule.
More importantly, when I contacted the IRS, I overheard spokesperson Bruce Friedland who wrote to me:
The IRS is aware of this transaction and does not believe it provides the desired tax benefits. The cited notice allows for the monetization of a down payment note received on a sale of farm property, which are exempt from pledge rules generally requiring recognition of gains when monetizing on a down payment obligation.
Additionally, there have been a significant number of litigation involving Crow which has resisted IRS subpoenas.
The new version
Now we have something more definitive, although to be honest it lacks a lot of authority. It’s a “Notice from lead counsel sent by email “- CCA_2019103109421213 as of October 31, 2019. The release date is 7/5/2021.
The email states that there are multiple promoters and sub-promoters, so not all points are applicable in all cases. The author recognizes that the theory on which the promoters base the arrangement is flawed. Here are the points.
- No real debt. An unsecured non-recourse unsecured loan is not genuine. There is no reason for a “borrower” to repay it.
- The debt is guaranteed by the receiver giving the seller an economic advantage making the payment taxable.
- The debt is secured by the dealer’s note resulting in deemed payment under the pledge rule.
- The intermediary is not the actual buyer making the ticket not subject to staggered processing
- Receipt of proof of debt secured in cash will be considered receipt of payment.
- NSAR 20123401F which is sort of the “holy grail” of MIS stands out. It does not involve an intermediary and, as Lou Vlahos pointed out with alert, it concerns agricultural goods that escape the pledge rule.
I spoke with Stanley Crow, the founder of S Crow Collateral and, according to his biography, a Harvard Law School graduate in 1967. (There is an ad in Harvard Magazine.) He told me that his company is not doing anything that is noted in the CCA and that IRS is referring to its competitors. He didn’t comment on the company’s litigation with the IRS, and he didn’t tell me who the competitors were. When asked, he indicated that an answer could be posted on the company’s website.
The IRS did not respond to my request about the email notice that was posted almost a year and a half after it was written.
Louis Vlahos by Rivkin Radler, which I quoted above, has a very good analysis on JDSUPRA – Cash, tax deferral, monetized installment sales: no, you can’t have it all.
Nick Gruidi, Joseph Wiener and Eric Brauer have As income tax rates rise, beware of some deferral strategies on the RSM website.
CCA 202118016 recalls that taxpayers should carefully analyze tax deferral techniques that seem too good to be true and seek appropriate tax advice.
On April 19, 2021, the IRS announced the creation of a new Office of Proponent Investigations (“OPI”). The creation of OPI illustrates the IRS’s commitment to prosecute promoters and combat abusive tax evasion operations. The MIS transaction structure has been on the IRS’s radar for several years, and the release of the IRS 2021 memorandum appears to suggest that OPI will take a close look at past and future MIS transactions. Sellers considering a MIS transaction structure based on advice received from a promoter should exercise caution. The potential of being caught in an IRS sweep of MIS promoters is now stronger than ever.