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Proposed Regulations Would Treat Monetized Installment Sale Transactions as Listed Transactions

By Michael Mishik .

On August 3, 2023, the United States Department of the Treasury issued proposed regulations that, if finalized, would treat certain monetized installment sale transactions as listed transactions for purposes of the tax shelter reporting requirements of Section 6011 of the Internal Revenue Code. The IRS has previously listed these transactions as part of their annual Dirty Dozen list for 2023.

Generally, the penalty for failure to furnish information with respect to a listed transaction is 75% of the reduction in the tax reported on the income tax return as a result of participation in the transaction, but not less than $5,000 in the case of an individual and $10,000 in any other case. The maximum annual penalty for failure to furnish information with respect to a listed transaction is $100,000 in the case of an individual and $200,000 in any other case. This penalty is in addition to any other penalty that may be imposed.

The transactions at issue involve the following general features:

  • A property seller intends to sell an appreciated asset to an identified buyer. Instead of selling the property directly to the buyer, however, an intermediary (who may be the promoter of the monetization transaction) buys the property from the seller for an installment note providing for annual interest payments and a balloon payment at maturity. The intermediary then re-sells the property to the identified buyer for cash, either immediately or shortly after the purchase from the seller.
  • In connection with these transactions, the intermediary refers the seller to a lender that will make a loan to the seller. The intermediary deposits the money received from the buyer (less a fee) into an account held by or for the benefit of the lender. The lender agrees to repay the deposit to the intermediary over the term of the installment note.
  • The lender loans an amount to the seller (on a nonrecourse basis) equal to the cash sale price to the buyer minus a fee. The loan to the seller is either funded or collateralized by the amount deposited by the intermediary in the account. The seller’s obligations under the loan are limited to the amount the seller is to receive from the intermediary under the installment note, and the loan and the installment note’s payment terms (e.g., interest rate and payment schedule) are substantially identical.
  • Upon maturity of each of (a) the installment note, (b) the loan to the seller, and (c) the deposit/funding arrangement between the intermediary and the lender (which will all be substantially contemporaneous) the offsetting obligations will terminate. This causes a deemed payment of the installment note and triggers the gain sought to be deferred by the seller until that time.
  • The promotional materials for these transactions generally assert that they afford the seller the ability to obtain upfront cash and defer gain on the sale of the asset until the taxpayer receives a balloon payment on the installment note.

The IRS indicates that it intends to attack these transactions using multiple arguments, including the following:

  • The intermediary is not a bona fide purchaser of the appreciated property, but rather is interposed in the transaction solely for tax avoidance purposes and does not have the benefits and burdens of ownership of the property. The interposition of the intermediary usually occurs after the seller has decided to sell the property to a specific buyer at a specific negotiated purchase price, and the economic effect to the seller is to pay direct and indirect fees to the intermediary and the lender that are substantially less than the purported federal tax savings from the gain deferral.
  • Because the installment note is indirectly secured by the proceeds from the property sale, the buyer has received payment as defined in the installment sale rules. Alternatively, since the loan from the lender is not a bona fide loan, the purported loan proceeds are appropriately treated as payment to the seller. Additionally, the anti-pledging rules in the installment sale provisions of the Code may be applied to treat the seller as having received payment of the installment obligation in the year the seller receives the loan proceeds.
  • The transactions may also be disregarded or recharacterized under the codification of the economic substance doctrine (Section 7701(o)), the substance over form doctrine, step transaction principles, or conduit theory.

The IRS is going through the unusual step of proposing regulations that treat monetized installment sales as listed transactions rather than a Notice because of recent successful challenges under the Administrative Procedure Act to various IRS Notices identifying other listed transactions. The regulations would be effective as of the date they are published as the final regulations in the Federal Register. Unlike a Notice, the effect of these regulations would not be immediate.

If you have previously entered into an existing monetized installment sale transaction, or a transaction that is substantially similar, while it is currently not a listed transaction, you may become subject to the reporting requirements for listed transactions in the year these regulations are finalized. Additionally, these transactions will likely be challenged on an audit. Understatements of tax liability attributable to listed transactions are subject to a 20% penalty that cannot be abated through a showing of reasonable cause.

If you have any questions about these proposed regulations, please contact Michael Mishik at or your Citrin Cooperman advisor.

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