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In proposed regulations (REG-109348-22), the IRS identifies monetized installment sale transactions as listed transactions under Treas. Reg. Section 1.6011-4(b)(2). Participants and material advisors involved in these transactions would be required to file disclosures with the IRS or face penalties.

In these transactions, generally, a seller transfers appreciated property to an intermediary in exchange for an installment obligation, and the intermediary immediately transfers the property to a buyer for cash. The seller then obtains proceeds from a third-party loan (often arranged by the intermediary) in an amount approximating the property's sales price and the terms of which generally mirror the terms of the intermediary's installment obligation. The intermediary's cash sales proceeds may serve as collateral on the third-party loan. In effect, the seller has received proceeds equal to the full purchase price while deferring tax on those proceeds.

The IRS is holding a public hearing on October 12, 2023.

Structure of the transaction

The IRS describes the seven elements that would make up the proposed listed transaction but notes that a transaction could still fall under the definition even if it does not include all of the following elements:

(1) A seller identifies a buyer who is willing to pay cash or other property for the seller's appreciated property.

(2) The seller enters into an agreement to sell the property to an intermediary in exchange for an installment obligation.

(3) The seller purportedly transfers the property to the intermediary, who does not take title to the property or does so only for a short period.

(4) The intermediary purportedly transfers the property to the buyer.

(5) The seller obtains a loan from a third-party lender, the terms of which correspond to the intermediary's installment obligation. Specifically, the intermediary's interest payments on the installment obligation correspond to the seller's interest payments on the loan, with balloon payments of all or a substantial portion of principal due at or near the end of each of the installment obligation and loan.

(6) The sales proceeds received by the intermediary from the buyer are given to the lender that is providing the loan. The lender agrees to repay these proceeds to the intermediary over the term of the installment obligation.

(7) The seller treats the transaction as an installment sale under IRC Section 453.

The proposed regulations would include in the definition of participants the seller, intermediary, lender and anyone else whose federal income tax return reflected tax consequences of the transaction. The buyer of the property, however, would not be treated as a participant under the proposed regulations. The IRS asked for comments on whether the buyer should be treated as a participant.

Participants must report the transactions on Form 8886, Reportable Transaction Disclosure Statement. Material advisors must report the transactions on Form 8918, Material Advisor Disclosure Statement. Material advisors would have to disclose these transactions for tax statements made on or after six years before the final regulations are published.

The IRS said that taxpayers that have participated in these transactions should file an amended return, an administrative adjustment request under IRC Section 6227, or a Form 3115, Application for Change in Accounting Method, as applicable.

The proposed regulations would apply as of the date they are finalized.

IRS concerns

In the summary of the proposed regulations, the IRS said it was concerned that promoters were marketing transactions that enabled sellers to defer gain on the sale of property under IRC Section 453 until they receive the balloon principal payment under the terms of the installment obligation while receiving cash from the third-party lender that substantially equals the buyer's payment to the intermediary. The IRS said it intends to use multiple arguments to challenge treating these transactions as installment sales to which IRC Section 453 purportedly applies, including the following:

• "The intermediary is not a bona fide purchaser of the gain property that is the subject of the purported installment sale."
• "The seller is appropriately treated as having already received the full payment at the time of the sale to the buyer because (1) the purported installment obligation received by the seller is treated as the receipt of a payment by the seller under Treas. Reg. [Section] 15a.453-1(b)(3) since it is indirectly secured by the sales proceeds, or (2) the proceeds of the purported loan are appropriately treated as a payment to the seller because the purported loan is not a bona fide loan for federal income tax purposes, or (3) the pledging rule of [IRC S]ection 453A(d) deems the seller to receive full payment on the purported installment obligation in the year the seller receives the loan proceeds."
• "The transaction may be disregarded or recharacterized under the economic substance rules codified under [IRC S]ection 7701(o) or the substance over form doctrine. The step transaction doctrine and conduit theory may also apply to recharacterize monetized installment sale transactions."

Implications

Installment sale monetization transactions have been the subject of IRS scrutiny as abusive transactions. The IRS initially raised concerns about these transactions in CCA 202118016. Similarly, a GAO study (GAO-23-105843 (December 12, 2022)) notes that the IRS was investigating over 40 types of abusive tax schemes involving promoters as of September 2022, including the monetized installment sale transaction. Monetized installment sales also made the IRS's "Dirty Dozen" list (see IR-2023-71 (April 4, 2023); IR-2022-113 (June 6, 2022)). The proposed regulations reflect the IRS continued focus on installment sale monetization transactions.

Taxpayers that are contemplating or that have engaged in installment sale monetization transaction or similar transactions should be aware that they are closely scrutinized by the IRS as being abusive and should consult with a tax adviser.

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Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor