Prop. regs. identify monetized installment sales as listed transactions

The IRS has issued proposed regulations identifying monetized installment sale transactions and substantially similar transactions as listed transactions that must be reported (REG-109348-22). The IRS listed monetized installment sales this year as part of the agency’s Dirty Dozen list of common tax scams and schemes.

The proposed regulations would require taxpayers who participate in monetized installment sale transactions and substantially similar transactions, and people who act as material advisers with respect to these transactions, to disclose the transactions in accordance with the regulations issued under Secs. 6011 and 6111, the IRS said. Material advisers would also be required to maintain lists as required by Sec. 6112.

Monetized installment sale transactions, as defined in Prop. Regs. Sec. 1.6011-13, generally include the following elements, the IRS said:

• A seller of appreciated property, or a person acting on the seller’s behalf, identifies a buyer who is willing to purchase the property in exchange for cash or other property.
• The seller enters into an agreement to sell the property to an intermediary in exchange for an installment obligation, which provides for interest payments from the intermediary to the seller.
• The seller then purportedly transfers the property to the intermediary, although the intermediary never actually takes title or takes title to the property only briefly before transferring title to the buyer in exchange for the buyer’s cash or other property.
• The seller also obtains a loan with an agreement that provides for interest payments from the seller to the lender that equal the amount of interest that the intermediary pays the seller under the installment obligation.
• Both the installment agreement and the loan provide for interest due over the same periods, with principal due in a balloon payment at or near the end of the term of the installment agreement and loan.
• The sales proceeds received by the intermediary from the buyer, reduced by certain fees, are provided to the lender to fund the loan to the seller or transferred to an escrow account of which the lender is a beneficiary.
• The lender agrees to repay these amounts to the intermediary over the course of the term of the installment obligation.
• The seller then treats the sale as an installment sale under Sec. 453 on a federal income tax return for the year of the purported sale and defers recognition of gain until the year in which the seller receives the principal balloon payment.

The IRS said last year in Announcement 2022-28 that it disagreed with a Tax Court decision in Green Valley Investors, LLC, 159 T.C. No. 5 (2022), which held that Notice 2017-10 was invalid because it was issued without following the Administrative Procedure Act’s notice-and-comment rulemaking procedures. The notice identified certain syndicated conservation easements as listed transactions, which must be reported to the IRS. Also in 2022, the Sixth Circuit issued a similar decision in Mann Construction, Inc., No. 21-1500 (6th Cir. 3/3/22), which involved another listed transaction.

Although it disagrees with these decisions, the IRS stated in the announcement that it was identifying certain conservation easement syndicate transactions as listed transactions in proposed regulations (REG-106134-22) “to avoid confusion and to prevent disruption of the IRS’s ongoing efforts to identify and examine abusive tax shelters throughout the nation.” It also stated that it planned to issue proposed regulations identifying additional listed transactions.

The IRS repeated its objections to these decisions, along with three other district court decisions that follow Mann, in the preamble to the proposed regulations. However, in the preamble, similar to Announcement 2022-8, the Service stated that it was identifying monetized installment sale transactions as listed transactions in proposed regulations “to avoid any confusion and ensure consistent enforcement of the tax laws throughout the nation.”

Written comments regarding the proposed regulations must be submitted by Sept. 3. A public hearing has been scheduled for Oct. 12.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.