Introduction
The IRS has for the second time in as many years included monetized installment sales on its annual “Dirty Dozen” tax schemes list. As we discussed in a prior post, the “Dirty Dozen” list alerts taxpayers and practitioners to certain transactions or arrangements that the IRS considers potentially abusive tax arrangements that taxpayers should avoid.[1] Generally, the “Dirty Dozen” list includes transactions that are heavily promoted and that will likely attract IRS enforcement and compliance efforts in the future. The IRS warned taxpayers to beware of, and avoid, advertised schemes, many of which are promoted online, that promise tax savings that are “too good to be true” and that will likely put taxpayers in jeopardy. The purported tax benefits that promoters offer from a monetized installment sale have clearly drawn the IRS’s attention. Generally, these tax arrangements allow taxpayers to sell appreciated property but defer the corresponding tax (typically many years later) when seller receives one or more payments, relying, in part, on the installment sale rules in section 453.

The inclusion of monetized installment sales on the “Dirty Dozen” tax list follows on the heels of CCA 2021180016[2] where the IRS explained six reasons why these transactions are problematic. The CCA also explained why the promoters’ basis for how the transactions purportedly achieve the desired tax consequences, is flawed. Promoters of monetized installment sales often rely on a 2012 IRS Memorandum[3] as support for their position that monetized installment sales have been blessed by the IRS and are legitimate. As discussed below, the 2012 IRS Memorandum was issued in a different factual context and should not be viewed as support for the typical monetized installment sale structure. Taxpayers that are considering, or have engaged in, monetized installment sales, deferred sales trusts, or similar transactions, should consult with an independent tax professional to carefully review the underlying legal requirements and technical analysis on which such arrangements are based.

The Generic Monetized Installment Sale
Promoters market monetized installment sales as a strategy to receive all of the proceeds from the sale of a highly appreciated asset in the year of the sale but defer paying the corresponding tax well into the future. In some cases, promoters are marketing a thirty-year deferral of the tax. If that sounds too good to be true, you are on the right path. If the transaction works as marketed, the promoter is selling an arrangement that takes advantage of the time-value of money. Investing pre-tax dollars received from the sale and allowing that investment to grow over a period of time will yield a larger return than if the same sales proceeds were used to pay the tax at the time of the sale and then the remainder invested post-tax.

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