The advantages of selling appreciated assets via a structured sale.

• Author: Wood, Robert W.

EXECUTIVE SUMMARY

* A structured sale is an obvious choice to consider to create a secure, fixed base of tax-deferred income.

* In a structured sale, the seller gets a guaranteed payment stream from an assignment company, without serious risk of either nonpayment or acceleration.

* A structured sale is eligible for installment sale reporting, and the assignment by the buyer is not a disposition.

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A structured sale is a type of installment sale that provides the seller with a guaranteed payment stream from an assignment company. This article discusses how a structured sale works and its tax implications.

Today, many people are selling businesses, houses and commercial real estate at record levels and setting up retirement funds with the proceeds. Paying tax on the sale of appreciated property later is better than paying it today. How can one delay the tax bill?

Income averaging used to be one way to reduce and stretch out tax obligations, but it was eliminated many years ago. A better approach is an installment sale, which simply involves taking sale proceeds over a number of years, and allowing them to grow on a pre-tax, rather than a post-tax, basis. This article describes the structured sale, which is a blend of an installment sale and a guaranteed payment stream.

Installment Sale Pitfalls

Installment sale appears straightforward. Indeed, it seems that little could go wrong from a tax standpoint. Yet, the history of installment sales discussed below suggests otherwise. (1) Understandably, installment sellers want to ensure that stretching out payments does not make ultimately being paid less likely. The foibles of traditional installment sales bring up an important point. Although installment sellers are concerned about being paid in general, what they really want is the security (and tax efficiency) of a payment stream over many years to secure retirement, achieve traditional tax deferral, serve asset protection goals, etc.

Security Interests

The installment seller can take back a security interest in sold property (such as a mortgage on real estate or a Form UCC-1, National UCC Financing Statement on inventory), but that often represents inadequate security. A security interest in real estate can be comforting when in first position, but in a business context it rarely gives much protection, because usually there are plenty of other creditors and it is not possible to jump ahead of them all. Besides, repossessing sold property is cumbersome and inconvenient, even if the seller can flip it.

Letter of credit: An installment sale note may be backed by a standby letter of credit that the seller can present for payment on a default. Although a letter of credit is far more efficient than collecting on a traditional security interest, most banks will issue one for only 12 months at a time. That means there are generally cumbersome renewal provisions in the note, purchase and/or security documents. A seller can be left with the choice whether to let a letter of credit lapse or to draw down on it, thus destroying the treatment of the transaction as an installment sale.

Deed of trust: A deed of trust on real estate, a security agreement or a pledge of stock in a closely held company can provide some security, but on default, they will compel the seller to foreclose and realize as much cash as possible, which would destroy installment sale treatment. Obviously, when the seller is faced with the possibility of not being paid, a desirable payment stream and tax deferral will pale in comparison.

Structuring an Installment Sale

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