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Treasury And IRS Have Released Proposed Regulations To Identify Specific Monetized Installment Sales As Listed Transactions

    Published August 4, 2023 – The proposed regulations issued jointly by the U.S. Department of the Treasury and the Internal Revenue Service aim to specifically classify certain monetized installment sales as listed transactions, which are subject to greater scrutiny.

    Discover the latest proposed regulations from the Treasury and IRS, targeting monetized installment sales classified as listed transactions.

    The Department of the Treasury and the Internal Revenue Service jointly issued proposed regulations yesterday. These regulations aim to identify specific monetized installment sale transactions and substantially similar transactions, categorizing them as listed transactions, which are considered abusive tax transactions. Taxpayers are required to report such transactions to the IRS.

    image representing changes made by internal revenue service regarding installment sales as listed transactions

    IRS mandates material advisors and certain participants in listed transactions to file disclosures or face penalties.

    The Internal Revenue Service (IRS) has officially included monetized installment sales in its list of common tax scams and schemes known as the Dirty Dozen for this year.

    Monetized transactions usually include several of the following details:

    A seller of appreciated property or an authorized representative acting on behalf of the seller identifies a willing buyer who expresses the intent to purchase the property. The transaction involves the seller entering into an agreement to sell the property to an intermediary. In return, the intermediary issues an installment obligation, outlining specific interest payments from the intermediary back to the seller. Subsequently, the property is purportedly transferred to the intermediary, who may briefly take title before transferring it to the buyer. This transfer occurs upon the buyer’s payment of cash or other property.

    Concurrently, the seller secures a loan and agrees to make interest payments to the lender. These interest payments are structured to match the interest payments received by the seller under the intermediary’s installment obligation. Both the installment agreement and the loan feature interest payable over specific periods, culminating in a balloon payment due near the end of the term of both agreements.

    The intermediary receives the sales proceeds from the buyer, and after deduction of specific fees, forwards the remaining amount to the lender. This amount either funds the loan provided to the seller or is placed in an escrow account where the lender is the beneficiary. The lender, in turn, agrees to repay these amounts to the intermediary over the course of the term of the installment obligation.

    From a tax perspective, the seller classifies this sale as an installment sale under section 453 on a federal income tax return for the year in which the purported sale occurred. The seller benefits from deferring recognition of the gain until the year in which the seller receives the principal balloon payment.