| Recently investors have begun to explore the concept | | | | assignment under suggested structured sale |
| of a "structured sale" as a way to defer taxes without | | | | agreement is to impose a payment obligation on the |
| the constraints of finding a replacement property. This | | | | third party that is in addition to, not in substitution for, the |
| article looks to see what structured sale tax issues | | | | original payment obligation of the buyer under the |
| may need to be considered with this new twist on | | | | agreement. |
| owner financing and installment sales of real estate. | | | | Next, the structured sale cannot be at odds with either |
| Many real estate investors have tried a 1031 exchange | | | | the "constructive receipt" or the "economic benefit" |
| as a real estate repositioning, or real estate exit, | | | | doctrines. |
| strategy. But, they have often been frustrated | | | | In this context, constructive receipt and economic |
| because they can't seem to find an appropriate | | | | benefit can be simplified to mean that if the seller has |
| replacement property. Recently, investors have been | | | | access (of any similar rights) to the funds then they |
| introduced to the concept of a "structured sale" as a | | | | are taxable at that time. IRS Code Section 453 has |
| 1031 alternative means to defer taxes without the | | | | very specific rules on this and as long as they are |
| replacement property issue. That's great potential | | | | followed the taxpayer should have no problems. The |
| news for many investors. The question is: will the IRS | | | | question is: does adding the structured settlement |
| share their enthusiasm? We will try to answer this | | | | feature of the assignment by the buyer's obligations to |
| question by looking at the concept of a structured sale | | | | a third party to make payments to the seller change |
| through the eyes of the IRS. | | | | this dynamic? Here is a summary of the issue to be |
| First, a structured sale, while a new term, is not | | | | aware of in this regard: |
| necessarily a new concept. In its essence, it is a | | | | Under traditional constructive receipt principles, if |
| combination of two long-standing IRS codes: installment | | | | payments are not credited to a seller's account, set |
| sales, and structured settlements. | | | | apart for him or otherwise made available so he may |
| Under an installment sale, a taxpayer has long been | | | | draw on the settlement at any time, there's no |
| permitted by section 453 of the IRS code to arrange a | | | | constructive receipt. Therefore, if a buyer assigns |
| sale of property so the proceeds are taxable as | | | | obligations to pay periodic payments to a seller, the |
| received across several years, without fear that the | | | | seller should not experience any acceleration of gain. |
| stream of payments will be accelerated and taxed in | | | | The essential point being that the buyer's assignment |
| the year of sale. | | | | of its payment obligation to a third-party assignment |
| The "structured settlement", and indeed the whole | | | | company cannot give the seller any greater rights than |
| Structured Settlement Industry, was created in the | | | | he had under the installment agreement. So, in a |
| 1970's because of Internal Revenue Service rulings. | | | | structured sale, the third party's payments need to |
| These rulings made it clear that periodic payments to | | | | remain unsecured and not replace the liability of the |
| claimants in personal physical injury cases were free | | | | buyer to make the periodic payments. If the buyer |
| of federal taxation as long as certain conditions were | | | | was already bound by an installment agreement under |
| met. This IRS acknowledgment made the concept of | | | | which the payments are taxable only in the year |
| using periodic payments to help injured parties and | | | | received, the buyer's receipt of payments from a third |
| defendants resolve claims popular. Before this time, | | | | party (whose ability to make those payments are not |
| U.S. common law promoted lump sum payments to | | | | secured) should not change the tax position of the |
| claimants. | | | | seller. |
| Listed below are the structured sale tax issues that | | | | From an economic benefit perspective the issue |
| had to be overcome in trying to combine these two | | | | becomes that structured sale cannot do anything to |
| separate concepts into this new unified concept. | | | | alter the series of events first set in place when the |
| The first basic issue is by virtue of the "structured | | | | seller negotiated for installment payments. The |
| sale" technique the buyer cannot be released from | | | | installment payments need to remain the same, the |
| liability in the transaction. In other words the IRS is | | | | interest rate needs to remain the same, and the original |
| saying that when the buyer "assigns" its payment | | | | obligor needs to be still obligated under the note. The |
| obligation to a third party in the structured sale | | | | only thing that can change - and only be changed not |
| agreement, this assignment cannot alter or otherwise | | | | through documents to which the seller is a party - is |
| affect the terms of the buyer's original obligation. The | | | | that the buyer's assignment of its obligations produces |
| IRS will look to see that the sole effect of the | | | | an additional obliger and a guarantor. |