IRS Rulings and Case Law in Support of the Structured Sale

Since the IRS ruling on the PAT (Private Annuity Trust) back in October 2006 there has been some confusion about whether the Structured Sale (Ensured Installment Sale) falls under the same scrutiny.

On this page, you will learn the current IRS rulings and case law that supports the Structured Sale and how the Structured Sale is much different than the Private Annuity Trust (or other tax deferral methods like it).

Structured Sale vs. Private Annuity Trust

As you know, the Private Annuity Trust (PAT) is no longer a viable capital gains tax deferral technique as shown by the IRS ruling in October of 2006. So, why was the PAT stopped by the IRS?

In simple terms, the reason the PAT was stopped is because the transaction in a PAT is nothing more than the seller taking assets from one pocket and placing it in their other pocket. There is no true transaction between the seller and the Trust that the asset is placed into. In addition, the seller has access to the asset held by the trust, which triggers the constructive receipt doctrine and capital gains tax is due in the year of sale.

The IRS ruling stated that a seller cannot exchange an asset directly for an annuity stream to defer capital gains. As you can see, the Private Annuity Trust was nothing more than exchanging the asset directly for the annuity.

Here's how the Structured Sale is different and isn't affected by the IRS rulings that stopped the Private Annuity Trust.

With the PAT, a seller would sell the asset and collect installment payments from the annuity; however, the buyer of the asset would not be liable for the payments to the seller. The Structured Sale however, follows the rules set by the IRS and allows the seller to enjoy the benefits of capital gains tax deferral, safety, guaranteed stream of income, and much more.

Here are several aspects that make the Structured Sale work.

• Seller sells the asset to the buyer in an installment sale agreement, which allows the seller to defer capital gains tax and collect payments over a period of years. (the buyer still comes in with financing or cash, they pay the lump sum to escrow and do not pay the installment sale payments to the seller)
• Just as in a traditional installment sale, the buyer is liable for the installment sale payments to the seller. (this is key, the buyer must take liability for installment sale payments... PAT did not address this)
• Buyer assigns his liability over to the assignment company (backed by Fortune 100 life insurance company). This takes liability off the buyer to pay future installment sale payments.
• Assignment company, who now is liable for the installment sale payments, purchases an annuity to fund the sellers installment sale payments.
• There is a true transaction allowing for installment sale payments... not a quasi transaction like the PAT offered.
• Seller does not exchange their asset directly for annuity payments. The seller sells their asset on an installment sale and the buyer pays the installment payments with an annuity.
• Seller does not have access to the funds like with the PAT. Funds go from buyer to escrow to assignment company to annuity issuer. Seller never has access to the funds and does not trigger the constructive receipt doctrine.
• Seller collects installment payments from Allstate/Prudential and is the sole beneficiary of the annuity; however, the assignment company (backed by annuity issuer) "owns" the annuity. *The assignment company cannot change the sole beneficiary once the annuity is purchased. So this ensures that the seller will receive each and every payment on time, every time.

As you can see, the Structured Sale (Ensured Installment Sale) follows the IRS rules and is as solid as a 1031 exchange or traditional installment sale. The Structured Sale addresses the constructive receipt and exchange for annuity issues that the PAT did not. Below you can see the actual IRS rulings and case law that support the Structured Sale. If you have any further questions, please call us at 1-800-666-5584.

*Two private letter rulings specifically addressing the Structured Sale are possibly due from the IRS in late 2007. These letters are expected to be positive.

IRS Rulings and Case Law in Support of the Structured Sale (Ensured Installment Sale) Components

• Ruling allowing disposition of real property by Installment Sales - IRC 453
• Ruling allowing substitution of obligors - Revenue Ruling 75-457, Revenue Ruling 82-122, Wynne v. Commissioner, 47 B.T.Z. 731 (1942), Cunningham v. Commissioner, 44 T.C. 103 (1965), acq., 1966-2 C.B.4
• Ruling showing constructive receipt is avoided - Treas. Reg. 1.451-2(a), Commissioner v. Tyler, 28 B.T.Z. 367 (1933)
  

It is true that the IRS disallowed the exchange of an asset for an annuity stream; however, as you can see from the information above, the Structured Sale is not an exchange of an asset for an annuity stream. A Structured Sale is the sale of an asset by installment sale whereby the seller collects the installment payments from a fixed annuity.

Top Tax Attorney Opinion on the Structured Sale

• Robert Wood JD - Wood and Porter - www.woodporter.com

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