Lb Presentation 0306

7/31/2019 Lb Presentation 0306

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Installment Sales


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Installment Sales

The Challenge With Selling a Business orProperty for Cash

Challenge: Individuals selling a business or personal

property for a lump sum are oftentimes faced withhaving to recognize the entire gain as taxable in theyear of the sale.

Solution: By making the sale and having part of the

proceeds payable over the following tax year(s), theseller can recognize the taxable gain in the tax yearthe installment payment is received or deemedreceived.

Broker Use Only


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Market Data*

Level 1 businesses sell for $2.5 - $50 million(Market = $138 - $600 Billion).

Level 6 sells for $50 million+

*Data obtained from the 2004 Business Ref. Guide.Broker Use Only


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What is an Installment Sale?

An Installment sale is defined in Sec. 453 of the Internal

Revenue Code of 1986 as a disposition of property where atleast 1 payment is to be received after the close of the taxableyear in which the disposition occurs.

In general, Installment Sales permit sellers to defergains on certain property dispositions to the tax year

in which the related sale proceeds are received.

Broker Use Only


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How does a Cash Sale work?

$100 Selling Price with a Basis of $10.

Seller recognizes taxable profit of $90 (or 90% of sellingprice) immediately.

Broker Use Only


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How does an Installment Sale work?

$100 Selling Price with a Basis of $10 (gross profit of $90, or90% of selling price).

Selling price paid in installments of $10/year for 10 years.

Seller recognizes taxable gain of $9 (90% of $10) each year

a distribution is received.

For simplicity, example does not take into account interest in theInstallment Obligation.

Broker Use Only


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Benefits of an Installment Sale

No direct relationship between the Buyer and Seller for the

assigned periodic payment obligation.

Security The Seller is not directly dependent on thesolvency or financial performance of the Buyer.

Broker Use Only


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Installment Sales

Broker Use Only


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Installment Sales-Continued

The Buyer assigns the obligation to an Assignment Company tomake periodic payments.*

An Assignment Company funds the payment liability bypurchasing an annuity from Allstate Life (part of the AllstateCorporation, headquartered in Northbrook, IL and a Fortune 100Company).

In the event the Assignment Company fails to makepayments, ALIC shall make the scheduled annuitypayments to Seller pursuant to the Agreement to Pay.

*See Revenue Rulings 75-457 and 82-122 and Tax Court decisions in Wynne v. Commissioner (47B.T.A. 731 (1942), nonacq. 1943 C.B.42)and Cunningham v. Commissioner(44 T.C. 103 (1965), acq.

1966-2 C.B. 4) for substituting obligors. Broker Use Only


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Design Mechanics

Sales agreement between the Buyer and the Seller includeslanguage allowing for installment sale.

Terms of an Installment Agreement govern payment schedule.

Can be paid period certain or period certain and life.

Only restriction on payment streams cannot be

life/life contingent only; needs period certain.

Broker Use Only


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Target Market*

Target value range is $500,000 to $50,000,000, or Level 2through Level 5.

Businesses sold for less than $500,000, or Level 1, andover $50,000,000, or Level 6, are probably not a targetmarket.

*Data obtained from the 2004 Business Ref. Guide.

Broker Use Only


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Some Restrictions to Consider Sales not eligible for Installment Treatment:*

Sales to related persons where the related persondisposes of the property within 2 years

Related persons as defined under IRC 267(b)

Sale of inventory

Depreciation Recapture The portion of the sale that represents amounts previously

deducted for depreciation are includible as ordinary income

Sales resulting in a loss

Sale of stock or securities traded on an established securities market

Sales of personal property by a person who regularly sells orotherwise disposes of the same type of personal property (Dealer)

*Internal Revenue Service Publication 537. Broker Use Only


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Reporting Requirements

The Seller is responsible for reporting any applicable InstallmentSale income to the Internal Revenue Service and should consultwith his or her own independent tax advisor for details.

Broker Use Only

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Lb Presentation 0306