Structured sale

A structured sale (or structured installment sale) is a United States tax-planning arrangement that combines the installment sale rules under 26 U.S.C. § 453 with a third-party assignment company that funds the buyer’s payment obligation, typically using an annuity or other fixed-income investments.^[1][2]

The structure is marketed as a way for sellers of appreciated property—such as closely held businesses or investment real estate—to spread recognition of gain over time while receiving scheduled payments that are backed by an assignment company and its funding investments.^[3][4] Structured sales are one of several methods used to manage capital gains exposure on the disposition of a capital asset, alongside conventional installment sales, 1031 exchange transactions and other deferral techniques.^[5][6]

Background

Under the installment method of 26 U.S.C. § 453, a seller who receives at least one payment after the year of sale may report gain over time as payments are received, subject to statutory limitations and interest charges on large installment obligations.^[2][7] The basic rules apply to many sales of business interests and investment real estate, but not to inventory, publicly traded securities, or certain other categories of property.^[7]

Structured sales adapt the installment-sale framework by inserting an assignment company between buyer and seller. The buyer and seller agree on a purchase price and a schedule of future payments; the buyer (or a related party) pays the assignment company, which assumes the obligation to make the scheduled payments to the seller and funds that obligation with an annuity or other investment assets.^[3][4]

Case law and Internal Revenue Service (IRS) administrative guidance have addressed when a substitution of obligor and use of an assignment company does, or does not, trigger recognition of gain. Revenue Ruling 82-122 and related authorities conclude that a mere substitution of obligor, without other material changes, is not necessarily a taxable disposition of an existing installment obligation.^[8][9] IRS Private Letter Ruling 200836019 similarly concluded that a claimant receiving periodic payments funded through a non-qualified assignment did not have actual or constructive receipt of the underlying amount until payments were due and paid.^[10]

Structured sales were discussed in the tax literature in the mid-2000s as a way to “revive” installment sales by combining them with assignment-company funded payment streams,^[11] and they continue to appear in professional tax and financial-planning publications.^[3][5][6]

Structure and parties

A typical structured sale involves three principal parties:

• the seller of the appreciated property;
• the buyer of the property; and
• an assignment company (often affiliated with a life insurance company) that assumes the buyer’s obligation to make the future payments.

The seller and buyer negotiate an installment schedule and other terms (such as initial down payment, number and timing of payments, and whether payments will be level or variable). At closing, the buyer (or a related party) pays the assignment company the portion of the purchase price to be deferred. The assignment company, in turn, assumes the obligation to make the agreed payments to the seller and purchases funding assets—commonly an annuity contract issued by a regulated life insurer, or a portfolio of United States Treasury obligations held in trust—designed to match the payment schedule.^[3][4][12]

In many implementations the seller has no ownership interest in, or control over, the annuity or other funding assets; the seller’s rights are limited to receiving the scheduled payments as an unsecured general creditor of the assignment company.^[3][10]

Uses

Structured sales are primarily used when a seller is disposing of:

• closely held business interests (for example, a professional practice or privately owned company);
• investment or commercial real estate; or
• other highly appreciated capital assets held outside tax-advantaged accounts.^[3][5][6]

Professional literature describes them as one of several strategies that may help a seller coordinate the timing of cash flows and income recognition, potentially smoothing taxable income over a number of years, while shifting investment and credit risk to the assignment company and its funding instruments.^[3][4]

Financial-planning sources typically discuss structured sales alongside other options such as simple seller-financed installment sales, like-kind exchanges under section 1031, and charitable or trust-based strategies.^[5][6][13]

Tax treatment

Because structured sales rely on the installment method, their basic tax treatment follows the general rules under section 453. Each payment is typically treated as consisting of three components:

• a tax-free return of the seller’s basis;
• recognition of the remaining gain on the sale; and
• interest or investment return on the unpaid balance or funding assets.^[2][7]

The same statutory limitations that apply to other installment sales also apply to structured sales. These include ineligibility for certain types of property (such as inventory and publicly traded securities), treatment of some recapture income as immediately taxable, and potential interest charges on large installment obligations under 26 U.S.C. § 453A.^[2][7]

Non-qualified assignment structures used in many structured sales are designed so that the seller does not have the right to accelerate, assign, or otherwise control the payment stream. IRS guidance and case law have generally held that, when these limitations are respected and the seller has only an unsecured contractual right to future payments, the doctrines of constructive receipt and economic benefit do not require inclusion of the entire funding amount in income when the assignment company receives it.^[10][14]

Comparison with other strategies

Structured sales are sometimes presented as an alternative when a 1031 exchange is unavailable or unattractive—for example, when the seller prefers to receive a cash flow rather than continue to hold investment property, or when like-kind replacement property is difficult to identify within the statutory time limits.^[15]

Structured installment sales are distinct from monetized installment sale transactions, in which a seller both defers gain and immediately borrows against the installment obligation. Monetized installment sales have been the subject of IRS scrutiny and proposed regulations identifying certain versions as listed transactions.^[16][17]

Commentators have also compared structured sales with other tax-motivated arrangements such as “deferred sales trusts”, noting differences in complexity, fee structure and the extent of IRS guidance.^[18]

Risks and criticisms

Professional and practitioner sources identify several potential drawbacks of structured sales in addition to the usual risks of a seller-financed transaction:

• Counterparty and funding risk: the seller relies on the financial strength of the assignment company and, indirectly, of the insurer or other institution providing the funding assets.^[4][12]
• Complexity and transaction costs: the structure requires additional documentation and professional advice compared with a simple cash sale, and may involve advisory or product costs even if they are not separately charged to the seller.^[3]
• Liquidity and flexibility: once established, the payment schedule is typically fixed, and the seller may have limited ability to accelerate or modify payments or to use the right to receive payments as collateral without changing the tax treatment.^[3][10]
• Regulatory and tax-law uncertainty: although the basic installment-sale framework is well established, commentators emphasize that taxpayers should carefully review current IRS guidance and obtain professional tax advice before entering into complex deferral arrangements.^[3]

See also

• Installment sale
• Monetized installment sale
• Structured settlement
• Tax deferral