Tuesday, November 6, 2007

A structured sale

A structured sale is a special type of installment sale pursuant to the Internal Revenue Code.[1]

Installment sales permit sellers to defer recognition of gains on the sale of a business or real estate

to the tax year in which the related sale proceeds are received. Structured sales allow the seller of an

asset to pay taxes over time while having the payments guaranteed by a high credit quality alternate

obligor, who accepts assignment of the buyers periodic payment obligation. Transactions can currently be

done as small as $100,000.

In a structured sale, rather than the buyer paying the installments, the buyer pays cash, some of which

is used as consideration for a third party assignment company to accept the payment obligation. The

assignment company then purchases an annuity from a life insurance company with high financial ratings

from A. M. Best. Case law and administrative precedents supporting substitution of obligors.[2] In

addition, a properly handled transaction will avoid issues with constructive receipt and economic

benefit.

While negotiating the installment payments, the seller is free to design payment streams with a great

deal of flexibility. The seller recognizes capital gain in each year an installment payment is received.

Interest is imputed and taxed annually, even in years d-ring the contract where no installment payments

are received. Taxation is the same as if the buyer were making installment payments directly.

Structured sales are an alternative to a section 1031 exchange, which defers recognition of capital

gain, but forces the seller to continue holding some form of property. Structured sales work well for

sellers who want to create a continuing stream of income without management worries. Retiring business

owners and downsizing homeowners are examples of sellers who can benefit.

The structured sale must be documented, and money must be handled in such a way that the ultimate

recipient is not treated as having constructive received the payment prior to the time it is act-ally

paid. For the buyer, there is no difference from a traditional cash-and-title-now deal, except for

additional paperwork. Because of tax advantages to the seller, structuring the sale might, however, make

the buyer's offer more attractive. Because the buyer has paid in full, the buyer gets full title at time

of closing.

There are no direct fees to the b-yer or seller to employ the structured sale strategy. The structured

settlement specialist who implements the transaction is paid directly by the life insurance company that

writes the annuity.

The internal rate of return is comparable to long term high quality debt instruments.

Allstate Life was the originator of the structured sale concept and until recently was the only

structured settlement annuity company whose product was available for the structured sale transaction.

Prudential has begun to use its non-qualified assignment product on a limited basis. By mid 2007, Aviva

Life may be in the market as well.

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