Family Deferred Payment Sales
Family Deferred Payment Sales

Author: Elliott Manning

Publisher:

Published: 2009

Total Pages: 0

ISBN-13:

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Although this article is more than fifteen years old, in light of the recent Tax Court Memorandum Decision in Est. of Angle, v. Commissioner, T.C. Memo. 2009-227 and earlier proposed regulations, Proposed Rules (REG-141901-05) On Tax Treatment of Exchanges of Appreciated Properties for Annuities, that are still pending, it may still be worth consulting. The issues of the proper relationship between the major types of deferred payment sales, particularly in families, that include installment sales that may include, contingent as well as fixed payments, private annuities, that are usually measured by the seller's' life, and a hybrid known as the self-cancelling installment note, which involves an installment sale that provides that payments terminate usually on the seller's death (SCINs) create tax planning issues and problems discussed in the article, but also tax policy issues because of the complex different application of the rules relating to original issue discount (OID) and the regulations relating to contingent payment sales. Many of these issues are also explored in Comment of the Real Property, Probate and Trust Law Section of the American Bar Association on REG-141901-05 (Exchanges of Property for an Annuity) (Jan.16, 2007), 2007 TNT 217-19, on which the authors participated.

Inter-Family Sales Using Private Annuities
Inter-Family Sales Using Private Annuities

Author: Jerome M. Hesch

Publisher:

Published: 2005

Total Pages: 0

ISBN-13:

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A growing number of tax advisors have been recommending the use of a Private Annuity Sale to a non-grantor trust in order to achieve income tax deferral. Since the income tax treatment of deferred payment sales using a private annuity is governed by Section 72, none of the restrictions which apply to installment sales under Section 453 exist. One can use private annuity sales to defer the reporting of the gain even though the sale would be ineligible for the installment method, such as a sale of marketable securities or depreciable property to a related party. Although the seller is able to defer the gain by using a private annuity sale before the property is eventually sold to an unrelated party for cash, the seller's advantages of this income tax deferral are eventually outweighed by the income tax treatment to the purchaser. When the income tax consequences to the purchasing trust are taken into account, the financial detriments to the purchaser eventually outweigh the financial benefit of the deferral of the capital gain. There are four reasons for this disadvantage, all resulting because private annuities are not subject to the OID rules. The first disadvantage is that the interest income is taxable as ordinary income, but the purchaser must treat the interest expense as a capital loss deduction. Secondly, the reporting of the interest expense, even as a capital loss, is postponed until the aggregate of all annuity payments made exceed the initial private annuity obligation. The third disadvantage results because capital losses can only offset ordinary income. If the purchaser does not have sufficient capital gains to absorb the capital loss deduction for the interest expense, the capital loss deduction cannot be used. The fourth disadvantage occurs because the interest is computed on the entire principal amount. A sale of an asset with a high basis and the sale of an identical asset with a low basis will have the same interest element even though there is less gain and consequently less income tax deferral for the high basis asset. Despite the obvious attractions of the deferral of capital gains afforded to the seller, the private annuity transaction is a detriment when the purchaser's income tax treatment is taken into account.