Is a monetized installment sale compliant with Section 453, or does the IRS treat it as a listed transaction?

Question

Tyler Smith · Accepted Answer

A monetized installment sale is an aggressive tax-avoidance structure that the Internal Revenue Service has officially designated as a listed transaction under IRS Notice 2023-44 and Treasury Proposed Regulations (REG-109309-22). Consequently, these arrangements face severe legal scrutiny, mandatory disclosure rules, and heavy promoter penalties.

How Monetized Installment Sales Were Promoted
In a typical monetized installment structure, a taxpayer looking to sell real estate or a business would transfer the asset to an intermediary company in exchange for an unsecured, 30-year interest-only installment note under Section 453. The intermediary would immediately resell the asset to the actual buyer for cash. Concurrently, a related lending entity would issue a non-recourse loan to the original seller for approximately 95% of the sales proceeds, with loan repayment terms mirroring the installment note payments.

Promoters claimed sellers could:

1. Defer all capital gains taxes for 30 years under Section 453;
2. Walk away with 95% of net proceeds tax-free as loan proceeds; and
3. Offset loan interest with interest received from the installment note.

The IRS Position and Legal Flaws
The IRS firmly rejected these claims based on established legal doctrines. Under IRC Section 453A(d), if an installment obligation is pledged directly or indirectly as security for a loan, the net loan proceeds are treated as a payment received on the installment note, triggering immediate tax recognition.

Furthermore, the IRS applies the economic substance doctrine, step transaction doctrine, and agency principles. The intermediary is treated as a conduit, the loan is considered a disguised sale payment, and constructive receipt of proceeds is assigned to the seller. Taxpayers who enter into these structures without filing IRS Form 8886 face mandatory penalties under Section 6707A, along with 20% to 40% accuracy-related penalties upon audit.