• Jeff Glass

Tax-Deferred Cash Out Review – IRS, Legal, Audits, Scam?, Risks

Updated: Jul 10


When sellers of capital assets face large capital gains taxes, they sometimes turn to the Internet to research ways of avoiding those taxes. They may soon find themselves doing a “tax-deferred cash out” review, because this tax strategy is one of the very few options that effectively deals with capital gains tax. As explained in previous posts, (definition, and how it works) a tax-deferred cash out employs an installment sale to a dealer to defer tax for 30 years and a simultaneous tax-free borrowing to provide immediate liquidity from a sale.


For those not already familiar with this tax strategy, they naturally have questions about its legitimacy, such as:

  • Are tax-deferred cash outs legal?

  • Or, is a tax-deferred cash out a scam?

  • Is there a tax-deferred cash out sale IRS review?

  • Have there been any tax-deferred cash out audits?

  • Is there a private letter ruling for tax-deferred cash outs?

For a seller who wants to know if a tax-deferred cash out’s tax risks are significant, or not, there are a variety of “proof points” they may consider. We have collected some of the more significant facts supporting the validity of tax-deferred cash outs on our Legal Basis page, which include these findings:

  • Many public companies have done these transactions over the years, with the full acquiescence of their boards, auditors and the SEC.

  • A federal bankruptcy court ordered the use of a tax-deferred cash out, resulting in full payoff of creditors and cash to the debtor, with notification to the IRS and state tax authority.

  • The topic was discussed at a recent meeting of the American Bar Association and, when asked if tax-deferred cash outs were an object of scrutiny by the IRS, an IRS official in attendance stated that they are not.

Tax-Deferred Cash Out IRS Review

The most important form of guidance of which we are aware is a review of a specific tax-deferred cash out by the IRS. In 2012 the IRS issued a memorandum in which it discussed a transaction that is the model for most of today’s tax-deferred cash outs. The IRS review concluded that there was no fault with the transaction.


Returning to the questions posed above, what can we say about them?


Are tax-deferred cash outs legal, or a scam?

Tax-deferred cash out are not a scam. As evidence, consider first that numerous publicly traded companies have used tax-deferred cash outs, dating back to 1999, with the full approval of their boards, auditors, attorneys and the SEC. Additionally, a California Bankruptcy court ordered the use of a tax-deferred cash out after it had submitted a request to both the IRS and CA Franchise Tax Board (FTB) and received no objections. Finally, in 2012 the IRS reviewed a completed tax-deferred cash out and issued a detailed memorandum explaining their acceptance of that transaction.


Facts and circumstances vary with each situation, so we advise checking with your own qualified tax adviser.


Is there a tax-deferred cash out IRS review?

Yes, as mentioned, the IRS has performed a diligent review of a specific transaction which exemplifies a properly structured tax-deferred cash out. Some of the legal concepts considered in their evaluation include:

  • The law of installment sales;

  • The step transaction doctrine;

  • The doctrine of economic form over substance.

Is there a private letter ruling for tax-deferred cash outs?

We are not aware of any private letter rulings for tax-deferred cash outs, although they may exist. The IRS memorandum mentioned above is not a private letter ruling. It is a Technical Advice Memorandum, which reviews a completed transaction after the fact, rather than a hypothetical or proposed transaction as is the case with a private letter ruling. Like a private letter ruling, its findings pertain only to the transaction review and cannot, by itself, be relied upon for another transaction. Logic suggests, however, that if another transaction is modeled after one that has been reviewed and accepted by the IRS, the other transaction should also be acceptable.


Tax-Deferred Cash Out Legal Review

Since we are not tax advisers, we always recommend to anyone considering a tax-deferred cash out that they seek qualified tax counsel before acting on any of the information we share on this web site. Since many tax advisers are not familiar with tax-deferred cash outs, we can assist them in their research by providing documentation that will speed their review. We can also provide a referral to a tax attorney who is experienced with monetized installment sales. Please contact us if these resources would be helpful to you.


WANT TO LEARN MORE?

How to Defer Capital Gains Tax for 30 Years and

Simultaneously Obtain Cash Equal to 93.5% of Your Net Sales Proceeds​


Contact us to discuss your situation



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