are allocable to corpus.” On its face, looking at just these two provisions, it seems like the promoters might have it right. Of course, statutes always need to be interpreted in context. The context here is that IRC § 643 does not define taxable income—it defines distributable net income (DNI). DNI is just a figure used for determining the deduction that is allowable for distributions to beneficiaries authorized by IRC § 651 (for simple trusts) and IRC § 661 (for complex trusts). Taxable income for a trust is determined under IRC § 641. And under § 641, capital gains and extraordinary dividends would be included in the taxable income of the trust for a given year. So, the idea of indefinitely deferring income tax falls apart rather quickly once the statutes are read in context. IRS Office of Chief Counsel Memorandum, AM 2023-006 specifically addresses this type of sham trust in more detail and warns taxpayers of the risks associated with reporting these trusts as promoters suggest. It is important to note that these types of trusts on their face are not invalid, but rather, the promoter’s suggested method in income tax reporting of each year is. TRUST 2: MONETIZED INSTALLMENT SALE TRUST The second trust to watch out for is less of a sham and more of a known high-risk structure, for which the IRS has indicated its disapproval. The strategy, referred to by the IRS as a “monetized installment sale,” is a transaction that attempts to characterize a cash sale of appreciated property as an installment sale so that taxable gain can be deferred. The IRS has included this type of structure on its “Dirty Dozen” list of common tax schemes being misused by promoters and has issued proposed regulations that would make this type of trust structure a “listed transaction.” Typically, these transactions are proposed to taxpayers contemplating the sale of their business, though they can be used in the sale of other assets as well. The aim is to take advantage of the installment sale treatment provided by IRC § 453. In their typical form, installment sales don’t bother the IRS. As long as a seller is receiving the proceeds of a sale from a buyer over a term of years, then the Code allows the taxpayer to recognize gain over the same terms of years. However, promoters of the monetized installment sale structure claim that taxpayers can have their cake and eat it, too. Here are the key components of this structure: 1. the seller identifies a buyer for their business/asset; 2. the seller sells the business/asset to an intermediary trust in exchange for an installment note; 3. the trust immediately re-sells the business/asset to the buyer; 4. the seller borrows from a third-party lender an amount equal to the value of the installment note (and potentially secured by the installment note); and 5. the trust makes payments to the seller on the installment note and the seller in turn funnels the payments to the third‑party lender. The net result is that the seller has access to the full sale proceeds via the third-party loan while they defer payment of the capital gains tax. The IRS views the economic substance of this transaction as a straightforward cash sale of the asset, thereby requiring all capital gains taxes to be paid in the year the transaction takes place. As with all tax schemes, advisors should be vigilant in identifying promoters who offer products rather than customized planning and promise tools with nearly unlimited tax avoidance or deferral tools. Remember, if it sounds too good to be true, it probably is. Clark Youngman and Nate Patterson are attorneys at Koley Jessen, where they focus their practices on estate planning, business succession, trust administration, and tax-efficient wealth transfer strategies. They advise individuals, families, and business owners on planning approaches that align with long-term personal and financial goals—ranging from foundational estate documents to sophisticated trust structures and planning techniques. They can be reached at clark.youngman@koleyjessen.com and nathan.patterson@koleyjessen.com. CONTINUED FROM PAGE 19 CLASSIFIED AD CFO Accounting Practice for Sale—Prime Lincoln, Neb., Location Ready to take the next step in your career? This is a rare opportunity to acquire a well-established, full-service CPA firm from a retirement-minded owner. Located in a professional building in central Lincoln, this practice has been serving clients from the same location for 25 years. Services include tax preparation, bookkeeping, consulting, audits, and compilations. The office space comfortably accommodates five people, offering plenty of room for growth. We’re looking for the right person—or team—to step in and continue providing exceptional service. The seller is committed to a smooth transition and will work alongside you during the handover. This is your chance to be your own boss, build on a strong foundation, and keep what you earn. Contact: Gary at Riggs & Associates, CPAs, PC Phone: (402) 483-7885 Email: griggs@riggscpas.com 20 Nebraska CPA
RkJQdWJsaXNoZXIy MTg3NDExNQ==