Monetized Installment Sales: Why the IRS Says the Deferral Fails

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

Part of our strategies that backfire series.

Who this page is for: anyone selling a business, real estate, a collection or another asset with a large built-in gain, at any estate size. The pitch reaches people with a $2 million gain and people with a $200 million one. The estate planning stakes rise above the $15 million exemption, where what you do with the sale proceeds also shapes your estate plan. See installment sales of a business.

What is a monetized installment sale?

A monetized installment sale is a transaction in which a seller interposes an intermediary between itself and an identified cash buyer, takes back the intermediary’s long-term note, and borrows an amount approximating the cash price from a lender, so that it has the money in hand while reporting the gain on the installment method as the note is paid.

The IRS’s description of the steps, from the proposed regulation (REG-109348-22, 2023):

1. The seller finds a buyer

   The seller, or someone acting for the seller, identifies a buyer willing to pay cash for appreciated property.

2. The seller sells to an intermediary instead

   The seller agrees to sell the property to an intermediary, who may be the promoter, for an installment obligation with annual interest and a balloon payment of principal at maturity.

3. The intermediary resells for cash

   The intermediary either never takes title or holds it briefly, and sells the property to the buyer for cash, usually at about the same negotiated price less fees.

4. The seller borrows the cash

   A lender the promoter refers makes the seller a loan, typically nonrecourse, for about the sale price less fees. The interest on the loan matches the interest on the installment note, and both have balloon payments at the same time.

5. The buyer’s cash funds the loan

   The intermediary’s sale proceeds, less fees and an amount set aside for interest, go to the lender to fund the loan or into an escrow or investment account for the lender’s benefit. At maturity the note and the loan offset each other, and the gain is reported then.

The IRS says that, apart from the claimed deferral, “the sole economic effect” for the seller is paying fees to the intermediary and the lender in an amount “substantially less than the Federal tax savings purportedly achieved” (REG-109348-22).

Why the IRS says the installment method doesn’t apply

The installment method lets a seller report gain as payments come in when at least one payment is received after the year of sale (IRC § 453(a), (b)). The IRS lays out its arguments in the 2023 proposal and in earlier Chief Counsel advice.

• The intermediary isn’t the buyer. Only a note from “the person acquiring the property” escapes being treated as payment (IRC § 453(f)(3)). The IRS says the intermediary is “interposed between the seller and the buyer for no purpose other than Federal income tax avoidance” and bears none of the benefits or burdens of owning the property, so the sale is treated as one directly from seller to buyer. It relies on Commissioner v. Court Holding Co., 324 U.S. 331 (1945), and similar cases.
• The note is secured by the cash. A note “secured directly or indirectly by cash or a cash equivalent” is treated as a payment (Temp. Treas. Reg. § 15a.453-1(b)(3)). When the buyer’s cash sits in an escrow the lender looks to, the IRS treats the seller as paid.
• The loan is the payment. If a loan is secured by an installment obligation from a sale over $150,000, the net loan proceeds are treated as a payment on the obligation (IRC § 453A(d)). And the IRS’s 2019 email advice says an unsecured nonrecourse “loan” isn’t genuine debt at all, so the proceeds would be income (CCA 202118016, released May 7, 2021).

The IRS adds that the economic substance doctrine in § 7701(o), substance over form, and the step transaction doctrine can each recharacterize the deal (REG-109348-22). When the intermediary is related to the seller, there’s a statutory rule too: a resale by a related buyer within two years, or at any time for marketable securities, accelerates the seller’s gain (IRC § 453(e)).

Monetized installment sale cases won and lost

No court has decided whether a monetized installment sale qualifies for the installment method as of October 2026, but the closest precedent went against the taxpayer and the litigation so far has gone the IRS’s way on procedure.

The closest precedent

• Wrenn v. Commissioner, 67 T.C. 576 (1976). A husband sold $250,000 of stock to his wife for a 15-year installment note, and she sold the shares on the open market the same day for $250,874. The Tax Court denied installment treatment because it couldn’t find “any apparent substantive purpose” for her purchase, pointing to the immediate resale, the apparent prearrangement, and the absence of any purpose other than tax avoidance. The IRS cites Wrenn in both its 2021 Chief Counsel advice and its 2023 proposal.

The litigation so far

• Bishop v. United States, No. 23-4020 (10th Cir. Dec. 4, 2023) (unpublished). The IRS was investigating whether a promoter of these transactions owed promoter penalties under § 6700. The Tenth Circuit affirmed orders denying petitions to quash IRS summonses for bank and business records and said the legality of the transactions was beyond the scope of a summons proceeding.
• Crow v. United States, No. 1:24-cv-00346 (D. Idaho Sept. 29, 2025). An intermediary that does these deals sued to set aside the proposed rule. The court dismissed the case without prejudice for lack of jurisdiction, because a proposed rule “is neither a final agency action nor made reviewable by statute.”

Neither case decided the tax result. The IRS has told its lawyers how it will argue one, in CCA 202118016 and in the 2023 proposal, and it put the structure on its Dirty Dozen list in 2022, 2023 and 2024.

Is the monetized installment sale a listed transaction?

Not yet: Treasury proposed listing monetized installment sales as listed transactions in August 2023 (REG-109348-22), the Federal Register shows only that proposal and an October 2023 notice canceling the public hearing, and no final rule had been published as of October 9, 2026.

The proposal still matters for anyone who has done one. If it’s finalized, it would make these transactions listed transactions for the disclosure rules (proposed Treas. Reg. § 1.6011-13). Under the existing disclosure regulation, when a transaction becomes listed after you’ve filed a return reflecting it, and the assessment period for that year is still open, you have to file Form 8886 with the Office of Tax Shelter Analysis within 90 days (Treas. Reg. § 1.6011-4(e)(2)(i), as described in REG-109348-22). The penalty for not disclosing a listed transaction is 75% of the tax decrease, up to $100,000 for an individual (IRC § 6707A), and the assessment period on that transaction stays open until one year after the information is furnished (IRC § 6501(c)(10)).

Worked example: what the deferral is worth, and what it costs if it fails

A hypothetical California resident has a $20 million long-term gain on investment real estate and an all-cash buyer. A promoter offers a 30-year monetized installment sale.

If the deal works as promoted, the $7,420,000 is deferred for 30 years, less the promoter’s and lender’s fees. If the IRS treats it as a cash sale, the full tax is due for the year of sale with interest from the return due date, plus a 20% federal penalty if the court finds negligence or a substantial understatement, and the fees are gone. If the proposal is finalized and the transaction isn’t disclosed, the federal accuracy penalty on the understatement rises to 30% (IRC § 6662A(c)).

What a real installment sale looks like

The installment method is in the Code for real seller financing. A sale qualifies when the buyer pays over time and the seller carries the risk that the buyer won’t.

If what you want is cash now and less tax, the honest options are a cash sale with the gain planned for, a real seller-financed sale that accepts the buyer’s credit risk, or a charitable remainder trust if you’re charitably inclined. Each has costs. See installment sales of a business in California, charitable remainder trusts and how to sell a business in California.

What changes in California

• The rate is higher and there’s no capital gains break. California taxes capital gains as ordinary income, at up to 12.3% plus a 1% surcharge on taxable income over $1 million (FTB; R&TC § 17043). A deferral pitch is more tempting here, and a failed one costs more.
• Moving doesn’t take the gain with you. California sources installment gain on intangible property, such as stock, to where the seller lived when the sale happened. A California resident who sells stock on the installment method and then moves to Florida still owes California tax on the capital gain in later payments, though not on the interest (FTB Publication 1100, Example 8).
• California real estate stays California income. Gain on California real property is taxed here whenever it’s received, even by a nonresident (FTB Publication 1100, Example 7). A buyer of California real property generally has to withhold 3⅓% of the sales price unless the seller qualifies for an exemption or elects withholding on the gain (R&TC § 18662(e)).
• The FTB has its own disclosure rules. California applies § 6011 and lets the Franchise Tax Board identify its own listed transactions (R&TC § 18407), with its own nondisclosure penalty for taxpayers above $200,000 of taxable income (R&TC § 19772) and a reportable transaction accuracy penalty patterned on § 6662A (R&TC § 19164.5).
• Estate planning. A seller who dies holding a real installment note doesn’t get a basis step-up on it. The unreported gain is income in respect of a decedent, taxed to whoever collects the note (IRC §§ 691(a)(4), 1014(c)). Plan the sale and the estate plan together.

Who this is for

This page is for owners about to sell a business or appreciated property who’ve been offered a “453 deferral” or a structured sale through a dealer or intermediary, and for sellers who’ve already closed one and need to know their reporting position.

Working with Ridley Law

I review sale structures as part of the estate plan around them, and I work with the seller’s CPA on how the sale is reported. I work alongside your CPA and, where the matter calls for it, co-counsel. Work at this level is built for each family and quoted in writing before any drafting starts. If you’re already under examination, I’ll help you find tax controversy counsel.

The first call is free and runs 30 minutes, by phone or Zoom. Book my 30-minute call or call 805-244-5291.

Frequently asked questions

Is a monetized installment sale legal?

The IRS says the installment method doesn’t apply and the gain is taxable in the year of sale. No court has ruled on the tax result yet, and the IRS has investigated promoters for § 6700 penalties (Bishop, 10th Cir. 2023).

Has the IRS finalized the monetized installment sale regulations?

No. The August 2023 proposal, REG-109348-22, is the only rulemaking in the Federal Register besides an October 2023 hearing cancellation, as of October 9, 2026.

What happens if the rule is finalized after I’ve done one?

If the assessment period for the year is still open, you’d have 90 days to file Form 8886 with the Office of Tax Shelter Analysis under the existing disclosure rules, or face a penalty of up to $100,000 for an individual.

Can I borrow against a real installment note?

You can, but for sales over $150,000 the loan proceeds are treated as a payment on the note and trigger the deferred gain (IRC § 453A(d)).

Does moving out of California avoid California tax on an installment sale?

Not on stock sold while you lived here, and not on California real estate (FTB Publication 1100). Interest received after you move generally isn’t California income.