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Pass Capitol Gain Deferral Solution

In general, an Installment sale offers an opportunity for an eligible seller to defer recognition of all or part of the gain on the sale of a business or of qualified property. However, an installment sale also leaves the seller at risk for the financial solvency and credit worthiness of the buyer for future periodic payments owed to the seller. The Pass Capitol Gain Deferral Solution mitigates that situation.

On the other hand, if the seller uses the Pass Capitol Gain Deferral Solution with payments of $1,000,000 per year for ten years, the annual federal tax will be a total of $625,832 through 2025 and $970,038 for the final 6 years.  The tax savings in year one is $1,805,180,096 (1,961,638 minus 156,458). All of those tax savings are available to invest at a market rate of return using your own investment advisor.

Benefits of the Pass Capitol Gain Deferral Solution in Real Estate and Business Transfers:

  • Provides all the tax savings of an installment sale, with the security of cash.
  • Allows unlimited deferral.
  • Eliminates the risk of buyer default
  • Seller may choose a financial manager with knowledge of the seller’s risk tolerance.
  • Invests for either a market or guaranteed rate-of-return return.
  • Customizes the installment payments.

How it works.  A Pass Advisor, Ltd. representative will work with the seller to determine the timing and amount of the  installment payments. When that is completed and agreed to by the seller, Pass Advisors, Ltd. will prepare the contract language necessary to enter into the Pass Capitol Gain Deferral Solution. The buyer and seller will enter into the installment sale agreement in which the buyer promises to make installment payments to the seller for a stated number of years. As part of the agreement, the seller agrees to allow the buyer to assign those installment obligations to Pass Advisors, Ltd. The buyer and Pass Advisors, Ltd. will negotiate the amount of the cost to the buyer of the assignment.

The Liability Transfer and Novation Agreement (LTA):  With the consent of the seller, the buyer will enter into a Liability Transfer Agreement (LTA) with Pass Advisors, Ltd. that will transfer the buyer’s liability for the future payments to Pass Advisors, Ltd. Upon the execution of the installment sale agreement and LTA, the buyer will wire transfer the agreed funds directly to the Private Placement Annuity issuer for the convenience of Pass Advisors.

The Funding Asset:  The funds transferred to the Private Placement Variable Annuity issuer will pay for an annuity to fund the future obligations of Pass Advisors, Ltd. to the seller. The PPVA will provide for the installment payments in the amounts and at the times set forth in the LTA. The PPVA installment payments will reflect the gain or loss of the invested funds. The issuer of the PPVA will be Lombard International Life Assurance Company domiciled in Pennsylvania. The account will be held in a segregated account under Pennsylvania law exclusively for the benefit of the annuity issued to fund the obligations to the seller and will not be subject to the creditors of issuer. The assets will be invested and managed by an investment manager or trust company selected by the seller and the PPVA issuer after nonbinding consultation with Pass Advisors, Ltd. Payments dependent on the investment performance of any investment in a PPVA are not guaranteed. If a guaranteed payment is desired by the seller, then the installment payments will be provided by investments in U.S. Treasury bonds and/or Treasury Notes rather than a PPVA.

Compliance with tax requirements:  In order to comply with requirements of the tax law, the seller will not be permitted to accelerate, defer, increase, or decrease the installment payments. Nor may he/she sell, pledge, hypothecate, or otherwise transfer or encumber the installment payments.

Pass Advisors, Ltd. will have full discretion and control over the decisions to acquire, sell or hold any investments or securities as well as over any changes to the investment policy. Seller may provide an “Investment Directive” based on his risk tolerance, at the time the contracts are signed and periodically thereafter. Seller may request a change to the investment policy (“Investment Request”) directed to Pass Advisors, Ltd. Seller may not make an Investment Request during the first year and is limited to making two Investment Requests per year and no more than one Investment Request in a given quarter. The requests of seller will be limited to general changes in investment policy. Pass Advisors, Ltd. is permitted, but is not legally required, to consider the Investment Requests of seller.

Beneficiary designation:  Pass Advisors, Ltd. as the owner of the PPVA retains the right to change the beneficiary of the PPVA. Decisions with respect to beneficiaries will be made by Pass Advisors, Ltd. in consultation with the seller.

Direct payments:   Pass Advisors, Ltd. may have the annuity issuer send payments under any annuity contract purchased hereunder directly to the seller  Such direction of payments shall be solely for the convenience of Pass Advisors, Ltd. and shall not provide the seller with any rights of ownership or control over the annuity contract or against the annuity issuer.

Discussion of Tax Issues

There are three tax doctrines that might be raised by the Internal Revenue Service. They are:

The constructive-receipt doctrine applies only when taxpayers try to defer the receipt of money, in which they have a vested interest. The constructive-receipt doctrine recognizes that income is not constructively received if there are substantial limitation on its receipt. The Pass Capitol Gain Deferral Solution does not allow the seller to have money credited to his or her account, or otherwise made available so that he or she may draw upon it at any time. Thus, we conclude that the constructive-receipt doctrine is inapplicable to the Pass Capitol Gain Deferral Solution.

The economic-benefit doctrine is similarly inapplicable. In Childs v. Commissioner, the Tax Court and the United States Court of Appeals for the 11th Circuit confirmed that annuities owned by the assignees, such as Pass Advisors, Ltd., “will not trigger the economic-benefit doctrine, even when the future compensation is accompanied by guarantees,” as confirmed by Priv. Let. Rul. 2008-36-019  In Priv. Let. Rul. 2008-36-019, regarding the deferral of attorney contingency fees, the IRS stated: “Neither the execution of the Non-Qualified Assignment nor the purchase of an annuity contract by the Assignee to fund its obligation to the taxpayer shall be viewed as conferring a current economic benefit on the taxpayer.”

The cash-equivalency doctrine is similarly inapplicable. If the seller’s rights in the Pass Capitol Gain Deferral Solution are non-assignable and therefore not capable of being transferred to lenders or investors at a discount, then the cash-equivalency doctrine is inapplicable.

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