Promoter structures library
Deferred Sales Trust
Sold as: "DST", "deferred sales trust", "1031 alternative", "sell your business and defer for 10 years"
The design determines the answer. If you can direct how the trust invests your money, you constructively received it.
Classification B or C, depending on the variant.
- B, legitimate, commonly abused. Real tax law with a real benefit. Promoters break it.
- C, legitimate but aggressive. Defensible, but fact-intensive and audit-attracting.
The pitch
Sell your business or property to a trust for an installment note instead of taking cash, defer the gain for ten years or more, and have the trust invest the proceeds meanwhile. A 1031 alternative that works for any asset.
How the structure works
Seller sells the asset to a third-party trust for an installment note. The trust sells to the buyer for cash and invests the proceeds. The seller takes note payments over time.
Where it breaks
Constructive receipt and the economic benefit doctrine if the seller retains control over the trust, its investments, or the trustee. Trustee independence. Whether a genuine note exists, a Washington DFI proceeding alleged the promissory note was never even issued. Sec. 453A interest on deferred tax for obligations over 5,000,000 dollars.
What it costs you if it is wrong
If the design leaves you control over the trust or its investments, constructive receipt puts the whole gain in the year of sale. Sec. 453A interest is owed on deferred tax for obligations over 5,000,000 dollars whether or not anyone computed it. The IRS is running a Sec. 6700 and 6701 promoter investigation on DST matters.
Red flags specific to this structure
- The trustee was supplied by the promoter
- You can direct how the trust invests the proceeds
- Nobody can produce the executed promissory note
- Sec. 453A interest was never computed
Questions to ask the person selling this
Take these into the next meeting. Someone selling the legitimate version answers them without difficulty.
- 1Who is the trustee, and are they affiliated with you?
- 2Can I direct how the trust invests the proceeds?
- 3Can you show me the executed promissory note?
- 4Who computes and pays Sec. 453A interest?
- 5How is this different from a plain Sec. 453 installment sale?
Which of the Seven Markers this trips
The client keeps control of what they supposedly gave away
The legitimate version
Depends entirely on design. A genuinely independent trustee, a real note, no seller control over investment of the proceeds, and real credit risk can work. The closer it looks to a plain Sec. 453 installment sale, the better.
What distinguishes it
- The trustee is genuinely independent and not promoter-affiliated
- The seller has no control over investments
- The note actually exists and was issued
- Sec. 453A interest is computed and paid
What the courts have done
How this has actually gone for the people who bought one.
Enforcement
The IRS filed a summons enforcement action in California district court on DST matters in connection with a Sec. 6700 and 6701 promoter investigation.
Holding one of these, or being pitched one?
The diagnostic work is worth doing before the return gets filed rather than after. That is a conversation, not an engagement.
Schedule a complimentary consultation