IRS Properly Issued Summonses Relating to Monetized Installment Sale Transactions

(Parker Tax Publishing February 2023)

A district court held that the IRS had made a prima facie case that it properly issued summonses to banks in which a taxpayer and a limited liability company promoting monetized installment sale transactions had a connection. The court found that the IRS met its burden to show that the summonses were relevant and proportional, while the taxpayers merely offered boilerplate statements of law and conclusory claims. Bishop v. U.S., 2023 PTC 3 (D. Utah 2023).

Background

David Bishop is the managing director of Slim Ventures, LLC, which describes itself as a "dealer in capital assets" that promotes monetized installment sale (MIS) transactions. A typical installment sale transaction occurs when a seller conveys property to a buyer and transfers the associated title before receiving payment. For example, if a title transfer takes place in December but the buyer pays the seller in January, Code Sec. 453(c) allows the seller to defer capital gains tax until the next calendar year.

A MIS transaction is different than a normal installment sale transaction as it occurs when a party simultaneously sells an appreciated asset and receives payment while deferring capital gains tax for an extended period of time. As advertised by Slim Ventures, an owner of highly appreciated assets can sell them and defer 100 percent of the capital gains tax for up to 30 years while receiving up to 95 percent of the value in cash. Slim Ventures describes the process as follows: (1) Slim Ventures offers to buy the seller's assets in exchange for an installment note; (2) the seller is offered a limited-recourse "monetization loan" from a third-party lender introduced by Slim Ventures; (3) Slim Ventures resells the asset to the buyer, and the closing on the MIS transaction and the resale closing happens simultaneously; (4) assuming that the seller accepted the loan, the seller would receive the proceeds immediately after closing on the asset's sale. Slim Ventures explains that the strategy allows investors to re-invest at 95 percent on a tax deferred basis instead of at 75 percent by paying the tax so that investors can "pay with future (inflation eroded) dollars."

According to the IRS, MIS transactions are an example of an abusive tax scheme. Around 2021, the IRS identified Slim Ventures and Bishop as promoters of MIS transactions. Consequently, the IRS began an investigation into Bishop for possible violations of Code Sec. 6700 for promoting illegal tax schemes and violations of a permanent injunction. Previously, in 2013, an injunction was issued against Bishop and he was ordered to stop engaging in any activity that would subject him to a penalty under Code Sec. 6700.

As part of its investigation in 2021, the IRS sent Bishop information and document requests. According to the IRS, while Bishop cooperated to some extent, he did not produce accounting records, bank statements, or a client list. After an interview and further investigation, IRS Agent Bauer found four financial institutions purportedly connected to Slim Ventures and Bishop: Key Bank, Summit Crest Financial, LLC (Summit Crest), Wells Fargo Bank, N.A. (Wells Fargo), and Zions Bancorporation NA (Zions Bank).

On May 7, 2022, the IRS issued eight summonses to the four financial institutions under the authority of Code Sec. 7602(a). Each summons directed the specified bank to produce records relevant to Bishop's or Slim Ventures' income. The IRS notified Bishop and Slim Ventures of the summonses by certified mail. Key Bank and Zions Bank responded, while the other two did not. The IRS had not referred the cases for grand jury investigation or criminal prosecution. Shortly thereafter, Bishop and Slim Ventures filed petitions to quash the IRS third-party summonses. On August 26, 2022, the IRS filed a motion to (1) consolidate and summarily deny the petitions, and (2) enforce the summonses against the two banks that had not responded to the summonses.

Analysis

A district court held that the petitions to quash the IRS summonses to Key Bank and Zions Bank were moot since they had already responded to the summonses and their response was that they had no information responsive to the summonses. With respect to the other two summonses, the court held that the IRS had made a prima facie case that it properly issued the summonses. The court noted that, for the IRS to make such a prima facie case, it had to demonstrate that the case had not been referred for criminal prosecution, and that it issued the summonses in good faith. With respect to the first prong of the test, Agent Bauer testified that the IRS had not recommended to the Department of Justice a grand jury investigation or criminal prosecution.

To determine if the second prong had been satisfied, the court turned to the four factors outlined in U.S. v. Powell, 379 U.S. 48 (1964). Under those factors, the IRS was required to establish (1) that the investigation would be conducted pursuant to a legitimate purpose; (2) that the inquiry may be relevant to the purpose; (3) that the information sought is not already within the IRS's possession; and (4) that the administrative steps required by the Internal Revenue Code have been followed. The court focused on the first two factors as the latter two factors were not at issue.

The court concluded that the IRS met its burden to show legitimacy and relevancy. Determining whether an individual has promoted false tax schemes, the court observed, can be a legitimate purpose. Agent Bauer, the court said, sought information to shed light on the implementation and details of Bishop's MIS transactions, whether Bishop would be liable for penalties under Code Sec. 6700, the amount he would be liable for, and whether he had violated the permanent injunction.

Agent Bauer also sought information from the financial institutions, the court said, because Bishop or Slim Ventures held ownership interests, signatory authority, or right to make withdraw from, or for which they were a fiduciary. The court noted that the IRS investigation indicated that Summit Crest and Wells Fargo were connected with Bishop and Slim Ventures through lending and other banking services. Thus, the court concluded that the IRS met its burden to show that the summonses to Summit Crest and Wells Fargo are relevant and proportional, while Bishop and Slim Ventures merely offered boilerplate statements of law and conclusory claims.

For a discussion of the taxation of monetized installment sales, see Parker Tax ¶244,573.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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