We have previously spoken about monetized installment sales (“MISTs”) on Dollars & Sense.  According to the IRS, these structures typically seek to defer gains associated with the sale of an appreciated asset through the use of an intermediary.  In recent years, the IRS has scrutinized taxpayers’ usage of MISTs, even proposing regulations that would make them listed transactions—i.e., subject to more rigorous reporting obligations. 

Based on the January 2, 2024, filing in United States v. Kaylor DST Services, LLC, No. 8:24-cv00003 (C.D. Cal.), it appears the IRS has continued its hunt for these types of transactions.  In that case, the IRS filed a Petition seeking to enforce an IRS administrative summons against both Kaylor DST Services, LLC and Michael Lee Kaylor (“Respondents”).  It is important to recognize that the allegations made by the government in the Petition are only allegations—none have been proven in the judicial proceedings, and the taxpayers have not yet filed their responses.

According to the Petition, the IRS is investigating “whether Respondents promoted a potentially illegal tax shelter during the tax years 2015 to present.”  The Petition indicates that the transactions at issue relate to the “transfer of real property to what has been referred to by Respondents as a Deferred Sales Trust (DST)”.  The IRS states in the Petition that it is investigating whether the structure “improperly defer[s] the recognition of capital gains taxes” and further indicates that the agency is actively investigating a third party, Robert Binkele, to determine whether civil promoter penalties under sections 6700 and 6701 should be imposed. 

By way of background, the IRS has wide authority under section 7602 to conduct examinations related to federal taxes.  Indeed, that provision states that the IRS may—in determining whether any tax return is correct or whether a tax return should have been filed:  (1) examine books, papers, records, or other data which may be relevant to the inquiry; and (2) summons persons to appear before the IRS at a time and place named in the summons.  If the person refuses to comply with the IRS summons, the agency may seek to enforce it through a United States district court order compelling, through the power of contempt, compliance with the summons. 

Generally, federal courts defer to the IRS’s summons power.  Some time ago, the Supreme Court held that a summons must be enforced by the courts if the IRS shows only a “minimal” prima facie case that it acted in “good faith in issuing the summons.”  This only requires the IRS to show (generally through an affidavit) that:  (1) the investigation is conducted pursuant to a legitimate purpose; (2) the inquiry may be relevant to that purpose; (3) the information sought is not already within the IRS’s possession; and (4) the IRS has followed all administrative steps required by the Code prior to seeking enforcement. 

In this case, the Petition and accompanying affidavit of the IRS agent suggests that the IRS requested information regarding the Deferred Sales Trust.  Significantly, it appears that the IRS also asked for the identifying information of Kaylor DST Services, LLC’s clients, such as a “fully executed copy of all trust agreements entered into between Kaylor DST Services, LLC and third-party beneficiaries” and “the client lists of all entities, including but not limited, to taxpayers, trusts, partnerships, corporations that dealt with Kaylor DST Services, LLC.”  The affidavit further states:

The testimony and books, records, papers, and other data demanded by the IRS summonses are necessary for the determination of whether the taxpayer/promoter, Robert Binkele, is liable for penalties pursuant to I.R.C. §§ 6700 or 6701, and to determine whether the summonsed parties, Respondents, are working with the taxpayer to promote an illegal tax shelter.  The government, by its petition to enforce, is now seeking an enforcement order as to the documents requested in the . . . summonses . . .

The issuance of administrative summonses is a powerful tool used by the IRS when they believe they have identified a promoter.  Generally, when the government obtains information from the summons, it will use that information to broaden the examination to other parties.  For example, in this case, if the government successfully enforces the summons, it is very likely that the IRS will expand its examination to include the clients that utilized the Deferred Sales Trust.  Therefore, taxpayers who become aware of IRS administrative summonses or enforcement actions—such as those at issue in this case—should immediately contact a tax professional to determine what options they have in preparing for a potential IRS examination. 

For additional information on IRS administration summonses and enforcement actions, see:

Release the Kraken Tax Transaction Information

The IRS is Hunting for Cryptocurrency Investors with John Doe Summonses