After reading a few recent LinkedIn articles characterizing the Deferred Sales Trust (DST) as a still-magnificent strategy for deferring capital gains after the sale of appreciated assets — including real estate, closely held businesses, cryptocurrency, and other capital assets — we felt it was time to set the record straight. One article went so far as to treat the DST as almost the next best thing since sliced bread for cryptocurrency investors looking to reduce or defer the tax hit after a major gain. That kind of enthusiasm may make for good marketing, but tax law has a way of being less impressed by enthusiasm than by statutory authority.
The DST has long been marketed as a sleek tax-deferral vessel: polished deck, impressive brochure, and a confident captain promising smooth waters. But the legal seas have changed. Between IRS scrutiny, state enforcement activity, and Treasury's broader attack on installment-sale monetization strategies, this boat may not merely have sailed — it may have already taken a torpedo below the waterline during the storm. So before anyone climbs aboard with a lifetime of appreciated gain, it is worth asking the harder question: does the Deferred Sales Trust actually rest on solid legal authority, or is it floating on a very creative reading of IRC §453?
Accordingly, every few months, a polished article or webinar makes the rounds promising business owners, real estate investors, and highly appreciated asset sellers a remarkable result:
Sell your asset.
Defer the capital-gains tax.
Keep income flowing for years.
Avoid the rigid limits of a 1031 exchange.
And do it all through something called a Deferred Sales Trust.
The pitch is seductive because it borrows credibility from a real and long-standing part of the tax code: the installment sale rules under Internal Revenue Code §453.
The argument usually sounds something like this:
“Installment sales are well-established law. A Deferred Sales Trust is simply an installment sale with a trust in the middle.”
That sentence does an enormous amount of work.
And in my view, far too much of it is undeserved.
Installment sales are real.
Installment-sale tax deferral is real.
Section 453 is real.
But the trust overlay is where the legal trouble begins.
The problem is not that deferring capital gain is automatically improper. It is not. The problem is that §453 was designed for a very specific type of transaction: a seller sells property and receives payments over time from a buyer or valid obligor. The seller is not sitting on the sale proceeds. The seller has not received the full cash. The seller is carrying real economic risk.
A Deferred Sales Trust attempts to change that basic architecture. It inserts a trust between the seller and the buyer, has the trust sell the property for cash, and then asks the IRS to pretend the seller has not effectively received the economic benefit of the sale proceeds.
That is the core tension.
This article will do what promotional materials often do not do. It will slow down, read the statute, explain the policy behind the installment method, and then examine what the public record now shows through IRS enforcement activity, state securities proceedings, and Treasury's broader attack on related installment-sale monetization strategies.
The conclusion is direct:
If a seller wants to spread gain over multiple years, the safer and more legally coherent path is a properly structured installment sale or structured installment sale — not a trust holding the seller's sale proceeds while the seller claims not to have received them.
What §453 Actually Says
Start with the statute.
Internal Revenue Code §453 defines an installment sale as:
A disposition of property where at least one payment is to be received after the close of the taxable year in which the disposition occurs.
In plain English, this means a seller transfers property and does not receive the entire purchase price in the year of sale. Instead, the seller receives payments over time.
For example:
A business owner sells a company for $5 million. Instead of receiving all $5 million at closing, the buyer pays $1 million at closing and promises to pay the remaining $4 million over five years.
That is the classic installment-sale concept.
The seller recognizes gain as payments are received. The tax is not eliminated. It is spread out over time because the seller has not yet received all of the money.
That is the basic bargain.
Section 453 and the related regulations then deal with a number of predictable installment-sale issues:
- What counts as a payment?
- How is gross profit calculated?
- What happens when the buyer is related to the seller?
- What happens with third-party notes?
- What happens when the installment obligation is pledged?
- What happens when the deferred obligation is very large?
- What reporting is required?
The statute is not casual. It is detailed. It reflects decades of congressional, Treasury, and IRS attention.
But here is the key point:
Section 453 does not contemplate a Deferred Sales Trust.
It does not say that a seller may transfer property to a trust, have the trust sell the property to the buyer for cash, let the trust hold and invest the cash, and then treat the seller as though he or she has not effectively received the sale proceeds.
The statute contemplates a seller and a buyer.
The Deferred Sales Trust inserts a third actor: a trust.
And that trust is not merely incidental. It is the centerpiece of the promoted structure.
That is where the DST theory begins to strain.
The Simple Example: Why the Trust Changes the Transaction
Imagine two sellers.
Seller A: Traditional Installment Sale
Seller A sells a business to Buyer for $5 million.
Buyer pays $1 million at closing and signs a promissory note for the remaining $4 million, payable over ten years.
Seller A has not received the $4 million. Seller A is relying on Buyer's promise to pay. If Buyer defaults, Seller A has a real collection problem.
That is the kind of economic risk §453 was designed to address.
Seller B: Deferred Sales Trust
Seller B transfers the business to a trust.
The trust sells the business to Buyer for $5 million cash.
The trust now holds the cash proceeds. The trust promises to pay Seller B over time.
The marketing materials may say Seller B has not received the money. But economically, the buyer has paid in full. The cash exists. It has been converted from the sold asset into liquid proceeds. The only reason Seller B is not holding the cash directly is because a trust was placed in the middle.
That is not just a minor paperwork difference.
It changes the economic substance of the transaction.
The question becomes:
Is the trust truly an independent buyer carrying real economic risk, or is it effectively holding the seller's money for the seller's benefit?
That question is where constructive receipt and economic benefit become dangerous.
Why the Installment Method Exists: The “Wherewithal to Pay” Problem
The installment method exists because of a practical fairness issue.
Tax lawyers often refer to it as the wherewithal-to-pay doctrine.
The concept is simple:
A taxpayer should not necessarily be forced to pay tax on money that has not yet been received.
If a seller sells property and receives only a promise of future payment, it may be unfair to tax the entire gain immediately. The seller does not yet have all the cash. The seller may be carrying risk. The buyer might default. The seller may never receive the full purchase price.
That is the moral and economic logic behind §453.
But that logic depends on one critical fact:
The seller has not yet received the money or its practical equivalent.
Once the sale proceeds are sitting in a trust, invested, managed, and earmarked for the seller's benefit, the wherewithal-to-pay argument becomes much weaker.
The seller may say:
“I have not received the cash personally.”
But the IRS may respond:
“The cash was set aside for your benefit. You arranged the structure. The proceeds are being invested to fund payments to you. You received the economic benefit.”
That is the tax problem in one sentence.
A Deferred Sales Trust tries to preserve installment-sale deferral while giving the seller many of the practical benefits of a completed cash sale.
That is exactly the kind of arrangement tax law tends to scrutinize.
Constructive Receipt: You Cannot Simply Turn Away From Money
The first major doctrine is constructive receipt.
Under the constructive-receipt doctrine, a taxpayer may be taxed on income even if the taxpayer does not physically take possession of the money.
The basic idea is this:
If income is credited to you, set apart for you, or otherwise made available so that you can draw upon it, you may be treated as having received it.
A simple example helps.
Suppose your employer gives you a bonus check on December 31. You decide not to cash it until January 2 because you would rather push the income into the next tax year.
That usually does not work.
You had access to the money in December. You cannot defer income simply by choosing not to pick it up or deposit it.
Constructive receipt looks through that type of timing maneuver.
In the Deferred Sales Trust context, the question becomes whether the seller had practical access, control, direction, or benefit over the proceeds through the trust arrangement.
Promoters will usually argue that the seller does not have direct access to the trust funds.
But that is not the end of the analysis.
The IRS and courts do not only look at formal labels. They look at practical control, economic benefit, and the real structure of the transaction.
Economic Benefit: The Sharper Problem for Deferred Sales Trusts
The economic-benefit doctrine may be even more important.
This doctrine applies when money or property is irrevocably set aside for a taxpayer's benefit, even if the taxpayer cannot immediately withdraw it.
The classic example is Sproull v. Commissioner.
In that case, funds were placed in a trust for the taxpayer's benefit. The taxpayer was taxed even though the payments were to be made later. Why? Because the money had been set aside for the taxpayer in a way that gave the taxpayer a present economic benefit.
That is the doctrine that should make sellers pause before entering a Deferred Sales Trust.
If the trust receives cash from the buyer, holds that cash, invests it, and uses it to make scheduled payments to the seller, the IRS may argue that the seller received an economic benefit when the trust was funded.
The seller may not have had the cash in hand.
But the seller had something economically valuable: a funded arrangement established for the seller's benefit.
That is precisely the concern.
“But the Trustee Is Independent” — Why That May Not Solve the Problem
Deferred Sales Trust promoters often respond by emphasizing the independent trustee.
The argument is:
“The seller does not control the trust. The trustee is independent. Therefore, the seller has not received the proceeds.”
That sounds helpful, but it is not automatically decisive.
Independence on paper is not always independence in substance.
The more the seller can influence the structure, the payment schedule, the investment approach, the beneficiaries, or the administration of the trust, the more difficult it becomes to argue that the trust is truly independent.
For example, consider these questions:
- Who selected the trustee?
- Who designed the payment schedule?
- Who benefits from the trust assets?
- Were the sale proceeds earmarked to fund payments to the seller?
- Can the seller influence investments?
- Can the payout terms be adjusted?
- Are successor beneficiaries named by the seller?
- Is the trustee truly adverse to the seller?
- Is the trust acting like a real purchaser or merely as a conduit?
These are not academic questions. They go directly to whether the trust has real independent substance or is simply a device to hold the seller's sale proceeds.
The more control, influence, or retained benefit the seller has, the more vulnerable the structure becomes.
The Missing Authority Problem
One of the most important questions in tax planning is:
Where is the authority?
For traditional installment sales, the answer is easy. There is statutory authority. There are regulations. There is IRS guidance. There is long-standing tax practice.
For Deferred Sales Trusts, the answer is much weaker.
There is no clear statutory provision in §453 blessing a trust-based sale-proceeds arrangement of this type.
There is no broad IRS safe harbor approving the DST structure.
There is no clean Treasury regulation saying that a seller may transfer appreciated property to a trust, have that trust sell the property for cash, and then report payments from the trust under §453 while avoiding constructive receipt and economic benefit.
That absence matters.
Promoters often frame this as:
“The IRS has not specifically prohibited it.”
But that is not the same thing as saying:
“The IRS has approved it.”
In serious tax planning, silence is not safety.
Silence is often where audit risk lives.
What Existing Installment Guidance Does Show
The installment-sale rules have been around for decades, and the government has issued substantial guidance on related issues.
The IRS and Treasury have addressed installment reporting, related-party resale concerns, pledging installment obligations, escrow arrangements, letters of credit, and security devices.
That guidance tends to focus on a central question:
Has the seller received cash, control, or the practical equivalent of payment?
If the answer is yes, deferral becomes difficult.
That is why the Deferred Sales Trust is not merely an “innovative” installment sale.
It is an attempt to create deferral after the buyer has effectively paid the full purchase price in cash to an intermediary trust.
That is a very different fact pattern from the classic installment sale.
The Public Record: What Happens When These Structures Meet Scrutiny
This issue is no longer purely theoretical.
The public record now includes significant scrutiny involving Deferred Sales Trust transactions and closely related installment-sale monetization strategies.
That public record does not automatically mean every taxpayer who entered a DST will lose. But it does show that these structures are on the government's radar and that the risk is not imaginary.
1. IRS Summons-Enforcement Litigation and Promoter Investigation
The United States has filed litigation seeking to enforce IRS summonses connected to Deferred Sales Trust transactions.
According to public reporting and filings, the IRS has been investigating whether certain promoters marketed a potentially improper tax shelter involving Deferred Sales Trusts and whether civil promoter penalties under IRC §§6700 and 6701 may apply.
That matters because §§6700 and 6701 are not ordinary tax-code provisions. They are promoter and aiding-and-abetting penalty provisions.
In other words, the issue is not merely whether a taxpayer made a reporting mistake. The government has been examining whether the structure itself was promoted in a way that violated tax-shelter rules.
That is a serious development.
And if promoter investigations expand, taxpayers who used the promoted structures may find themselves drawn into examination activity as well.
2. Washington State Securities Enforcement
The Washington Department of Financial Institutions, Securities Division, brought proceedings involving a Deferred Sales Trust arrangement.
One allegation in that public record is especially troubling: the respondents allegedly managed and advised the trust for years without issuing the promissory note that was supposed to evidence the trust's obligation to pay the sellers.
That detail is critical.
The promissory note is not a minor document in an installment-sale structure. It is the evidence of the deferred-payment obligation.
Without a genuine note, what exactly does the seller have?
If the structure is supposed to be an installment sale, the installment obligation is central. If that obligation is missing, delayed, defective, or treated as an afterthought, the transaction begins to look far less like a legitimate installment sale and far more like proceeds being held in a trust for the seller.
That is exactly the type of fact pattern that can create tax and legal exposure.
3. Treasury's Attack on Monetized Installment Sales
Treasury and the IRS have also targeted monetized installment sale transactions, proposing regulations that would identify those transactions and substantially similar transactions as listed transactions.
A monetized installment sale is not identical to a Deferred Sales Trust.
But the family resemblance is obvious.
Both structures attempt to take what is economically close to a cash sale and transform it into tax deferral through an intermediary arrangement.
The common theme is this:
The seller wants liquidity or economic access while still claiming installment-sale deferral.
That is precisely the type of mismatch that attracts IRS attention.
When Treasury begins identifying a transaction family as abusive or reportable, prudent advisors should pay attention to the entire neighborhood — not just the exact structure named in the regulation.
Why a Real Installment Sale Is Different
None of this means installment-sale planning is improper.
The installment method is legitimate when used as intended.
A real installment sale has real economics:
- The seller does not receive all the cash at closing.
- The buyer or valid obligor owes future payments.
- The seller bears credit risk.
- The seller cannot control a pool of sale proceeds.
- The seller reports gain as payments are actually received.
That is the structure §453 was designed to address.
For example, if a buyer pays over ten years and the seller truly depends on that buyer's future payments, installment reporting may be appropriate.
The tax deferral matches the economic reality.
The seller has not received the full purchase price.
That is very different from routing cash sale proceeds into a trust and then claiming the seller has not received the economic benefit of those proceeds.
The Sound Alternative: A Structured Installment Sale Without a Trust
For sellers who want tax deferral and payment certainty, one potential alternative is a properly structured installment sale or structured installment sale.
In a structured installment sale, the buyer's payment obligation may be assigned to an unrelated assignment company that becomes responsible for making periodic payments to the seller. The assignment company may fund those obligations through an annuity or other regulated arrangement.
The key distinction is control.
The seller does not receive the cash.
The seller does not direct the investment of the underlying funds.
The seller does not have a trust holding sale proceeds for the seller's benefit.
The seller receives only the scheduled payments.
That lack of control is not a weakness.
It is what helps preserve the tax position.
A structure that gives the seller less flexibility may actually be safer because it better aligns with the installment-sale rules.
In tax planning, too much flexibility can be dangerous.
If the seller can direct, influence, borrow against, adjust, or benefit from the underlying proceeds, the IRS may argue that the seller has received something more than a mere installment obligation.
Other Code-Based Alternatives to Consider
The Deferred Sales Trust is often marketed as though it fills a unique planning gap. But there are other strategies with clearer statutory footing.
Depending on the asset, timing, client goals, and tax profile, a seller may consider:
1. Traditional Installment Sale
Best for sellers willing to accept payments over time and bear buyer-credit risk.
Example:
A business owner sells to a younger buyer and takes a secured note payable over seven years.
2. Structured Installment Sale
Best for sellers who want more payment certainty and are comfortable with a fixed payment schedule through a third-party obligor.
Example:
A real estate seller receives scheduled payments over ten years through an assignment company rather than a trust.
3. Charitable Remainder Trust
Best for sellers with charitable intent who want income, diversification, and a charitable remainder.
Example:
A seller contributes appreciated stock or real estate to a charitable remainder trust, the trust sells the asset, and the seller receives an income stream, with the remainder ultimately passing to charity.
4. §1031 Exchange
Best for real estate investors who want to sell investment real estate and acquire replacement real estate.
Example:
An investor sells an apartment building and exchanges into another qualifying investment property.
5. Qualified Opportunity Zone Planning
Best for sellers who are comfortable investing in qualified opportunity zone property or funds and accepting the statutory risks and holding periods.
Example:
A seller realizes capital gain and reinvests into a qualified opportunity fund within the required period.
6. §1202 Qualified Small Business Stock
Best for founders, investors, and business owners holding qualifying C-corporation stock.
Example:
A founder sells qualifying small-business stock after the required holding period and potentially excludes a significant amount of gain.
Each of these strategies has complexity. None should be used casually.
But each has a more identifiable statutory or regulatory framework than a Deferred Sales Trust.
That matters.
The Core Problem in One Sentence
The Deferred Sales Trust asks the IRS to accept the following proposition:
“The buyer paid cash, the cash went into a trust arranged for the seller's benefit, the trust will pay the seller over time, but the seller should still be treated as though the sale proceeds have not been received.”
That is the problem.
The form says “installment sale.”
The economics may say “cash sale with an intermediary.”
And tax law often follows economics.
Practical Warning for Business Owners and Real Estate Sellers
If you are considering a Deferred Sales Trust, do not stop at the brochure.
Ask hard questions:
- Where is the IRS authority approving this structure?
- Has tax counsel issued a written opinion?
- Is the opinion independent or promoter-connected?
- Who controls the trustee?
- Who controls investments?
- Who receives the benefit of the trust assets?
- What happens if the IRS challenges the transaction?
- Who pays the tax, penalties, and interest?
- Is there audit-defense support?
- Has the promissory note actually been issued?
- Is the trust a real purchaser or merely a conduit?
- What public enforcement history exists involving the promoter?
These questions are not hostile. They are basic due diligence.
A seller facing a large capital gain should not rely on slogans.
A large exit deserves a structure that can survive contact with the IRS.
FAQ: Deferred Sales Trusts and §453 Installment Sales
What is a Deferred Sales Trust?
A Deferred Sales Trust is a promoted tax-deferral strategy in which a seller transfers appreciated property to a trust, the trust sells the property to the buyer, and the trust promises to pay the seller over time.
The claimed goal is to defer capital-gains tax under the installment-sale rules of IRC §453.
The problem is that §453 does not expressly authorize this trust-based structure, and the arrangement may raise constructive-receipt and economic-benefit concerns.
Is an installment sale legal?
Yes. Installment sales are expressly recognized under IRC §453.
A traditional installment sale generally involves a seller transferring property and receiving at least one payment after the close of the tax year in which the sale occurs.
The seller reports gain as payments are received, assuming the transaction qualifies and no exception applies.
Why is a Deferred Sales Trust different from a regular installment sale?
In a regular installment sale, the buyer usually owes future payments directly or through a valid obligor, and the seller has not received the full purchase price.
In a Deferred Sales Trust, the trust may receive the sale proceeds in cash from the buyer and then promise to pay the seller over time.
That difference matters because the IRS may argue that the seller received the economic benefit of the cash once it was placed in a trust for the seller's benefit.
What is constructive receipt?
Constructive receipt is a tax doctrine that treats income as received when it is made available to the taxpayer, even if the taxpayer does not physically take possession of it.
If money is credited, set aside, or otherwise available to the taxpayer without substantial restriction, the taxpayer may be taxed as though the money was received.
What is the economic-benefit doctrine?
The economic-benefit doctrine can tax a person when money or property has been irrevocably set aside for that person's benefit.
In the Deferred Sales Trust context, the concern is that sale proceeds held in trust for the seller may be treated as a present economic benefit, even if paid out later.
Has the IRS approved Deferred Sales Trusts?
There is no broad IRS safe harbor or clear statutory provision expressly approving the common promoted Deferred Sales Trust structure.
That lack of direct authority is one of the central risks.
Promoters may argue that the structure fits within §453, but the absence of IRS approval is not the same as legal certainty.
What are alternatives to a Deferred Sales Trust?
Depending on the facts, alternatives may include:
- a traditional installment sale;
- a structured installment sale;
- a charitable remainder trust;
- a §1031 exchange for real estate;
- qualified opportunity zone planning;
- §1202 qualified small business stock planning.
Each option has its own rules, benefits, and limitations.
Conclusion
Strip away the brochures, charts, webinars, and polished explanations, and the Deferred Sales Trust rests on one central move:
It places a trust between the seller and the sale proceeds, then asks the tax law to treat the seller as though those proceeds have not effectively been received.
That is a difficult position.
Section 453 contemplates installment payments over time. It does not expressly bless a trust that receives cash from the buyer, holds the proceeds, invests them, and pays the seller later.
The policy behind the installment method is the seller's lack of wherewithal to pay. But if the proceeds have been converted to cash and placed in a trust for the seller's benefit, that policy justification becomes strained.
The constructive-receipt and economic-benefit doctrines exist precisely to prevent taxpayers from avoiding income recognition by using formal arrangements that give them practical access to, control over, or benefit from income.
And the public record now shows that these structures have attracted serious scrutiny.
For sellers facing a large exit, the safer path is not the most aggressively marketed one. It is the one that follows the statute, respects the economics, and minimizes the gap between form and substance.
A properly structured installment sale may not sound as glamorous as a Deferred Sales Trust.
But in tax planning, durability is worth more than glamour.
If the goal is to defer gain, do it in a way the Code actually contemplates.
Because once the IRS concludes that the trust was simply holding your money for your benefit, the transaction may no longer look like deferral.
It may look like an audit waiting to happen.
Resources and Authorities
Statute and regulations
- IRC § 453, Installment method — https://www.law.cornell.edu/uscode/text/26/453
- IRC § 451 (taxable year of inclusion) and Treas. Reg. § 1.451-2 (constructive receipt)
- Treas. Reg. § 15A.453-1 (installment method reporting)
- IRC §§ 6700 / 6701 (promoter and aiding-and-abetting penalties)
- IRS Publication 537, Installment Sales — https://www.irs.gov/publications/p537
Case law and doctrine
- Sproull v. Commissioner, 16 T.C. 244 (1951), aff'd 194 F.2d 541 (6th Cir. 1952) — economic benefit doctrine
Treasury / IRS enforcement and guidance
- Identification of Monetized Installment Sale Transactions as Listed Transactions (Proposed Regs, Aug. 4, 2023) — https://www.federalregister.gov/documents/2023/08/04/2023-16650/identification-of-monetized-installment-sale-transactions-as-listed-transactions
- IRS summons-enforcement litigation concerning Deferred Sales Trust transactions and the §§ 6700/6701 promoter investigation of Robert Binkele / Estate Planning Team — coverage: https://www.jdsupra.com/legalnews/irs-seeks-to-enforce-summons-related-to-2460504/ and https://www.goldinglawyers.com/the-irs-sues-to-enforce-a-deferred-sales-trust-summons/
State securities action
- Washington Dept. of Financial Institutions, Securities Division, In re Binkele, Estate Planning Team Inc., Mariani, et al., Statement of Charges (Oct. 6, 2020), Final Order (2023), No. S-18-2520-19 — https://dfi.wa.gov/documents/securities-orders/S-18-2520-19-SC01.pdf
Independent analysis
- Michael Kitces, "Why a Deferred Sales Trust Can Be a Risky Way to Defer Taxes on a Business Sale" — https://www.kitces.com/blog/deferred-sales-trust-dst-taxes-installment-business-irc-section-453/
Important Disclaimer
This article is for general educational purposes only and is not legal, tax, investment, or financial advice. The tax consequences of any sale, installment arrangement, trust structure, or exit-planning strategy depend on the specific facts, documents, parties, timing, applicable law, and execution. Before entering into any tax-deferral or exit-planning strategy, consult qualified tax counsel, your CPA, and appropriate financial professionals.
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