Using the Intermediary Option

Using the Intermediary Option

East coast doctor, Martin Diaz, M.D. sold his practice to a medical group for substantial value, much to be recognized ordinary income. His practice was in a C-corp. Substantial fees were being paid for consulting, personal goodwill, and a noncompete. On top of other income for the year, taxes range included 39.6 % ordinary federal income tax, 3.8% Affordable Care Act tax, 23.8% capital gain tax with Affordable Care Act, and 4.6% state and local tax. This totals 48% on ordinary income and 28.4% on capital gain for personal goodwill. Two Million of total exit price ($2,000,000) would have been reduced to $1,157,600 after tax.

It had been 5 years since Martin’s practice was last worth $1,157,600. To recover the $842,400 payable in tax, on top of the cost of living and supporting Martin’s family at ordinary income rates of 48% would have required $1,620,000, or another 5 to 10 years of Martin’s life, depending on how hard he worked. The money he would newly earn would never replace the income he could earn if he invested the $842,400 instead of paying taxes.

CSS purchased Martin’s right to receive installments based on a payment schedule agreeable to him. Then, by agreement with Buyer and all reps and warranties in place, CSS received the funds, invested with the approval of Dr. Diaz, and payed his note as he elected by agreement, with cheaper tax dollars and more growth happening over time. The investment manager approved by Martin is a trusted, unrelated friend.  Investment manager chose to invest in life insurance, and Martin knows his family will be protected without having to purchase life insurance with after-tax dollars.

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