We are structuring a Section 453 installment sale to defer taxes, but the buyer wants the right to offset installment payments against any future, unspecified indemnity claims without third-party arbitration. How do we block this offset clause while keeping our tax deferral intact?

Question

Tyler Smith · Accepted Answer

A buyer's demand for an unrestricted right of offset is a trap that can destroy your installment payments under Section 453. If the buyer can unilaterally withhold payments based on unsubstantiated indemnity claims, they effectively control the purchase price post-close. To preserve your tax deferral and protect your cash flow, you must negotiate a strict limitation on offset rights.

First, require that any claimed indemnity breach must exceed a meaningful basket or deductible amount before any offset can be proposed. Second, prohibit unilateral offsets. The purchase agreement must state that if a dispute arises, the disputed portion of the installment payment must be placed into a third-party escrow account, while the undisputed portion is paid to you immediately.

Third, mandate expedited, binding arbitration by an independent third party to resolve any claims within thirty days. This prevents the buyer from freezing your cash indefinitely over minor disputes. You should also ensure that the installment note is secured by a first-priority security interest in the assets of the business. If they default on a payment due to an unproven claim, you must have the immediate right to accelerate the note and foreclose. Do not let them turn a tax-deferral strategy into a tool for post-closing price reductions.