3.4 - Related Party Transactions Flashcards

1
Q

What prevents taxpayers from shifting ownership of stock or property to a related person or entity in an effort to take advantage of beneficial provision while essentially still controlling their original investment?

A

Provisions of section 267 of the internal revenue code

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2
Q

Section 267 of the internal revenue code defines related parties as:

A

Siblings
Spouses
Ancestors and descendants
Entities that are more than 50% owned

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3
Q

Who is not considered a related party?

A

In-laws and step relationships

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4
Q

Kathy owns 80% of Company A. Company A owns 30% of Company B. What’s Kathy’s ownership percentage of company B?

A

80% X 30% = 24%

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5
Q

Chad owns 30% interest in company A. His wife owns 20% interest, his grandson owns 5% interest and his nephew owns 15% interest. Determine Chad’s ownership in company A.

A

30% + 20% + 5% = 55%

Nephew is not included

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6
Q

Company A owns 40% of company B an 30% of company C. Company C owns 40% of company B. Determine whether company A and B are related parties.

A

Yes, because company A owns 52% of company B (40% X 30% = 12% 12% + 40% = 52%)

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7
Q

Capital gains tax is imposed on all sales of non-depreciable property (land)) between related parties except for what sales?

A

Sales between 2 spouses
An individual and a 50% plus controlled corporation ARO partnership (taxed as ordinary income)

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8
Q

How are losses on related party sales treated?

A

Losses are disallowed

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9
Q

What are the gain rules for related parties?

A

The basis is the same as the basis for gift tax (depends on future selling price)

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10
Q

Ned bought stock for $20,000 that he sold to his brother, ray, for $16,000. The $4,000 loss is disallowed. Ray then sells the stock to Bobby, and unrelated party for $21,000. Determine ray’s basis and his recognized gain or loss on the sale.

A

Basis = 20,000 because 21,000 selling price is greater than the cost and selling price from Ned

21,000 - 20,000 = 1,000 recognized gain

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11
Q

What prevents parties from offering below-market interest rates on loans that could be particularly appealing to related parties?

A

Section 7872 of the IRC

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12
Q

Individuals who do make a. Below-market loan generally must do what?

A

Report any foregone interest as interest income. The borrower may be able to edict the foregone interest.

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13
Q

What loans does the below market loan provision apply to?

A

Gifts
Compensation related loans
Corporation shareholder loans

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14
Q

What is the de minimis exception to the below market loans provision?

A

The imputed interest rule does not provide for:
Gift loans between two individuals with an amount below 10,000
Compensation related and corporate shareholder loans with an amount below 10,000

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15
Q

What is the special rule for gift loans between individuals is less than $100,000?

A

The foregone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower’s net investment income for the year

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16
Q

Mike loans $200,000 to his sister payable in 10 years at an annual interest rate of 1%. The AFR issued by the IRS for long-term loans is 2.24%. Determine whether mike’s loan qualifies as a below-market loan and if so, calculate the imputed interest income to mike.

A

1% < 2.24% - therefore the loan is a below-market loan.

200,000 X 2.24% = 4,480 interest required under AFR
200,000 X 1% = 2,000 interest payable under the loan

4,4800 - 2,000 = 2,480 imputed interest