Module 4: Related Party Transactions

Question 1

What does the related party provision do?

Answer 1

Prevents taxpayers from shifting ownership of stock/property to a related person or entity in an effort to take advantage of beneficial provisions of the IRC when essentially still controlling their original interest

Question 2

Definition of related parties

Answer 2

• Brothers and sisters
• Husband and wife
• Ancestors and lineal descendants
• Entities that are > 50% owned, directly or indirectly, by indivs., corporations, trusts, partnerships
• Controlled groups
• Various relationships b/w trusts, grantors, fiduciaries, executors, and beneficiaries
• Tax-exempt organizations and person controlling, directly or indirectly, such organizations

Question 3

Are in-laws and step relationships related parties?

Answer 3

No (may become “out-laws”)

Question 4

What are section 267 attribution rules for constructive ownership?

Answer 4

1. Stock owned directly/indirectly by a corporation, partnership, estate, or trust is treated as owned proportionately by its shareholders, partners, beneficiaries
2. An individual shall be considered as owning stock owned by those related family members
3. Stock constructively owned by a person under Rule 1 shall be treated as actually owned by that person for Rule 1 and Rule 2

Question 5

What is the general rule for capital gains and related parties?

Answer 5

Capital gains taxes are imposed on all sales of non-depreciable property b/w all related parties

Question 6

What is the exception to the general rule for capital gains and related parties?

Answer 6

Sales b/w the following related parties do not receive capital gains treatment:

• Husband and wife
• An individual and 50% plus controlled corporation/partnership

Question 7

How are capital losses and related parties treated?

Answer 7

Losses are disallowed on (most) related party sales transactions

Question 8

What are the gain rules for related parties?

Answer 8

Gain is recognized only to the extent that the future sale price > the previous relative’s cost basis

Question 9

What are the loss rules for related parties?

Answer 9

Loss is recognized only to the extent that the sale price to the unrelated party is lower than the acquiring relative’s original purchase price in the asset (FMV)

Question 10

What does section 7872 of the code do?

Answer 10

Seeks to prevent parties from offering below-market interest rates on loans that could be particularly appealing to related parties

Any foregone interest is reported as interest income

Question 11

What types of loans does the below market loan provision apply to?

Answer 11

Gifts
Compensation-related loans
Corporation-Shareholder loans
Tax-Avoidance loans
Other below-market loans
Loans to qualified continuing care facilities

Question 12

De minimus exception for below-market loans

Answer 12

Gift loans = when loans $10,000 or less

Compensation-related and corporate-shareholder loans = when $10,000 or less