REG 3 - Related Party Transactions Flashcards
Who is included as being a related party? Who is not included as being a related party?
Related Party
- Family
- Entities that are more than 50% owned
Unrelated parties
- In-laws and step relationships are NOT related parties
Define Rule 1 of constructive ownership? (proportionate attribution)
Stock owned directly or indirectly by a corporation, partnership, estate, or trust is treated as owned proportionately by its shareholders, partners, or beneficiaries.
E.g. Kathy owns 80% of Handlebars, Inc., which owns 30% of ABC Company.
- Kathy owns 24% of ABC Company (80% x 30%)
Define Rule 2 of constructive ownership? (family members)
An individual shall be considered as owning stock owned by family members.
E.g. Chad owns 30% in Wick Corp. His wife Kathy owns 20% and his grandson owns 15%.
- Chad owns 65% in Wick Corp (30%+20%+15%)
Define Rule 3 of constructive ownership?
1) Stock constructively owned by a person in Rule 1 (proportionate attribution) shall be treated as actually owned for by family members
E.g. Kathy owns 24% of ABC Company (per Rule 1). This means her husband owns 24% of ABC Company, and all interest in ABC Company needs to be added together.
2) Family members are not applied in the same manner as above.
E.g. Chad owns 20% owned by wife (per Rule 2). Chad’s sister DOES NOT include Chad’s wife’s interest with her interest. Chad’s sister MUST INCLUDE Chad’s interest.
How are capital gains treated between related parties. What is the exception?
Capital gains between related parties are taxed
- Exception: The following are not treated as capital gains and not taxed
1) Husband and wife sell each other stock
2) An individual and a 50% controlled corporation or partnership sell each other stock
How are capital losses treated between related parties.
Losses are disallowed (can’t recognize) between related parties.
What are the basis rules for related parties?
Same as gift tax rules. The basis is the NBV of previous related party.
E.g. Ned bough stock $20,000 and sold it to his brother Ray for $16,000. The brother then sells it to an unrelated party for $21,000.
- The basis for the brother is $20,000
- The gain is $1,000
What is the holding period for related parties?
The holding period starts with NEW owner’s period of ownership.
How are gains/losses calculated for the following for related party transactions:
1) The selling price is higher than cost and FMV.
2) The selling price is lower than cost and FMV.
3) The selling price is between cost and FMV.
SAME AS GIFT TAX RULES
1) The selling price is higher than cost and FMV:
- Use relative’s basis to determine gain
- The gain is the difference between the sale price and the relative’s basis
2) The selling price is lower than cost and FMV:
- Use “purchase price” to determine loss
- The loss is the difference between the purchase price and the sale price
3) The selling price is between cost and FMV.:
- No gain or loss
Explain below-market loans and imputed interest? How is foregone interest treated. What are the two exceptions for interest of loans given less than $100,000?
Individuals who make a below-market loan GENERALLY must report any foregone interest as interest income.
Exceptions:
1) Foregone interest for lender and borrower is limited to the amount of the borrower’s investment income for loans given less than $100,000.
E.g. Grandpa (lender) gives grandson (borrower) $100,000. The deduction of interest is limited to the amount of investment income (like itemized deductions).
2) If the borrower’s investment income is $1,000 or less, then foregone interest is $0.
E.g. If grandson has $1,000 investment income, the foregone interest is $0.
What are three types of loans affected by imputed interest?
1) Gifts between individuals
2) Compensation - related loans
- Employees and employers
3) Corporation - related loans
- Shareholders and corporation
What is the de minimis exception for loans affected by imputed interest?
The following loans that are less than $10,000 are not subject to imputed interest rules:
1) Gifts between individuals
2) Compensation - related loans
- Employees and employers
3) Corporation - related loans
- Shareholders and corporation
