Non Deductible Loss With Related Parties

Often the sale or exchange of property may be between related parties.  Losses on the sale or exchange of property between related parties is not deductible.  This rule on nondeductible losses applies to both direct and indirect transactions, but would  not apply when a corporation distributed property to a shareholder in a complete liquidation of the corporation.  Below is a list of related parties.

 

–       Members of a family including brothers & sisters, half brothers & sisters, parents, grandparents, children, grandchildren and other lineal descendants.

–          An individual and a corporation of the individual owns 50% or more, directly or indirectly in the value of the outstanding corporate stock.

–          Two corporations that are members of the same controlled group- see Internal Revenue Code Section 267(f).

–          A trust fiduciary and a corporation if the trust or the grantor of the trust owns directly or indirectly 50% or more of the value of the outstanding corporate stock.

–         A grantor and trust fiduciary, and the trust fiduciary and beneficiary of any trust.

–          Trust fiduciaries of two separate or different trusts and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of the applicable trusts.

–          A tax exempt organization and a person who directly or indirectly controls the organization, or a family member of the person who directly or indirectly controls the organization.

–         A corporation and partnership when the same person owns 50% or more in the value of the outstanding corporate stock and more than 50% in the capital interests or profits interest in the partnership.

–        Two different S corporations when the same person owns more than 50% of the value in the corporate stock.

–          Two corporations when one of the corporations is an S corporation if the same person owns more than 50% of the value in the outstanding corporate stock of both applicable corporations.

–        The executor of an estate and the beneficiary of an estate.  An exception exists though under situations whereby the executor is satisfying a pecuniary bequest.

–        Two partnerships when the same person directly or indirectly owns more than 50% (fifty-percent) of the profits interest or the capital interests in both of the partnerships.

–          A person and a partnership if the applicable person owns (whether it be directly or indirectly) more than 50% of the partnership profits interest or capital interest in the partnership.

The nondeductible rule as stated in the last two rules above would not apply to a sale, transfer or exchange of a partnership interest between related parties.  Furthermore, when determining ownership interests in partnership or corporation, certain attribution rules will apply.  For example, certain percentage shareholders in a corporation are deemed to own the stock that the is owned by the corporation.  Further, family attribution rules apply whereby an individual is deemed to own stock and partnership interest that family members (brother, sister, spouse, lineal descendants etc) own.

Speak with a Denver tax attorney and business attorney at The McGuire Law Firm if you have questions related to the tax implications of a business or individual transaction.  The McGuire Law Firm offers you a free consultation with a tax attorney and business attorney to discuss your issues and matters.

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