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A previous article discussed how a sale or exchange between related parties may be treated differently under the Internal Revenue Code.  As a tax attorney, when I see a transaction or series of transactions between related parties, it always raises a red flag.  Hopefully, the article below can provide additional information regarding such sale or exchanges.  If you have questions, please contact The McGuire Law Firm to speak with a tax attorney.

The sale or exchange of property between related parties can result in ordinary income, or if there is a loss, the loss is disallowed.  If gain is recognized on the sale of property between related parties, the gain is ordinary income, even if the asset was a capital asset.

Depreciable Property Transactions: Gain on sale or exchange of property that is or was depreciable property in the hands of the person who receives it is ordinary income if the transaction if directly or indirectly between the following parties stated below.

–          A person and the person’s controlled entity or entities

–          A taxpayer and any trust in which the taxpayer (or the taxpayer’s spouse) is a beneficiary of the trust unless such interest in the trust is as a remote contingent beneficiary.  A remote contingent beneficiary would have a computed actuarial interest of about 5% or less of the trust property.

–          A beneficiary and the executor of an estate, unless the sale or exchange is in satisfaction of a pecuniary interest.  A pecuniary interest is an interest in a specific sum of money.  Thus, if a beneficiary specifically inherited $50,000 cash and received a car worth $50,000 the above statement may apply.

–          An employer

What is a controlled entity?  A person’s controlled entity could be any of the following:

–          A Corporation whereby 50% or more of the value of all outstanding stock (or a partnership where 50% or more of the capital interest or profits) is directly or indirectly owned by that person.

–          Any entity whose relationship with the applicable person is: A corporation and a partnership if the same person owns more than 50% in the value of the outstanding stock of the corporation or more than 50% of the capital interest or profits in the partnership; two corporations that are members of the same controlled group as stated under IRC Section 1563; two S corporations if 50% or more of the outstanding stock in each S corporation is owned by the same person; and, two corporations whereby one corporation is an S corporation if 50% or more of the value in outstanding stock is owned by the same person.

If you have questions relating to the above matters or other tax & business questions, speak with a tax attorney at The McGuire Law Firm.


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