T4-M3 Related Party Transactions Flashcards
1
Q
what are related parties under section 267?
A
- Brothers and sisters
- Spouses
- Ancestors and lineal descendants (ex: father, son, grandfather)
- entities that are > 50% owned directly or indirectly by individuals, corporations, trusts and/or partnerships. Note: constructive ownership rules apply
- controlled groups (any 2 corporations, partnerships, S corps, or a combination of those, both > 50% owned by the same party)
- various relationships between trusts, grantors, fiduciaries, executors, and beneficiaries
- tax-exempt organizations (within definition of section 501) and person controlling, directly or indirectly, such organizations
- note: in-laws and step relationships (stepbrothers and stepsisters) are NOT related parties.
2
Q
what are 3 rules under constructive ownership?
A
- Rule 1: stock owned directly or indirectly by a corporation, partnership, estate, or trust is treated as owned proportionated by its shareholders, partners, or beneficiaries. ex: Kathy owns 80% of Han co. Han co owns 30% of ABC co. So Kathy owns 24% (80x30)% of ABC co
- Rule 2: an individual shall be considered as owning stock owned by those family members related in accordance with section 267. ex:
- stock constructively owned by a person under rule 1 above (proportionate attribution) shall be treated as actually owned by that person for the purpose of applying either rule 1 or rule 2 in other situations. However, rule 2 (family members) cannot be applied in this manner
3
Q
what are general rules about capital gains and losses under related parties?
A
- capital gains:
+ capital gains are taxed on sales of non-depreciable property (ex: land) between related party
+ exception: NO taxable capital gains under the following situations
a. two spouses (basis is merely transferred)
b. an individual with > 50% controlled corporation or partnership (gain is taxed as ordinary income) - capital losses: are disallowed on most related party transactions, even if FMV price is at “arm’s-length”
4
Q
what are the 3 scenarios after a related party occurs and property is then sold to an unrelated party?
A
- the 3 scenarios are similar to gift tax rules:
- Gain rule: gain is recognized only to the extent that the future sales price EXCEEDS the previous relative’s cost basis. Use relative’s cost basis (original cost) to determine gain
- Loss rule: loss is recognized only to the extent that the sales price to the unrelated party is LOWER than the acquiring relative’s purchase price
- No gain or loss rule: no gain or loss is recognized when the sales price to the unrelated party is between the original cost basis and related party purchase price
- Holding period: starts with the new owner’s period of ownership. This is different from gift tax rule where it uses rolling cost basis
5
Q
what are loans affected by imputed interest rules?
A
Any below-market loans below
- gifts
- compensation-related loans
- corporation-shareholder loans
- tax-avoidance loans
- other below-market loans
- loans to qualified continuing care facilities
6
Q
what are de minis exception rules?
A
- gift loans between individuals: loans do not exceed $10K => NO imputed interest rules apply
- compensation-related and corporate-shareholder loans: loans do not exceed $10K => NO imputed interest rules apply
7
Q
what are special rules for gift loans NOT in excess of $100K?
A
- loans > $10K and < $100K
+ lender are taxed on foregone interest up to amount of net investment income
+ borrower deducts foregone interest up to amount of net investment income (not personal interest)
+ similar to gambling losses => can only offset gambling winnings to $0 and cannot claim a loss
+ if borrower’s net investment income is $1,000 or less, the foregone interest is treated as zero - loans > $100K
+ lender taxed on foregone interest
+ borrower can deduct all foregone interest regardless of net investment income (not personal interest)
