LLC Interest / Related Party Rules

[Snaggletooth]

More discussion

I don't mind admitting I'm wrong, if in fact, I am. I've read the court case and the code, and looked at the chart which is correct according to my understanding.

However, the court case involves annuity proceeds and an estate - (trusts are addressed by the code - estates are not). The case has often been cited by institutions that sell annuities.

In the real world, the chart doesn't stop with the spouse. Normally taxpayers who have a spouse will file a joint return. This means that both spouses are jointly and separately liable for the information on the return. Under this mentality I would interpret that the addition of a spouse to a joint return adds his whole family under the definition and doubles the chart. If this is true, the only way to stop the chart with the spouse is to file a married and separate return.

If I'm wrong, I'll admit it. Would like to hear from others. Good discussion, Maude.

[Maude Lebowski]

Thanks, Snaggletooth. I have no problem admitting I'm wrong either & in fact, would rather know that I am BEFORE filing something with the IRS. Otherwise, I would have filed this darn thing already & moved on.

I don't think you have the right court case; there have been several Stern vs. Commissioner cases. This one is from 1954 and Stern was a fellow in Wilkes-Barre, PA who sold his house to his son-in-law. I don't have a link because I use Parker Tax Publishing, which is a paid service, but here's a link to a discussion of the case from the Duke Bar Journal: http://scholarship.law.duke.edu/cgi/...10&context=dlj.

I understand what you are saying about joint filing status, but it doesn't seem to be relevant because it was noted in the case that son-in-law & daughter were joint filers and that had no bearing. Also, it was noted that none of the daughter's funds were used to purchase the house. The case is very specific that the funds to purchase the house were from the son-in-law's employment as a psychiatrist.

I've since found a few more cases where a parent has sold to a child & his/her spouse & only half of the loss was disallowed by the related-party rules.

Thank you for the very thoughtful & thought-provoking discussion. I really appreciate the points you've brought up because it's forcing me to consider all of the angles--not just the ones that seem to benefit my client.

[TaxGuyBill]

I know VERY little about how Community Property States work, that that MIGHT throw a wrench in things if the taxpayers are in a Community Property State. If that applies, the Spouse might be considered as owning half of the property, and the Related Party rules come back into play.

[Maude Lebowski]

Excellent Point

I know VERY little about how Community Property States work, that that MIGHT throw a wrench in things if the taxpayers are in a Community Property State. If that applies, the Spouse might be considered as owning half of the property, and the Related Party rules come back into play.

I think you are probably right, TaxGuyBill. The state is Alaska, which instituted a voluntary/optional community property system in 1998. I'll make sure the son-in-law & the daughter have not entered into one of these agreements.