Related Taxpayers

[Corduroy Frog]

Father owns a janitorial company. Son owns a trucking warehouse.

Son engages father's company to clean warehouse, mow grass, clean offices.
Over the course of the year, father's job cost system shows Labor, Fringe and
Supplies for $17,000. Problem is, dad only charges his son $10,000.

Question 1. The related taxpayer doctrine disallows losses on transfers of property. In this
case, there is no transfer of property, but there is a loss on operations. Do the related taxpayer rules still apply? Is Dad forced to forego deducting $7000 of his operating expenses?

Question 2, only relevant if the #1 is "yes."
With transfers of property, the disallowed loss transfers to the basis of the recipient. If an operational loss follows the same logic, what "basis" is increased by the $7000 loss above? No property is involved.

[erchess]

Bump

No idea what the law is on this. Do you know what the ruling would be if both corporations were wholly owned by the same individual or if the son's corp were jointly owned by Father and Son or Father, Son, and someone who is not related by blood or marriage to either of them? (I wouldn't know about any of those cases either and even if I did I wouldn't just blindly apply the same logic to this case.)

[Burke]

I do not think the transfer of property rules apply here, IMO. From your post, it appears Dad is undercharging son and his costs exceed his income. So it is an ordinary business loss if the expenses are legit. I assume his "labor" costs are what he pays someone else, not his own time.

[Snaggletooth]

Thanks

Thanks Burke.

Yes, Dad is obviously charging Son less than he would charge anyone else, and this is what the Code had in mind when creating the rules for Related Taxpayers.

However, you might be correct that the rules apply only to transfers of property and not to operational losses. I can't find anything that applies to operational losses.

Anyone else care to address this??

[DaveO]

I have no cite but know that auditors will look at this issue when determining if a person has a profit motive in their business. What does the rest of the Father's return look like? Is he profitable overall? I could see where the IRS could make a case for a gift element of the service.

[Davc]

If Father's company is a corp the excess expenses should be taken as shareholder wages not "Labor, Fringe and Supplies". If father is an SP, then they shouldn't be taken at all.

[Snaggletooth]

Davc

Davc when you say "should be taken" are you saying that the excess expenses should be deducted?

Thanks, Snag

[Burke]

I have no cite but know that auditors will look at this issue when determining if a person has a profit motive in their business. What does the rest of the Father's return look like? Is he profitable overall? I could see where the IRS could make a case for a gift element of the service.

When I posted my reply, I was assuming that the father had other clients and that he was making a profit overall. If the son is his ONLY client and this is the only income, then I would have serious problems with the deductions, as obviously, he does not have a profit motive in the "business."

[Davc]

Davc when you say "should be taken" are you saying that the excess expenses should be deducted?

Thanks, Snag

Yes,as wages to the father. A taxable fringe benefit just like personal use of the company car. On "C" you have the "less personal" concept but a corp doesn't have personal expenses.