LLC Interest / Related Party Rules

[TAXNJ]

Thanks for your input, Golden Rocket. That's exactly why I'm thinking out loud here. I've been going around in circles within my own head, alternately convinced that it is & then is not a related-party transaction. What was throwing me off, I think, was that neither party directly involved & specifically named in the transaction has any indirect ownership.

I think I get it now: the transaction is considered a related-party transaction because the daughter has indirect ownership, so it plays out, per IRC 267, as a transaction between father & daughter. Is that right?

(And I do understand how the un-allowed loss gets added to the son-in-law's basis if this is a related-party transaction, but thanks for pointing that out.)

If you have time consider this to review

http://www.taxlawforchb.com/2013/12/related-party-sales/

[Maude Lebowski]

Thanks for your input, Golden Rocket. That's exactly why I'm thinking out loud here. I've been going around in circles within my own head, alternately convinced that it is & then is not a related-party transaction. What was throwing me off, I think, was that neither party directly involved & specifically named in the transaction has any indirect ownership.

I think I get it now: the transaction is considered a related-party transaction because the daughter has indirect ownership, so it plays out, per IRC 267, as a transaction between father & daughter. Is that right?

(And I do understand how the un-allowed loss gets added to the son-in-law's basis if this is a related-party transaction, but thanks for pointing that out.)

[Golden Rocket]

Thinking is not sound

Maude, your thinking is not sound as the related party rules are violated at every turn.

Firstly, the related party rules extend to spouses. Secondly, he sold the 5% interest directly to his son/son-in-law. The loss unavailable to the father, however, can be added to the buyer's basis.

If the LLC was not 95% owned by the daughter, he could have sold back to the LLC under a structured sale, and then LLC could have issued to son/son-in-law at value.

My opinion only. Maybe others will post.

[Maude Lebowski]

I've read Code Sec 267 regarding related-party sales, but I'd like some feedback on my thought process/interpretation.

My client bought 5% interest in an LLC from his son-in-law in 2012. The LLC intended to build a building and planned to get a mortgage, plus borrow $100K each from his father & his father-in-law (my client). The bank wouldn't lend unless the two fathers bought an interest in the LLC, so they each bought a 5% interest in the LLC for $100,000 each.

In 2015, the son-in-law has repurchased my client's 5% for $100,000. My client's basis exceeds $100,000, so the sale is at a loss. Do the related-party rules make the loss non-deductible?

The 2012 Sales agreement was between the son-in-law & my client. My client's daughter doesn't own any part of the LLC directly. I feel like the loss on the sale is deductible because, following the related-party rules, my client does not/did not own any other portion of the LLC directly or indirectly before or after the purchase or sale & the son-in-law did not own any portion of the 5% interest directly or indirectly during the period of my client's ownership. To put it another way, this only works because my client's daughter has no direct interest in the LLC--even though she owns/owned 95% INDIRECTLY--90% via her husband & 5% via her father--that's actually why I hesitate. It seems like it is following rules, but violating the intent.

Is my thinking sound? Anything else I need to consider? (Sale at less than FMV, for example.)