LLC Interest / Related Party Rules

[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.

[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]

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.

[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]

Thank you for the discussion.

I would rather hash this out with other tax professionals beforehand than with the IRS after I file the return. :-)

[TAXNJ]

Yes, spouses are related parties, but a related party's spouse is not. Stern V. the Commissioner concerns a father who sold his residence to his son-IN-LAW and the Tax Court determined that they were not related parties.

So Harry, the father-in-law, while a related party to his son, Claude, is NOT a related party to Maude, his daughter-in-law.

To put it another way, the tree goes only vertically & horizontally. Anyone outside of that is not necessarily a related party based on family relationships--they could be when examining other relationships such as common ownership of another entity (corp, partnership, etc.).

Here's a chart I found & which I believe to be a reliable interpretation of Sec. 267(c)(4): http://www.andrewmitchel.com/charts/...ttribution.pdf

Well, the United States Court of Appeals Third Circuit ruling and a chart of Sec 267 (pictures are worth a thousand words) seems to provide the best support for your opinion.

[Maude Lebowski]

It's a cross not a tree.

Yes, spouses are related parties, but a related party's spouse is not. Stern V. the Commissioner concerns a father who sold his residence to his son-IN-LAW and the Tax Court determined that they were not related parties.

So Harry, the father-in-law, while a related party to his son, Claude, is NOT a related party to Maude, his daughter-in-law.

To put it another way, the tree goes only vertically & horizontally. Anyone outside of that is not necessarily a related party based on family relationships--they could be when examining other relationships such as common ownership of another entity (corp, partnership, etc.).

Here's a chart I found & which I believe to be a reliable interpretation of Sec. 267(c)(4): http://www.andrewmitchel.com/charts/...ttribution.pdf

[Snaggletooth]

Not Necessarily True

If anyone cares, I was able to determine that in-laws are not related parties under Section 267 of the Code. See Stern V. Commissioner 1954.

Maude - don't believe this is necessarily true. The "tree" for related parties invokes the spouse, and vertical kinship of the spouse.

Maude's husband is Claude. Claude's father is Harry. Harry is Maude's father-in-law but he is a related party to Maude.

Maude has a neice, Mary. Mary is NOT a related party, nor is she an in-law.

The tree starts with the taxpayer, and stretches vertically upward and downward to direct ancestors and descendants. It also stretches sideways with brothers and sisters in the immediate family and stops there. However, if the taxpayer marries, the spouse and his tree becomes related parties as well, at least vertically.

[TAXNJ]

If anyone cares, I was able to determine that in-laws are not related parties under Section 267 of the Code. See Stern V. Commissioner 1954.

As long as you care is the important factor. Good job and thanks for sharing.

[Maude Lebowski]

In-laws are not related parties

If anyone cares, I was able to determine that in-laws are not related parties under Section 267 of the Code. See Stern V. Commissioner 1954.

[TAXNJ]

Thanks, but it's not a 1031 Exchange.

Yes but there was a contact. Lastly two more suggestions

http://tax.cchgroup.com/downloads/files/contemporary-tax-practice/Module2/Topic4/A-Sec-267-Related-Party-Definitions-Attribution-Rules.asp

http://www.csa-accounting.com/Ace/Articles/Relatedpartysales.htm

[Maude Lebowski]

One more reference with a possible contact if you have not reviewed

http://www.ccim.com/cire-magazine/articles/irs-clarifies-related-party-rule-1031-exchanges/?gmSsoPc=1

Good luck

Thanks, but it's not a 1031 Exchange.

[TAXNJ]

One more reference with a possible contact if you have not reviewed

http://www.ccim.com/cire-magazine/articles/irs-clarifies-related-party-rule-1031-exchanges/?gmSsoPc=1

Good luck

[Maude Lebowski]

Thanks for the welcome, Snaggletooth. Back when I used Drake, I used to participate in their forum. I found this forum when I switched from Quickfinder to The Tax Book, but I've mostly been lurking so far.

TAXNJ, thank you for the link. Coincidentally, I had already read that post, and believe it or not, it's not what happens once "relatedness" is determined that was throwing me off. Trying to determine if the parties were related was throwing me off.

Language like the following IRC 267 snippets are hard for me to parse without thinking out loud, especially, (5)! If that's not as clear as mud, I don't know what is!:

(b) Relationships

The persons referred to in subsection (a) are:

(1) Members of a family, as defined in subsection (c)(4);

. . . . . . .

(c) Constructive ownership of stock

For purposes of determining, in applying subsection (b), the ownership of stock -

. . . . . . .

(4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and

(5) Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock.

[Snaggletooth]

More from You

Maude, I notice this was your first post. Please consider coming back and asking more questions as you feel the need. There are numerous helpful people on this forum.