tax-exempt orgs and the person controlling the org
What are the 3 constructive ownership rules for related party attribution?
Rule 1: stock owned directly or indirectly by a corp, partnership, estate, or trust is treated as owned proportionately by its shareholders, partners, or beneficiaries.
Rule 2: Stock owned by related family members is considered owned by the taxpayer
Rule 3: Stock constructively owned by Rule 1 shall be treated as actually owned by that person when applying Rule 1 or Rule 2 in other situations, but Rule 2 isn’t applied in this manner. [Example Chad is attributed his wife’s 20% stock interest, but this interest would not be attributed to Chad’s sister]
How are sales between related parties that result in a gain treated for tax purposes?
Capital gains taxes are imposed on all sales of NON-depreciable property (such as land) between all related parties EXCEPT
Husband and wife (the basis merely transfers) OR an individual and a 50%+ controlled corp or partnership (because gain is taxed as ordinary income) -- you're basically selling the item to yourself
How are sales between related parties that result in a loss treated for tax purposes?
Losses are disallowed even if the transaction was at arms-length, but the loss could adjust the basis (deferred loss)
How is the basis of a related party sale determined? What is the holding period?
The 1st relative sells the property to the 2nd relative. Basis is determined when the 2nd relative sells the asset to an unrelated party.
Gain: The sales price exceeds the 1st relative’s basis
Loss: If the 2nd relative purchased for less than the 1st relative (a deferred loss), the final sale basis is the 2nd relative’s purchase price
No Gain or Loss: When the final sale price is between the 1st relative’s original purchase price and the 2nd relative’s purchase price from the 1st relative.
[Look at the chart on R3-48]
Holding Period: When party #2 purchased the item.
Who is included in the definition of related parties with regard to below-market loans?
employer to employee
ind contractor and his employer
corp and shareholder
loans to a qualified continuing care facility
What is the de minimis exception for a loan between related parties?
If the loan is <$10,000
What is the special rule imputed interest regarding gift loans between individuals?
If the loan is >/= $100,000, the inputed interest is determined as the lesser of the
** Actual imputed interest OR
** Net investment income. If net investment income <$1000 then imputed interest = $0
Determine Kathy’s ownership in ABC Co using the following: She owns 80% of Z-Corp which in turn owns 30% of ABC Corp.
Kathy’s ownership is proportional to Z-Corp’s ownership b/c she owns >50% of Z-Corp
80% x 30% = 24% ownership of ABC Corp
True / False: The constructive ownership rules determine how much tax the taxpayer owes.
False
It determines if the transaction is regarded as a “related party”
This may eventually affect taxes owed, but it’s NOT the reason for the calculation
What is the deduction from a loss in a related party transaction?
Losses from related party transactions are not deductible.
True / False: Step-siblings are counted as a related party.
