AICPA Representative Tasks (verbatim). 1. Remembering & Understanding: Recall related parties for tax purposes. 2. Application: Calculate the direct and indirect ownership percentages of corporation stock or partnership interests to determine whether there are related parties for tax purposes. 3. Application: Calculate a taxpayer's gain or loss on a subsequent disposition of an asset to an unrelated third party that was previously purchased from a related party. 4. Application: Calculate the amount and treatment of imputed interest on related party transactions for tax purposes.
Congress restricts tax benefits on transactions between parties whose economic unity makes arm's-length dealing unlikely. The primary definitions appear in IRC §267(b) for losses and §707(b) for partnerships.
KEY: In-laws, aunts, uncles, nephews, nieces, and cousins are NOT related parties under §267. Only siblings (whole or half-blood), spouse, ancestors (parents, grandparents), and lineal descendants (children, grandchildren) qualify as family.
The related party tests apply to both direct and indirect (constructive) ownership. IRC §318 attributes ownership through three pathways:
Common mistakes
- Including in-laws as related parties. Only spouse, siblings, ancestors, and lineal descendants are related parties under §267(b). Trap: "sold to my brother-in-law, so loss is disallowed." Correct: in-laws are not related parties, the loss is deductible.
- Allowing the disallowed loss to create a loss on subsequent sale. The disallowed loss only reduces gain; it cannot create or increase a loss. Trap: "buyer inherits the seller's loss." Correct: the disallowed loss has value only if the buyer sells at a gain.
- Forgetting double attribution prohibition. Stock attributed from one family member cannot be re-attributed to another family member's family. Trap: "stock goes from father to son to son's wife." Correct: attribution stops at son.
Bottom line
- Related parties include family (spouse, siblings, ancestors, lineal descendants, but NOT in-laws, cousins, aunts, uncles, nieces, or nephews), >50% owned corporations and partnerships, and §318 constructively owned interests
- Losses on sales between related parties are permanently disallowed to the seller under §267(a)(1); the buyer does not inherit the loss as additional basis
- The buyer's later gain on sale to an unrelated party is reduced (but not below zero) by the disallowed loss; any excess disallowed loss vanishes permanently
- Constructive ownership under §318 attributes stock through family, entity-to-owner, owner-to-entity, and options, but prohibits double attribution through family members
Exam shortcut
"Siblings yes, in-laws no." Siblings are related parties for loss disallowance. In-laws, cousins, aunts, uncles, nieces, and nephews are not. If the exam presents a loss sale to an in-law, the loss is allowed. "Loss reduces gain, never creates loss." When tracing a disallowed loss to the buyer's subsequent sale, the offset can only reduce gain to zero. If the buyer sells at a loss, ignore the disallowed loss entirely.
The full lesson (about 2,354 words, 16 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- IV.C1
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