I’ve discussed Internal Revenue Code Section 267 in several columns. Section 267 generally disallows deductions for losses on sales to certain family members and other related parties.
Its wide-ranging definition of related parties includes close relatives, such as a spouse, child, grandchild, parent, sibling or a company in which you own more than 50 percent of the stock.
An unyielding IRS is unwilling to cut any slack even when a family fight is the reason for the related sale. It disallowed a loss deduction for a brother-to-brother sale.
The Tax Court agreed. It mattered not that the brothers disliked and distrusted each other and that the sale was bona fide and involuntary.
The sale in question was ordered as a result of binding arbitration to separate the stock and real estate holdings of the brothers. The court held that the hostility was irrelevant. The law makes no exception to the absolute prohibition of deductions for such transactions merely because family members have a falling out.
The IRS doesn’t always insist on a literal interpretation of the law. For example, Ruling 7737025 approved a loss deduction for an estate on the sale of real property to the decedent’s daughter, who was one of two executors of the estate.
It all began when Rudolph Rassendyll wrote a will that established a trust to hold property for several grandchildren until they became adults. The will designated Flavia, Rudolph’s daughter, and Ronald, his brother, as trustees of the property and executors of his estate. On Rudolph’s death, the assets placed in the trust included some rental property valued at $100,000.
Flavia and Ronald attempted to sell the property through Madeline, an agent who represented that she could find a buyer willing to pay $106,000. But Madeline’s allegedly increasing efforts produced no offers at that price.
Later, she recommended that the estate accept an offer for $60,000, if one was made. Eventually, Flavia’s offer of $70,000 was accepted by Ronald on behalf of the estate.
While Section 267’s ban on loss deductions applies to a sale of trust property to a trust beneficiary, the ruling carved out an exception. Unlike a trust that can be set up at an appropriate time and readily used to achieve such tax ends as artificial losses, the creation of Rudolph’s estate wasn’t the result of his “forethought.” Therefore, the ruling approved the estate’s deduction for its loss on the sale to Flavia.
Another exception kicks in even when the related-party rules are inapplicable. The transaction must be bona fide. When the IRS determines that the primary motive was tax avoidance, it will disallow a loss.
In a subsequent column, I’ll delve into additional complications that arise when there are multi-asset sales.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 300 and counting).
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.