Hi and welcome to our site!Your assessment seems as correct. Family members for Sec. 267(a) purposes include only those specifically listed - as lineal descendants. In-laws and step relationships are not related parties - therefore losses on sale or exchanges with these parties may be deducted.Unless... his son's wife is merely acting as a nominee for a related party and the asset will be treated as the martial asset paid with martial funds - and not a separate asset owned his son's wife and paid with her own funds.If that will clear be a separate asset owned his son's wife - there is no issues.
The situation is commonly referenced by the case Stern v. Commissioner of Internal Revenue, 215 F.2d 701 (3d Cir. 1954) which rules that a son-in-law is not a related person within the meaning of the section 267.http://www.leagle.com/decision/1954916215F2d701_1758
Simister v. Commissioner, 4 T.C. 470 (1944) rules that a loss is partially allowed on the sale of property by a father to his daughter and son-in-law in which the buyers acquired the property as tenants in common.See here - http://taxprof.typepad.com/taxprof_blog/files/2005-25317-1.pdf
Thank you. This is helpful. But, how do I know if the son's wife is merely acting as a nominee? Michigan is not a Community Property State. Does that make a difference?
That is not something you could know - but your assessment may be based on knowing all facts and circumstances. As we are heading to a gray area - there will be "open door" for interpretations.Generally - it doesn't matter what you or I think about that transaction... but you may want to warn the client that the IRS might disagree with our interpretation - and could treat that sale as partly to his son and partly to his son's wife. In this case - they might be asked to proof their intention in the Tax Court. While that might be rare situation - still that is possible - especially if a large amount involved - and the client might need to be aware.