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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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This is in regards XXXXX XXXXX Law. Internal Revenue Code Sec.

Resolved Question:

This is in regards XXXXX XXXXX Law. Internal Revenue Code Sec. 267(a) describes who are related persons for taking a loss from the sale or exchange of property. One of my tax clients is a Partnership. One of the partners wants to transfer his shares to his son's wife. This transfer would result in a tax loss for the old partner if to an unrelated person. I am simply a tax accountant -- need a better pair of eyes to confirm what the code says.
Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

Lev :

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.

Lev :

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

Customer:

Lev,

Customer:

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?

Lev :

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.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22831
Experience: Taxes, Immigration, Labor Relations
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