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This is in regards XXXXX XXXXX Law. Internal Revenue Code Sec.

This is in regards XXXXX...
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.
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Answered in 14 minutes by:
10/29/2013
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,598
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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
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