|
Related Party Transactions
Gregory J. Cook, EA, CPA, Accredited Tax Advisor
A corporation that uses an accrual method of accounting cannot deduct business
expenses and interest owed to a related person who uses the cash method of
accounting until the corporation makes the payment and the
corresponding amount is includible in the related person's gross income.
Determine the relationship, for this rule, as of the end of the tax year for
which the expense or interest would otherwise be deductible. If a deduction is
denied under this rule, the rule will continue to apply even if the
corporation's relationship with the person ends before the expense or interest
is includible in the gross income of that person. These rules also deny the
deduction of losses on the sale or exchange of property between related persons.
Related persons. For purposes of this rule, the following persons are
related to a corporation.
- Another corporation that is a member of the same controlled group as
defined in section 267(f) of the Internal Revenue Code.
- An individual who owns, directly or indirectly, more than 50% of the value
of the outstanding stock of the corporation.
- A trust fiduciary when the trust or the grantor of the trust owns,
directly or indirectly, more than 50% in value of the outstanding stock of
the corporation.
- An S corporation if the same persons own more than 50% in value of the
outstanding stock of each corporation.
- A partnership if the same persons own more than 50% in value of the
outstanding stock of the corporation and more than 50% of the capital or
profits interest in the partnership.
- Any employee-owner if the corporation is a personal service corporation
(defined later), regardless of the amount of stock owned by the
employee-owner.
Ownership of stock. To determine whether an individual directly
or indirectly owns any of the outstanding stock of a corporation, the following
rules apply.
- Stock owned, directly or indirectly, by or for a corporation, partnership,
estate, or trust is treated as being owned proportionately by or for its
shareholders, partners, or beneficiaries.
- An individual is treated as owning the stock owned, directly or
indirectly, by or for his or her family. Family includes only brothers and
sisters (including half brothers and half sisters), a spouse, ancestors, and
lineal descendants.
- Any individual owning (other than by applying rule (2)) any stock in a
corporation is treated as owning the stock owned directly or indirectly by
that individual's partner.
- To apply rule (1), (2), or (3), stock constructively owned by a person
under rule (1) is treated as actually owned by that person. But stock
constructively owned by an individual under rule (2) or (3) is not treated
as actually owned by the individual for applying either rule (2) or (3) to
make another person the constructive owner of that stock.
Personal service corporation. For this purpose, a corporation
is a personal service corporation if it meets all of the following requirements.
- It is not an S corporation.
- Its principal activity is performing personal services. Personal services
are those performed in the fields of accounting, actuarial science,
architecture, consulting, engineering, health (including veterinary
services), law, and performing arts.
- Its employee-owners substantially perform the services in (2).
- Its employee-owners own more than 10% of the fair market value of its
outstanding stock.
Reallocation of income and deductions. Where it is necessary to
clearly show income or prevent tax evasion, the IRS can reallocate gross income,
deductions, credits, or allowances between two or more organizations, trades, or
businesses owned or controlled directly, or indirectly, by the same interests.
Complete liquidations. The disallowance of losses from the sale or
exchange of property between related persons does not apply to liquidating
distributions.
More information. For more information about the related person rules,
see Publication 544.
|
