Tax Challenges With Related Party Sales: Navigating Complex IRS - PowerPoint PPT Presentation

Presenting a live 90-minute teleconference with interactive Q&A Tax Challenges With Related Party Sales: Navigating Complex IRS Rules for Closely Held Businesses Defining Related Parties and Applying Rules for Capital Gain Treatment, Installment Reporting, Disallowed Losses THURS DAY, OCTOBER 23, 2014 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Matthew Donnelly, Esq., Skadden Arps , Washington, D.C. oram Keinan, Partner and Chair, Tax Department, Carter Ledyard & Milburn , New Y Y ork The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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Tax Challenges With Related Party Sales: Navigating Complex IRS Rules for Closely Held Businesses

Presenters • Matthew Donnelly, Skadden Arps, Washington, D.C. • Yoram Keinan, Partner and Chair, Tax Department Carter Ledyard & Milburn, New York 6

Yoram Keinan • Yoram Keinan, 212-238-8790 (keinan@clm.com) • Yoram Keinan is the chair of the tax department at Carter, Ledyard & Milburn LLP in New York. With more than fifteen years of experience in tax law both in the United States and Israel, Yoram Keinan focuses on U.S. and international taxation of financial products and institutions and represents major banks and investment firms. Prior to joining Carter Ledyard & Milburn LLP, Yoram Keinan served as a shareholder at Greenberg Traurig’s Tax Department in New York. 7

Matthew Donnelly • Matthew Donnelly, (202) 371-7236 (matthew.donnelly@skadden.com) • Matt is an associate at Skadden Arps in Washington, DC, where his practice focuses on the domestic and international tax aspects of mergers, acquisitions, dispositions, joint ventures, restructurings and financings. 8

Overview 9

Related Party Transactions • Disallow Losses on Sales or Exchanges of Property between Related Parties • Re-characterization of Gain on Sale of Depreciable Property between Related Parties. • Limitations on Like Kind Exchanges 10

Section 267: Limitations on Losses/Deductions in Transactions between Related Parties 11

Overview • Section 267(a)(1) disallows any loss from the sale or exchange of property, directly or indirectly, between related persons specified in Section 267(b). • Four loss “disallowance” rules – Note: Statute speaks in terms of loss “disallowance” – which, in the Code, typically implies a permanently state – however the losses “disallowed” by section 267 may ultimately be utilized, albeit in some instance by another taxpayer – Perhaps the most pervasive related-party rules in the Code – Affect numerous transactions – Applies to transactions conducted at arm’s length 12

Section 267(a)(1): Loss Suspension/Transfer Rule • Disallows deduction in respect of any loss from the sale or exchange of property, directly or indirectly, between related persons (as defined in 267(b)) – Exceptions: (i) losses (of the transferor or transferee) recognized as a result of distributions by a corporation in complete liquidation, and (ii) transfers of property between spouses or incident to divorce • If section 267(a)(1) applies and the transferee later sells or otherwise disposes of such property at a gain (or of other property the basis of which in his hands is determined directly or indirectly by reference to such property), then such gain shall be recognized only to the extent that it exceeds so much of such loss as is properly allocable to the property sold or otherwise disposed of by the transferee – Does not apply if the loss sustained by the transferor is not allowable to the transferor as a wash sale under section 1091 – Suspended loss transfers only to original transferee, not subsequent transferees (e.g., donee) – Suspended loss tracked among divisible properties to which loss is attributable; if not possible, a portion assigned to property based on proportionate FMV of part, item or class • Note: Suspended loss not a basis adjustment; affects only gain, not loss 13

Section 267(a)(1): Examples • H sells to his wife, W, for $500, certain corporate stock with an adjusted basis for determining loss to him of $800. The loss of $300 is not allowable to H by reason of section 267(a)(1) and paragraph (a) of §1.267(a)-1. W later sells this stock for $1,000. Although W's realized gain is $500 ($1,000 minus $500, her basis), her recognized gain under section 267(d) is only $200, the excess of the realized gain of $500 over the loss of $300 not allowable to H. In determining capital gain or loss W's holding period commences on the date of the sale from H to W. • Alternatively, W later sells her stock for $300 instead of $1,000. Her recognized loss is $200 and not $500 since section 267(d) applies only to the nonrecognition of gain and does not affect basis. • Alternatively, W transfers her stock as a gift to X. The basis of the stock in the hands of X for the purpose of determining gain, under the provisions of section 1015, is the same as W's, or $500. If X later sells the stock for $1,000 the entire $500 gain is taxed to him. Treas. Reg. § 1.267(d)-1(a)(4) Ex. 1-3. 14

Section 267(a)(1): Suspense/Transfer Rule (cont.) • Disallows deduction in respect of any loss from the sale or exchange of property, directly or indirectly, between related persons (as defined in 267(b), listed later) • “Indirect” sale or exchange characterization has been employed successfully by the Service on several occasions to defer losses on sales or exchanges between unrelated parties but in which the taxpayer ultimately suffered no economic loss. 15

Section 267(a)(1): Case Law Not always consistent and analysis must proceed carefully • • “If there is a shift of property between those economically related persons designated under section 267(b), then, regardless of the motive for and manner in which the intragroup transfer is accomplished, the resulting loss is disallowed under section 267(a)(1) unless there occurs a definite break in the continuity of the related group's economic interest in the transferred property so that the seller undoubtedly realizes a genuine substantive economic loss. In determining whether there is a genuine economic loss, the intent of the parties, the time element, the ultimate result, and the mutual interdependence of the steps taken as well as the selling price, the fair market value, and the near-identity of terms of the sale and purchase are among the factors to be considered.” Hassen v. Comm’r, 63 T.C. 175, 185 (1974). 16