Category: Estates and Trusts Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Taxpayer is the grantor of an irrevocable trust for the benefit of his children. Taxpayer sold loss property to the trust and seeks to deduct the loss personally. The issue is whether the loss is disallowed. Section 267(a) disallows the loss on a sale or exchange of property between certain related parties as defined in Section 267(b). Section 267(b)(4) specifies a grantor of a trust and a fiduciary of the same trust. The plain language of the statute seems to clearly encompass the fact pattern in this case such that the taxpayer would be unable to deduct the loss resulting from the sale of property to the trust. The taxpayer in this matter asserts that because the trust is irrevocable, the loss disallowance rule does not apply. There is absolutely no evidence to support that assertion. First, the words of the statute are plain on their face. If an exception were intended for irrevocable trusts, then Congress could have provided one. Since no exception is provided, we must assume that none is intended. Second, the assertion that the rule does not apply to irrevocable trusts makes no sense. If a trust is not irrevocable, then it is revocable. If a trust is revocable, it is treated under Section 676 as a grantor trust in which case the trust entity is ignored altogether for tax purposes, and the grantor is treated as the owner of the trust property. If the grantor still owns the trust property for tax purposes, it would not be possible to sell the property to the trust as far as taxation is concerned. As such, the rule of Section 267(b)(4) would be completely unnecessary if it only applied to revocable trusts. There is also a case on point. Barjona S. Meek v. Comr., TC Memo 1996-236 (1996). Here the grantor of a trust sold a partnership interest at a loss to an irrevocable trust for the benefit of the grantor's children. The IRS disallowed the loss under Section 267(b)(4). The point of the case was to litigate 1) who was really the trustee, 2) was there a valid trust, 3) was there really a sale. All the parties agreed if the taxpayer was the grantor of a valid trust and there really was a sale, then Section 267(b)(4) was applicable. Since this case involves an irrevocable trust and a fact pattern extremely similar to the one at hand, it serves to strongly underscore that irrevocability is no defense to the application of the loss disallowance rule of Section 267(a). |
