Category: Sales & Exchanges Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Taxpayer, an individual, wants to sell depreciable property on an installment sale basis to a corporation controlled by his children. · Section 453(g) denies installment sale treatment between certain related parties. · Section 453(g) refers to Section 1239(b) for its definition of related party. · Section 1239(b) covers... (1) a taxpayer and certain related entities; (2) a taxpayer and certain related trusts; and (3) a taxpayer and an estate in certain situations. · Under Section 1239(c) the term "related entities" means among other things a corporation in which the taxpayer owns (either directly or by attribution) at least 50% of the stock. The attribution rules of Section 267(c) apply for this purpose. · Clearly, the stock owned by taxpayer's children will be attributed to him under the family attribution rules of Section 267(c). · Accordingly, installment treatment would be denied for a sale between the taxpayer and a corporation controlled by his children. Oddly enough, it seems that the taxpayer could sell the property directly to his children as individuals and avoid the restrictions of Section 453(g). The rule was made to prevent a taxpayer from selling depreciable property to an alter-ego type entity, one so closely related to the taxpayer's own tax affairs that the sale is essentially a sale to one's self. While it is true that the children and the taxpayer are related parties, they are nonetheless separate taxpayers. I gather that there is more than one child involved. As such, care should be exercised to avoid doing anything that could be construed as creating a tax partnership between the various children. If selling to the children directly is appealing, then we should discuss this further. Also, what is the effect of depreciation recapture on the amount of gain that could be deferred under the installment sale rules? Finally, would it make any sense just to sell
the underlying land and then lease it back or something of that sort? Non-depreciable
property would not be subject to Section 453(g) and would not create any
problem with depreciation recapture. Obviously, it is the land, not the
structure, that would appreciate in the future. |
