Question

Marilyn owns land that she acquired three years ago as an investment for 250,000. Because the land has appreciated in value as she anticipated, she sells it to her brother, Amos, for its fair market value of180,000. Amos sells the land two years later for 240,000.

a. Explain why Marilyn's realized loss of70,000 (180,000 amount realized -250,000 adjusted basis) is disallowed.
b. Explain why Amos has neither a recognized gain nor a recognized loss on his sale of the land.
c. Is the family unit treated fairly under the related-party disallowance rule under 267? Explain.
d. Which party wins, and which party loses? How could Marilyn have avoided the loss disallowance on her sale of the land?

Answer 1

Marilyn's realized loss is disallowed due to the related-party disallowance rule. Amos does not have a recognized gain or loss on the sale. The family unit is treated fairly under the related-party disallowance rule.

Step-by-step explanation:

b. Marilyn's realized loss of $70,000 is disallowed because the transaction is between related parties. The related-party disallowance rule under IRC Section 267 prohibits deducting losses on the sale or exchange of property between individuals where there is a direct or indirect relationship. Since Marilyn sold the land to her brother, Amos, the loss is disallowed.

b. Amos does not have a recognized gain or loss on the sale of the land because the fair market value he sold it for ($240,000) is less than the original purchase price ($250,000). According to the related-party disallowance rule, any loss or gain is disregarded on the sale of property between related parties.

c. The related-party disallowance rule is designed to prevent related parties from artificially shifting tax consequences through the sale of property. In this case, Marilyn and Amos are family members, so the disallowance rule applies to their transaction. The rule ensures that tax benefits are not abused in family transactions.

d. In this case, Marilyn loses because she cannot deduct the loss on the sale of the land. Amos neither wins nor loses because he does not have a recognized gain or loss. Marilyn could have avoided the loss disallowance by selling the land to an unrelated third party.