Related taxpayers the following taxpayers are deemed

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Related Taxpayers The following taxpayers are deemed to be related for purposes of Code Sec. 267: The following family members – brothers and sisters (including half blood), spouses, ancestors (i.e., (1) parents and grandparents), and lineal descendants (i.e., children and grandchildren); An individual and a corporation if the individual owns, either directly or (2) indirectly , more than 50 percent of the corporation’s stock; An individual and a partnership in which the partner owns more than a 50% interest; (3) A personal service corporation and an employee owner (whether or not he or she owns more than 50% (4) of the corporation’s stock): a personal service corporation is a corporation whose principal activity is the performance of personal services that are performed by the employee owners; Certain other relationships involving regular corporations, S corporations, partnerships, estates, trusts, (5) and individuals. Disallowed Losses The taxpayer is not allowed to deduct any loss realized on a sale or exchange of property directly or indirectly to a related taxpayer (as de fi ned above). However, any loss disallowed on the sale may be used to offset gain (if any) realized on the subsequent sale of the property by a related taxpayer to an unrelated third party. Unpaid Expenses and Interest Code Sec. 267(a)(2) provides that an accrual basis taxpayer can deduct an accrued expense payable to a related cash basis taxpayer only in the period in which the payment is included in the recipient’s income. ¶6785 Payment of Another Taxpayer’s Obligation As a general rule, a taxpayer is not permitted to deduct the payment of expenses incurred by another taxpayer. ¶6795 Capital Expenditures A business expense is not deductible in the year paid or incurred if it can be considered a capital expenditure. Rather, capital expenditures may be deducted ratably over the period for which they provide bene fi ts. Capital Expenditures vs. Repairs No deduction is allowed for betterments made to increase the value of property. Additionally, expenditures substantially prolonging the property’s useful life, adapting the property to a new or different use, or materially adding to the value of the property are not deductible. Reg. § 1.263(a)-1(b). Conversely, the cost of incidental repairs that do not materially increase the value of the property nor appreciably prolong its life, but maintain it in a normal operating state, may be deducted in the current year.
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86 CCH Federal Taxation—Comprehensive Topics Chapter 6 © 2009 CCH. All Rights Reserved. Acquisition Costs As a general rule, costs related to the acquisition of property must be capitalized. This includes sales taxes, freight, demolition of an existing structure in order to build a new one on the site, title fees, and certain legal fees incurred to recover property.
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