than 50 of the corporations stock a personal service corporation is a

Than 50 of the corporations stock a personal service

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than 50% 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;5. Certain other relationships involving regular corporations, S corporations, partnerships, estates, trusts, and individuals.Disallowed LossesThe taxpayer is not allowed to deduct any loss realized on a sale or exchange of property directly or indirectly to a related taxpayer (as defined 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 the related taxpayer to an unrelated third party.EXAMPLE 6.39 A father owns land that he purchased as an investment for $20,000. He sells the land to his daughter for $15,000, producing a $5,000 loss. The $5,000 loss is not deductible by the father because the transaction is between related taxpayers. Assume, however, that the daughter later sells the property for $22,000. She realizes a $7,000 gain ($22,000 sales price - $15,000 basis). However, her gain is reduced by the $5,000 loss disallowed to her father, so that she recognizes a gain of only $2,000 ($7,000 realized gain - $5,000 previously disallowed loss).EXAMPLE 6.40 Assume the same facts as in the previous example, except that the daughter
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sold the property for only $19,000, rather than $22,000. In this case, she realizes a gain on the sale of $4,000 ($19,000 - $15,000). Again, she is allowed to offset this gain with the disallowed loss previously realized by her father. This reduces her taxable gain to zero (his disallowed loss was $5,000, which is greater than her realized gain of $4,000). Note, however, that the $5,000 disallowed loss is used only to the extent of the daughter’s $4,000 gain. The remaining portion of the disallowed loss ($1,000) cannot be deducted.EXAMPLE 6.41 Susan owns 100% of Equinox Corporation. She sells stock with a basis of $100 to her good friend Teri for $75, generating a $25 loss for Susan. Teri, in turn, sells the stock to Equinox Corporation for $75, thus recouping the amount she paid Susan with no gain or loss. In effect, this transaction is between Susan and her wholly owned corporation —the sale to the corporation is indirect, passing through her friend Teri. Consequently, Susan will not be allowed to deduct her $25 loss on the sale.Unpaid Expenses and InterestPrior to enactment of Code Sec. 267, another tax avoidance device used by related taxpayers involved the use of different accounting methods by each taxpayer. In the typical scheme, a taxpayer’s corporation would adopt the accrual method of accounting while the taxpayer reported on the cash method. The taxpayer could lend money, lease property, provide services, etc., to the corporation and charge the corporation for whatever was provided. As an accrual method taxpayer, the corporation would accrue the expense and create a deduction. The cash method individual, however, would report no income until the corporation’s payment of the expense was actually received. As a result, the corporation could accrue large deductions without
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