Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale orexchange of property between related persons. If these rules apply,gains may be treated as ordinary income and losses may not bedeductible. See Transfers to Spouse in chapter 1for rulesthat apply to spouses. Gain Is Ordinary Income If a gain is recognized on the sale or exchange of property to arelated person, the gain may be ordinary income even if the propertyis a capital asset. It is ordinary income if the sale or exchange is adepreciable property transaction or a controlled partnershiptransaction. Depreciable property transaction.Gain on the sale or exchange of property, including a leasehold ora patent application, that is depreciable property in the hands of theperson who receives it is ordinary income if the transaction is eitherdirectly or indirectly between any of the following pairs of entities. A person and the person's controlled entity orentities. A taxpayer and any trust in which the taxpayer (or his orher spouse) is a beneficiary unless the beneficiary's interest in thetrust is a remote contingent interest, that is, the value of theinterest computed actuarially is 5% or less of the value of the trustproperty. An executor and a beneficiary of an estate unless the saleor exchange is in satisfaction of a pecuniary bequest. An employer (or any person related to the employer underrules (1), (2), or (3)) and a welfare benefit fund (within the meaningof section 419(e) of the Internal Revenue Code) that is controlleddirectly or indirectly by the employer (or any person related to theemployer). A person's controlled entity is either of the following. A corporation in which more than 50% of the value of alloutstanding stock, or a partnership in which more than 50% of thecapital interest or profits interest, is directly or indirectly ownedby or for that person. An entity whose relationship with that person is one of thefollowing. A corporation and a partnership if the same persons own morethan 50% in value of the outstanding stock of the corporation and morethan 50% of the capital interest or profits interest in thepartnership. Two corporations that are members of the same controlledgroup as defined in section 1563(a) of the Internal Revenue Code,except that "more than 50%" is substituted for "at least 80%"in that definition. Two S corporations, if the same persons own more than 50% invalue of the outstanding stock of each corporation. Two corporations, one of which is an S corporation, if thesame persons own more than 50% in value of the outstanding stock ofeach corporation. Controlled partnership transaction.A gain recognized in a controlled partnership transaction may beordinary income. The gain is ordinary income if it results from thesale or exchange of property that, in the hands of the party whoreceives it, is a noncapital asset such as trade accounts receivable,inventory, stock in trade, or depreciable or real property used in atrade or business. A controlled partnership transaction is a transaction directly orindirectly between either of the following pairs of entities. A partnership and a partner who directly or indirectly ownsmore than 50% of the capital interest or profits interest in thepartnership. Two partnerships, if the same persons directly or indirectlyown more than 50% of the capital interests or profits interests inboth partnerships. Determining ownership.In the above transactions, use the following rules to determine theownership of stock or a partnership interest. Stock or a partnership interest directly or indirectly ownedby or for a corporation, partnership, estate, or trust is consideredowned proportionately by or for its shareholders, partners, orbeneficiaries. (However, for a partnership interest owned by or for aC corporation, this applies only to shareholders who directly orindirectly own 5% or more in value of the stock of thecorporation.) An individual is considered as owning the stock orpartnership interest directly or indirectly owned by or for his or herfamily. Family includes only brothers, sisters, half-brothers,half-sisters, spouse, ancestors, and lineal descendants. For purposes of applying (1) or (2) above, stock or apartnership interest constructively owned by a person under(1) is treated as actually owned by that person. But stock orpartnership interest constructively owned by an individual under (2)is not treated as owned by the individual for reapplying (2) to makeanother person the constructive owner of that stock or partnershipinterest. Nondeductible Loss A loss on the sale or exchange of property between related personsis not deductible. This applies to both direct and indirecttransactions, but not to distributions of property from a corporationin a complete liquidation. The following are related persons. Members of a family, including only brothers, sisters,half-brothers, half-sisters, spouse, ancestors (parents, grandparents,etc.), and lineal descendants (children, grandchildren, etc.). An individual and a corporation if the individual directlyor indirectly owns more than 50% in value of the outstanding stock ofthe corporation. Two corporations that are members of the same controlledgroup as defined in section 267(f) of the Internal RevenueCode. A trust fiduciary and a corporation if the trust or thegrantor of the trust directly or indirectly owns more than 50% invalue of the outstanding stock of the corporation. Ponta luxury hotelsA grantor and fiduciary, and the fiduciary and beneficiary,of any trust. Fiduciaries of two different trusts, and the fiduciary andbeneficiary of two different trusts, if the same person is the grantorof both trusts. A tax-exempt educational or charitable organization and aperson who directly or indirectly controls the organization, or amember of that person's family. A corporation and a partnership if the same persons own morethan 50% in value of the outstanding stock of the corporation and morethan 50% of the capital interest or profits interest in thepartnership. Two S corporations if the same persons own more than 50% invalue of the outstanding stock of each corporation. Two corporations, one of which is an S corporation, if thesame persons own more than 50% in value of the outstanding stock ofeach corporation. An executor and a beneficiary of an estate unless the saleor exchange is in satisfaction of a pecuniary bequest. Two partnerships if the same persons directly or indirectlyown more than 50% of the capital interests or profits interests inboth partnerships. A person and a partnership if the person directly orindirectly owns more than 50% of the capital interest or profitsinterest in the partnership. If a sale or exchange is between any of these related persons andinvolves the lump-sum sale of a number of blocks of stock or pieces ofproperty, the gain or loss must be figured separately for each blockof stock or piece of property. The gain on each item is taxable. Theloss on any item is nondeductible. Gains from the sales of any ofthese items may not be offset by losses on the sales of any of theother items. Partnership interests.Hotels in HajduszoboszloThe nondeductible loss rule does not apply to a sale or exchange ofan interest in the partnership between the related persons describedin (12) or (13) above. Controlled groups.Losses on transactions between members of the same controlled groupdescribed in (3) above are deferred rather than denied. For more information, see section 267(f) of the Internal RevenueCode. Ownership of stock or partnership interests.In determining whether an individual directly or indirectly ownsany of the outstanding stock of a corporation or an interest in apartnership for a loss on a sale or exchange, the following rulesapply. Stock or a partnership interest directly or indirectly ownedby or for a corporation, partnership, estate, or trust is consideredowned proportionately by or for its shareholders, partners, orbeneficiaries. (However, for a partnership interest owned by or for aC corporation, this applies only to shareholders who directly orindirectly own 5% or more in value of the stock of thecorporation.) An individual is considered as owning the stock orpartnership interest directly or indirectly owned by or for his or herfamily. Family includes only brothers, sisters, half-brothers,half-sisters, spouse, ancestors, and lineal descendants. An individual owning (other than by applying (2)) any stockin a corporation is considered to own the stock directly or indirectlyowned by or for his or her partner. For purposes of applying (1), (2), or (3), stock or apartnership interest constructively owned by a person under (1) istreated as actually owned by that person. But stock or a partnershipinterest constructively owned by an individual under (2) or (3) is nottreated as owned by the individual for reapplying either (2) or (3) tomake another person the constructive owner of that stock orpartnership interest. Indirect transactions.You cannot deduct your loss on the sale of stock through yourbroker if under a prearranged plan a related person or entity buys thesame stock you had owned. This does not apply to a cross-trade betweenrelated parties through an exchange that is purely coincidental and isnot prearranged. Property received from a related person.If, in a purchase or exchange, you received property from a relatedperson who had a loss that was not allowable and you later sell orexchange the property at a gain, you recognize the gain only to theextent it is more than the loss previously disallowed to the relatedperson. This rule applies only to the original transferee. Example 1.Your brother sold stock to you for $7,600. His cost basis was$10,000. His loss of $2,400 was not deductible. You later sell thesame stock to an unrelated party for $10,500, realizing a gain of$2,900 ($10,500 - $7,600). Your recognized gain is only $500,the gain that is more than the $2,400 loss not allowed to yourbrother. Example 2.Assume the same facts as in Example 1, except that you sell thestock for $6,900 instead of $10,500. Your recognized loss is only $700($7,600 - $6,900). You cannot deduct the loss not allowed toyour brother.