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[answered] March 5, 2016 TAX FILE MEMORANDUM From: Bridget McGuffin Su

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March 5, 2016




From: Bridget McGuffin Subject: Sara Colter


Engagement Research Conclusions Summary of Facts


Sara Colter is considering a sale of 12 acres of undeveloped land to CCM Inc. at a proposed price of $325,000. The land was purchased in 2005 for $400,000 as a long?term investment from unrelated sellers, Mr. and Mrs. Bianca. Ms. Colter has made no improvements to the land since the date of purchase and has neither purchased nor sold any other real estate with the exception of her personal residence. CCM Inc. is a closely held corporation with 1,000 shares of stock outstanding. Ms. Colter is not


a shareholder of CCM; however, her brother Jack Colter and his son Robert Colter own 350 and 200 shares, respectively. Ms. Colter is not acquainted with any other CCM shareholders. Research Issue


Is Ms. Colter entitled to recognize any realized loss on sale of the land? Law and Analysis


Under Section 1001 of the Internal Revenue Code of 1986, Ms. Colter will realize a $75,000 loss on the proposed sale of the land equal to the excess of her adjusted basis in the land ($400,000 purchase price) over the amount realized on the sale ($325,000 proposed sales price). However, Section 267(a)(1) provides that no deduction is allowed for a loss from the sale or exchange of property between related parties, as defined in subsection (b) of Section 267. For this purpose, related parties include an individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual. Although Ms. Colter does not directly own any stock in CCM Inc., we must consider whether ownership of CCM stock by her brother and nephew constitutes indirect ownership


of more than 50 percent of the value of CCM stock.


Section 267(c)(2) provides that, in determining indirect ownership for purposes of Section 267(b), an individual is considered as owning the stock owned, directly or indirectly, by or for his family. Under Section 267(c)(4), family includes an individual?s brothers, sisters, spouse, ancestors, and lineal descendants. Thus, Sara Colter is considered to own indirectly the stock owned by her brother Jack Colter, but not the stock owned by her nephew, Robert Colter. Note that Jack Colter would be considered to indirectly own the stock owned by his son, Robert Colter. However, under Section 267(c)(5), Jack?s indirect ownership of these shares is disregarded in determining Sara?s ownership. Thus, Sara Colter indirectly owns 350 shares of CCM Inc., equaling 35 percent of its 1,000 outstanding shares of stock. Because Ms. Colter?s ownership of CCM is less than 50 percent, the related party loss disallowance rule of Section 267(a) does not apply.


Page 112 Ms. Colter?s recognized loss is considered a capital loss if the land is considered a capital asset under Section 1221. The land is not a capital asset if it is considered property held for sale to customers [Section 1221(a)(1)]. This determination has been the topic of numerous judicial decisions. One recent case, James E. Zurcher Jr. v.Commissioner, T.C. Memo 1997?203, states in part:


Whether the Property is a capital asset or was instead held primarily for sale in the ordinary course of petitioner?s business is a factual determination. ? Courts have developed the following nonexclusive factors to assist in this determination: (1) The nature of the taxpayer?s business; (2) the taxpayer?s purpose in acquiring and holding the property; (3) subdivision, platting, and other improvements tending to make the property more marketable; (4) the frequency, number, and continuity of sales; (5) the extent to which the taxpayer engaged in the sales activity; (6) the length of time the property was held; (7) the substantiality of income derived from the sales, and what percentage the income was of the taxpayer?s total income; (8) the extent of advertising and other promotional activities; and (9) whether the property was listed directly or through brokers.


Ms. Colter?s stated purpose in acquiring the land was to hold it as a long?term investment. She has made no improvements to the property, engaged in no other real estate sales (other than of her personal residence), does not derive a substantial portion of her income from such sales, and does not advertise or


promote real estate activities. These facts support the conclusion that Ms. Colter did not hold the land for sale in the ordinary course of business and thus the land is a capital asset. Conclusions


Ms. Colter will recognize a $75,000 capital loss. Because she held the land for more than one year, the loss will be a long?term capital loss. If the loss exceeds any recognized capital gains, under Section 1211(b) she may deduct $3,000 of the excess in computing adjusted gross income. Any nondeductible loss may be carried forward into subsequent taxable years.


You also write the following letter to Sara Colter:


March 5, 2016


Ms. Sara Colter


1812 Riverbend Place


Kirkwood, MO 62119


Dear Ms. Colter:


This letter is in response to your inquiry concerning the tax consequences of a proposed sale of 12 acres of undeveloped land to CCM Inc. Before stating my conclusions, I?d like to summarize the facts of your case. You purchased the land in 2005 as a long?term investment. The purchase price was $400,000 and the sellers of the property, Mr. and Mrs. Bianca, are unrelated to you. You have not improved the land in any way since date of purchase and have neither purchased nor sold any other real estate with the exception of your personal residence. CCM Inc. is a closely held corporation with 1,000 shares of outstanding stock. Although you do not own any shares, your brother Jack Colter and his son Robert Colter own 350 and 200 shares, respectively. You are not acquainted with any other CCM stockholders. The accuracy of my conclusions depends entirely on my understanding of these facts. Consequently, if the statement of facts is in any way incorrect or incomplete, please notify me immediately. If you sell your land to CCM Inc. for the proposed contract price of $325,000, you will realize a $75,000 loss. This loss equals the excess of your $400,000 investment in the land over the $325,000 cash you will


receive at closing. You are allowed to report this loss on your individual tax return in the year of sale unless you and CCM Inc. are ?related parties? within the meaning of the tax law. According to my research, you and CCM Inc. do not meet the statutory definition of ?related parties,? even though your brother and nephew own an aggregate 55 percent interest in CCM Inc. Therefore, you can report your $75,000 loss for tax purposes. Because you held the land for investment and owned it for more than one year, the loss is classified as a long?term capital loss. You can deduct a long?term capital loss to the extent of your capital gains for the year. If your capital loss exceeds your capital gains, you can deduct only $3,000 of the excess loss against other sources of income.


Page 113 Thank you for giving my firm the opportunity to advise you in this matter. If you have any questions about my conclusions, please don?t hesitate to call me. If you proceed with your plans to sell the land, I would be


glad to meet with you to develop a strategy to maximize your deduction for the projected $75,000 capital loss.




Bridget McGuffin


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