Discussion:Homebuyers credit and related parties?

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Discussion Forum Index --> Basic Tax Questions --> Homebuyers credit and related parties?


Discussion Forum Index --> Tax Questions --> Homebuyers credit and related parties?

Scottycoyote (talk|edits) said:

9 June 2009

Situation.....a client got married on april 1 2009 and closed on a home bought from her new spouse's grandparents on april 20, 2009. Shes been told she still qualifies for the homebuyer credit, but best as i can see (irc267), her spouse's grandparents become related parties to her thru marriage so she doesnt qualify. The only way i see how that could have worked would be if they had closed on the house BEFORE they married, then she would have qualified (he still wouldnt because they are his grandparents). Am i looking at this wrong? Once you marry, you become one unit and its your brothers/sisters and lineal decendants that become your family (related parties).

Riley2 (talk|edits) said:

9 June 2009
Just to clarify, brothers and sisters are not related parties for purposes of the Sec. 36 credit.

I believe that the credit is out of the question if they file a joint return. However, reading Sec. 36, it would seem that the husband would qualify for a $4,000 credit since he is not related to his spouse's grandparents.

Scottycoyote (talk|edits) said:

10 June 2009
where did you find that riley? i was reading some faq's and it gave a specific example of a brother selling a house to his brother and it not qualifying b/c they are related parties.

i thought once a couple gets married, his grandparents are her grandparents for related party rules, so if they bought the house AFTER they marry, looks like neither would qualify for the credit due to related party. If they had remained unmarried and bought it, or bought it before they married, then i believe she could receive the entire $8k credit (the house was his grandparents, not hers)?

RoyDaleOne (talk|edits) said:

10 June 2009
Sec. 36(c)(5) RELATED PERSONS.
    A person shall be treated as related to another person if the 
    relationship between such persons would result in the disallowance of 
    losses under section 267 or 707(b) (but, in applying section 267(b) 
    and (c) for purposes of this section, paragraph (4) of section 267(c) 
    shall be treated as providing that the family of an individual shall 
    include only his spouse, ancestors, and lineal descendants).

http://www.andrewmitchel.com/html/topic.html

See Section 267 chart.

Section 267(c)(4) (4) The family of an individual shall include only his brothers and

    sisters (whether by the whole or half blood), spouse, ancestors, and 
    lineal descendants; and

Scottycoyote (talk|edits) said:

10 June 2009
thanks for the responses guys, i dont know if its just unclear or if im just thick,ive read267 and 707 and done numerous searches but I still cant find the answer to this question......

each person has their family (brothers, sisters, lineal decendants). When one person marries another person, are the families comingled in regards to related party rules. In other word......Tom has grandparents.....Susan has grandparents.......tom marries susan. Now is toms grandparents related parties to susan and vice versa.....or not.

RoyDaleOne (talk|edits) said:

10 June 2009
Is Tom's grandparents' relationship to Susan in the form of, spouse, lineal ancestor, or a lineal descendant? Or the inverse of Susan's grandparents to Tom? Lineal means in a straight line. If the answer is no, then except at family parties, weddings, and other get to gathers there is no commingling.

Well, you opened the door as they say.

Scottycoyote (talk|edits) said:

10 June 2009
ok thanks roy, thats what i wanted to know :)

Riley2 (talk|edits) said:

11 June 2009
Scotty, an in-law is not a related party. See Stern v Commissioner, 46 AFTR 584 (215 F.2d 701), (CA3), 09/17/1954.

Sw (talk|edits) said:

2009-06-11
So if in-law are not a related party and susan buy the home from Tom's grandparents and both qualify otherwise then Susan can qualify for the $8000. credit???

Riley2 (talk|edits) said:

12 June 2009
If Susan files a separate return, yes.

TAXBILLY (talk|edits) said:

12 June 2009
If Susan files a separate return the credit is limited to the lower of 10% or $4000.

taxbilly

LJACPA (talk|edits) said:

22 June 2009
I'm almost hesitant to bring this discussion back up as it is so confusing and seems kind of contradictory (still am not sure if they file a separate return if each would qualify? Seems like only she would...). Regardless, I know that related party as it relates to this credit includes an individual and a corporation which is 50+% owned by that individual. But, that's "direct or indirect" ownership, so does that mean that a parent who owns an S corporation 100% and the corporation owns a home and sells to the son of the 100% shareholder, the son would not qualify? Is that clear as mud? I don't think the son would qualify because he indirectly owns (267(c)(2)) - maybe???

Riley2 (talk|edits) said:

23 June 2009
Under 267(c)(2), the son is a 100% shareholder for purposes of the Sec. 36 credit. Thus, no credit is allowed.


Nora (talk|edits) said:

30 June 2010
This is how I read Section 36(c)(3)(A)(i) - the term "purchase" means any acquisition, but only if the property is not acquired from a person related to the first time homebuyer (or the first time homebuyer's spouse). Accordingly, if the property is acquired from a person related to the first time homebuyer's spouse, it is not a "purchase." Thus, the acquisition by daughter-in-law from husband's grandparents (ancestors) is not a purchase and doesn't qualify for the credit.

I have a different situation. Unmarried Mother-in-law acquires property from son-in-law's disregarded LLC. In this case son-in-law is not a lineal descendent of mother-in-law, so when mother-in-law buys home from disregarded LLC/son-in-law, this does qualify as a purchase because the property is not acquired from a person related to the first-time home buyer. A disregarded LLC is not a partnership and it does not issue stock, so there is no attribution to daughter who does not own any of disregarded LLC. I think the answer changes if the disregarded LLC is owned by an S corporation owned by son-in-law, because daughter would be considered to own stock owned by her spouse. What do you think?

DaveFogel (talk|edits) said:

1 July 2010
I'm not sure that this qualifies. Members of a family include the taxpayer, spouse, ancestors and lineal descendants under IRC §36(c)(5). Wouldn't that include the mother-in-law (daughter's mother), daughter and son-in-law (daughter's spouse)?

Nora (talk|edits) said:

1 July 2010
There seem to be some old cases and revenue rulings that allow deductions for losses incurred on a sale to an inlaw under Section 267 - I have not been able to locate and verify these. I am relying principally on Tax Analysts Doc 2005-25317 (3 pgs) as excerpted on this blog http://taxprof.typepad.com/taxprof_blog/files/2005-25317-1.pdf which lists the following:

LTR 9017008 (Jan. 24, 1990), declined to disallow a deduction for a loss sustained by a taxpayer on the sale of stock to his son-in-law.

Simister v. Commissioner, 4 T.C. 470 (1944) (a loss sale of property by a father to his daughter and son-in-law in which the buyers acquired the property as tenants in common was governed by section 267’s predecessor only to the extent of the portion of the loss attributable to the sale to the daughter; the portion of the loss attributable to the sale to the son-inlaw (the court stated that tenants in common hold, unless the governing instrument provides otherwise, an equal share or interest in the common property) was not disallowed because one’s son-in-law, not being a lineal descendant, cannot be regarded as a member of one’s family). See also Rev. Rul. 71-50, 1971-1 C.B. 106 (taxpayer sustained a loss from the sale of stock to his stepmother, and the loss was not precluded by section 267(a) because one’s stepmother is not a member of one’s family; she is not, with respect to her stepson, an ancestor). See also Rev. Rul. 77-439, 1977-2 C.B. 85 (section 267(a) does not disallow a loss from the sale of property between an estate and the executor of that estate (who, in this case, was a child of the decedent); the sale is not between related parties described in section 267(b), but between an estate and an individual). See Estate of Hanna v. Commissioner, 320 F.2d 54 (6th Cir. 1963).

Nora (talk|edits) said:

1 July 2010
See also Stern v. Commissioner of Internal Revenue, 215 F.2d 701 (3d Cir. 1954) http://ftp.resource.org/courts.gov/c/F2/215/215.F2d.701.11226.html for the proposition that a son-in-law is not family within the meaning of the old 267. Of course, this was under an old code section (24(b)(2)(D)) and I don't know if the code has been amended sufficiently to make this bad law or if the old case has been overruled.

Complicating matters in my situation is the fact that a single member disregarded LLC owned by a corporation more than 50% of which was owned by son-in-law was actually the seller. In that case, I believe that the attribution rules of 267 would cause daughter to be treated as owning the stock of the deemed seller (per 267(c)(2)), so that the sale would be deemed between mother and daughter's corporation, rather than mother and son-in-law. (The stock can't be reattributed to mother through reapplication of 267(c)(2) per 267(c)(5), so in no event is mother considered to own stock owned by son-in-law, assuming inlaws still are not family under current law).

My next question is - under 267(a)(1), clearly a loss on a sale between an individual and a corporation more than 50% in value of the outstanding stock of which is owned, directly or indirectly by or for such individual would be disallowed because that relationship is described in Section 267(b)(2), however, I am not clear that sale between corporation and family member is disallowed. Are the numbered paragraphs of 267(b) all read together or separately? Under 267(b) a sale between members of a family is disallowed. Under 267(b)(2) a sale between an individual and a corporation in which they own more than 50% of the value of the stock is disallowed, but I am not sure if a sale between a family member (b)(1) and a corporation owned by a family member (b)(2) is disallowed, where the stock can't be reattributed to that family member per (c)(5).

Trillium (talk|edits) said:

1 July 2010
Nora, when was the home purchased? Take a look at Sec. 36(c)(3)(A)(i) before and after the changes from HR 3548. If home was purchased before that change became effective - the discussion above from June 2009 addresses the in-law issue according to Sec. 36 at that time. If after - obviously it's a different story.

Nora (talk|edits) said:

1 July 2010
Trillium, the home was purchased in June 2010, pursuant to binding contract entered into by April 30, 2010.

Nora (talk|edits) said:

1 July 2010
Trillium,

I think the amendment to 36(c )(3)(A) (i) was poorly written and vague. As you will note, it says "the property is not acquired from a person related to the person acquiring such property (or, if married, such individual's spouse),"

Thus, it is not clear whether it applies to buyer's spouse, seller's spouse or both. The problem is the use of the word "individual" rather than the word "person."

If it had said "person's spouse" then I would agree that the term "spouse" means the spouse of the buyer or the seller, however, because it says "individual's spouse" I would argue that it means the buyer's spouse only and not the seller's spouse. This is because the definition of first time homebuyer is an "individual" and the specific use of the word individual in this context, when they could have used the word "person" makes me believe they did not intend to cover the seller's spouse, but were only concerned with the buyer's spouse.

Trillium (talk|edits) said:

1 July 2010
Okay, now I see your point about how the law now differs depending on which generation is buying. Prior to Nov 6, 2009, purchases from or by in-laws were qualified purchases (although that may not have been intended). With HR 3548, the loophole was closed with regard to purchases from a parent-in-law, but perhaps not for purchases from a child-in-law.

Even if that's the case, though, you need to know if you're correct about none of the son's ownership of the LLC being constructively attributed to the daughter, and offhand I don't think you are right about that, but others will be much more able to address that point authoritatively.

Nora (talk|edits) said:

1 July 2010
Might as well continue this discussion: Under Reg. 1.267(c)-1 Example 1 applies constructive ownership of stock within a family and concludes that wife's stock is constructively owned by wife's father, but husband's stock is not constructively owned by wife's father. Thus, a deduction would be allowed for a loss on an arms-length sale between husband and wife's father and between wife's father and husband's corporation.

Applying this to my fact pattern, husband's stock is constructively owned by wife per 267(c)(2), but the constructive ownership is not considered as actual ownership for the purpose of again applying the family ownership rule to make wife's mother the constructive owner of husband's stock per 267(c)(5). Because wife's mother does not own stock in husband's corporation (actually or constructively), a loss on a sale between husband's corporation and wife's mother would not be disallowed as a deduction under Section 267.

Because a loss would not be disallowed under 267 on a sale from husband's corporation to wife's mother, they are not considered "related" under Section 36(c)(5). Accordingly, a sale from husband's corporation to wife's mother qualifies as a "Purchase" under Section 36(c)(3) and can qualify for the first time homebuyer credit (assuming all other requirements are met).

Trillium (talk|edits) said:

1 July 2010
If daughter constructively owns the LLC that would sell the home to the mother, then it's a sale not just from son-in-law to mother-in-law, but also from daughter to mother, which would disqualify it for the FTHB credit.

Nora (talk|edits) said:

1 July 2010
Even though daughter constructively owns the LLC through her constructive ownership of its single member (the corporation), a loss on the sale from LLC to mother would not be disallowed under Reg. Section 1.267(c)-1, because daughter's constructive ownership is not reattributed to mother. Thus, they aren't related under Section 36(c)(5).

This is not a case of stock owned by a corporation being attributed to its shareholders under 267(c)(1), because an LLC doesn't issue stock. Further, a single member LLC is not a partnership.

R2 (talk|edits) said:

6 July 2010
If son-in-law purchases from mother-in-law, the credit would be disallowed If mother-in-law purchases from son-in-law, the credit would be allowed. Who says the law must be symmetrical?

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