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Need help on this project. Should be no longer tha...




Need help on this project. Should be no longer than a page for each memorandum and then the resources part. There are three parts to the project. Each memorandum should be similar to this: August 26, 2010 TAX FILE MEMORANDUM FROM Gillian J. Jones SUBJECT Fred and Megan Taxpayer Engagement Today I talked to Fred Taxpayer with respect to his August 14, 2010 letter requesting tax assistance. He wishes to know if he can sell his stock in Airways Co. to Maple, Inc., and deduct the $2,500 loss on his Airways stock. FACTS Maple, Inc., is owned 50% by Fred and 50% by Megan. Fred wants to continue holding Airways stock in anticipation of a rebound in its value, and that is why he has asked about a proposed sale of this stock to Maple. ISSUE Can shareholders deduct a loss on the sale of an asset to a corporation all of whose stock they own? CONCLUSION Fred should not sell his Airways stock to Maple. Instead, he should sell this stock via his regular broker and either acquire new Airways stock more than 30 days before or after the date of sale, or acquire stock of a similar company. ANALYSIS Section 267(a) provides that no loss will be deductible on a sale or exchange between certain related parties. One of these relationships involves a corporation and a shareholder who owns ??more than 50 percent?? of that corporation?s stock [see ? 267(b)(2)]. Although Fred owns only 50% of Maple, Inc., his wife, Megan, owns the other 50%. The constructive ownership rule of ? 267(c)(2) attributes stock held by family members, and a spouse is part of a taxpayer?s family for this purpose, according to ? 267(c)(4). Consequently, Megan?s stock will be attributed to Fred, who is then treated as owning 100% of Maple, Inc. The related-party disallowance rule would then apply to the loss from Fred?s selling his Airways stock to Maple. Accordingly, Fred must sell this stock to an unrelated party to make his loss deductible. Since Fred really wants to retain an investment in Airways, he can purchase replacement stock either before or after he sells his original Airways stock. Section 1091(a), however, requires that more than 30 days elapse between the purchase and the sale, or the sale and the purchase, as the case may be. Moreover, for this purpose, an option to buy the stock is treated as equivalent to the stock itself. As a result, Fred must wait more than 30 days between transactions and cannot utilize stock options in the interim to minimize his stock market exposure. A final alternative might be to replace the Airways stock with securities of a comparable company in the same industry. Although no two companies are exactly alike, there may be another company whose management philosophy, marketing strategy, and financial data are sufficiently similar to Airways to provide an equivalent return on investment. Under this alternative, Fred could acquire the new company?s shares immediately without waiting the 30 days mandated by ? 1091(a). Despite the two companies? investment similarity, they would not be treated as ??substantially identical?? for this purpose[see Rev.Rul. 59?44, 1959?1 C.B. 205].


Paper#1050 | Written in 18-Jul-2015

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