Video: Disallowed Losses Due to Related Party Transactions

In this lesson, Nick Palazzolo delves into the complexities of related party transactions, with a particular focus on situations where losses are disallowed. He uses a clear example to illustrate the impact of ownership percentages on the tax treatment of transactions, exploring how Lisa's attempt to claim a loss on a sale to a corporation partly owned by her brother Mark raises red flags under tax laws due to their related party status. Nick makes it easy to understand why certain losses can't be used to offset other gains, emphasizing the tax law's intent to prevent the manipulation of financial activities and to promote natural economic transactions. The lesson leaves no stone unturned in explaining the rationale behind the disallowance of such losses and the broader implications for tax planning and reporting.

"Examprep.ai helped me pass all 4 CPA exams on the first try. I highly recommend. I especially like the feedback and ratings the software provides so I know where to focus my time."

Daniel H., CPA

"I can't recommend ExamPrep.ai enough. Nick's lessons turned concepts I struggled with into strengths. I was able to pass FAR right before other exams expired!"

Andrew K, CPA

"I just want to say thank you for the great lesson videos. I couldn't stay awake through lectures of another course. After watching all your FAR lessons I was finally able to pass!"

Alyssa M., CPA Candidate

Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

Cite this lesson

Link to this page

[[ citeExample ]]

Copy to clipboard

Copy URL to clipboard

Copy HTML to clipboard

We are going to see an example here of disallowed losses due to related party transactions. So we've spent so much time calculating what the percentage of the related party is. Now, let's see about any losses actually being disallowed, meaning you can't get the benefit of the losses because you do have related party situations arising. Now, suppose Lisa owns 60 percent of a corporation called LMN Inc. and her brother Mark owns the remaining 40 percent. LMN holds stock in another company, XYZ. Now, Lisa decides to sell her shares in XYZ to LMN at a loss of 15. So first off, I mean, you can just look at this and say, all right, this is probably going to deal with related party. There's a lot of overlap here. We've got a loss. If it was a gain, you'd pay tax there. But a loss. Yeah, we're going to get that benefit disallowed, likely because Lisa and LMN are related parties, as Lisa is going to own more than 50 percent of LMN. The tax law considers this a related party transaction. Consequently, Lisa's 15,000 realized loss, realized it's what really happened, but it's not possibly what's recognized in the books. Loss in the sale of XYZ would be disallowed. The main reason is to prevent her from using the loss to offset other gains because Lisa's got control over these things. Lisa could be using this to manipulate tax situation for other reasons. She has a gain somewhere else. She wants to, you know, take take down with the loss from here. But this is not a real loss because Lisa has control and she's manipulating things. It would essentially allow her to transfer losses between related parties to minimize tax liability. And in this example, the

Unlock the full video transcript and subtitles support with a free account!

Get more from this lesson

Create an account 7-day free trial. No credit card required.

Property Tax: Acquisition and Disposition of Assets

Module: 5 Concepts, 55 Videos

Basis and Holding Period of Assets Overview

0:44

Introduction to Basis and Holding Period of Assets

8:20

Costs Included in a Asset's Taxable Basis

7:24

Examples of Calculating Tax Basis