Constructive ownership rules and related party transactions.

• Author: Ellentuck, Albert B.

Facts

Martina, Ivan, Boris and Chrissy, who are brothers and sisters, and Jimmy Hana, Steff and Mats, their respective spouses, own equal 12.5% interests in Land Racket, a partnership that owns several parcels of land. One of Land Racket's properties is Plaidacre, an undeveloped parcel. Land Racket's basis in Plaidacre is $28,000.

Martina would like to purchase Plaidacre for its fair market value, and construct and operate a sporting goods store on the site. Consequently, Plaidacre would not constitute a capital asset in Martina's hands, but would be classified as real property used in her trade or business. She has sought the advice of her family's tax adviser in structuring the transaction.

Issue

Will Land Racket recognized capital gain on a sale of Plaidacre to Martina?

Analysis

Tax benefits are restricted in transactions between partnerships and partners who actually or constructively own interests of more than 50% in the partnership's capital or profits. In determining whether a partner has an interest of more than 50% in partnership capital or profits, both interests owned directly by the partner and interests owned by others whose ownership will be attributed to the partner must be considered.

Under the applicable constructive ownership rules, interests owned directly or indirectly by or for a corporation, partnership, estate or trust are considered owned proportionately by or for its shareholders, partners or beneficiaries. In addition, an individual is considered the owner of interests owned directly or indirectly by or for members of the individual's family, which consists of brothers, sisters, spouse, ancestors and lineal descendants.

Interests owned constructively under the first rule may be reattributed without limitation. For example, if a partnership interest is owned by a subsidiary corporation, ownership of the interest will be attributed to that corporation's parent and then reattributed to the parent's shareholders.

The rule relating to family attribution may not be reapplied. Thus, if a person is considered a construction owner of a partnership interest only if the family attribution rules were applied more than once, that person is not a constructive owner of the interest. For example, if a parent owns a partnership interest (or is treated as the owner other than because of family attribution), the parent's children and grandchildren are treated as owners of the interest, but the family...