J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

5.6 Losses May Be Disallowed on Sales to Related Persons

A loss on a sale to certain related taxpayers may not be deductible, even though you make the sale at an arm’s-length price, the sale is involuntary (for example, a member of your family forecloses a mortgage on your property), or you sell through a public stock exchange and related persons buy the equivalent property; see Examples 1 and 2 in this section.

Related parties.

Losses are not allowed on sales between you and your brothers or sisters (whether by the whole or half blood), parents, grandparents, great-grandparents, children, grandchildren, or great-grandchildren. Furthermore, no loss may be claimed on a sale to your spouse; the tax-free exchange rules discussed in Chapter 6 apply (6.7).

A loss is disallowed where the sale is made to your sister-in-law, as nominee of your brother. This sale is deemed to be between you and your brother. But you may deduct the loss on sales to your spouse’s relative (for example, your brother-in-law or spouse’s step-parent) even if you and your spouse file a joint return.

The Tax Court has allowed a loss on a direct sale to a son-in-law. In a private ruling, the IRS allowed a loss on a sale of a business to a son-in-law where it was shown that his wife (the seller’s daughter) did not own an interest in the company. Losses have been disallowed upon withdrawal from a joint venture and from a partnership conducted by members of a family. Family members have argued that losses should be ...