Question

Bank Corp.'s voting stock is owned by the following individuals: Farber, 25%; Farber's mother, 15%;
Farber's father, 40%; and Grosset, an unrelated person, 20%. Farber's sister sold equipment to Bank at a
loss. For the purposes of determining whether the sister's loss is deductible under the related party rules,
what percentage of Bank's stock, if any, does the sister constructively own?
A.0%
B.25%
C.55%
D.80%

Answer 1

Answer:

D) 80%

Explanation:

IRS Section 267(c)(4) establishes that the sister will be considered as constructive owner of the stock that her family owns. Family is defined as brothers (25%), sisters, spouse, ancestors (father 40% and mother 15%),  children, and grandchildren.  

In this case, Farber's sister would constructively own 25% + 40% + 15% = 80% of the bank's stocks.