How does the Section 179 family definition, which excludes siblings, influence related party transactions in tax planning?
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The Section 179 family definition, which specifically excludes siblings (brothers and sisters), plays a significant role in determining whether certain transactions between related parties are subject to the related party limitations under Section 179, and this has important implications for tax planning.
1. Section 179 and Related Party Limitations
Section 179 allows taxpayers to elect to expense the cost of qualifying property rather than depreciate it over time. However, to prevent abuse, Section 179 imposes limitations on property acquired from related parties. Specifically, property acquired by purchase from a related person (as defined in Section 267 or 707(b)) does not qualify for the Section 179 deduction.
2. Family Definition under Section 267(c)(4)
Section 179(d)(2) refers to Section 267 for the definition of related parties. Section 267(c)(4) defines "family" for these purposes as including only an individual's spouse, ancestors, and lineal descendants—not siblings. The statute states:
"The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants".
3. Practical Impact: Siblings Are Not Related Parties for Section 179
Because siblings are excluded from the family definition for Section 179 purposes, a purchase of property by one sibling from another is not considered a related party transaction under Section 179. This means:
- If a taxpayer purchases qualifying property from a sibling, the property is not disqualified from Section 179 expensing on the basis of related party rules.
- In contrast, purchases from a spouse, parent, child, or grandchild would be disqualified, as these are included in the family definition.
This distinction is confirmed in IRS guidance and private letter rulings. For example, in PLR 200133030, the IRS analyzed a transaction between brothers and concluded that, due to the family definition, the parties were not related for purposes of the related party rules.
4. Tax Planning Implications
- Flexibility in Family Business Transactions: Siblings can sell qualifying property to each other, and the buyer may claim the Section 179 deduction, provided all other requirements are met. This can be a useful planning tool in family business succession or restructuring.
- Contrast with Other Family Members: The same transaction between a parent and child, or between spouses, would not qualify for Section 179 expensing due to the related party rules.
- No Attribution Through Siblings: The constructive ownership rules do not attribute ownership through siblings for Section 179 purposes, further limiting the scope of relatedness.
5. Limitations and Cautions
- Other Related Party Rules: While siblings are excluded for Section 179, they may be included for other Code sections, so care must be taken in broader tax planning.
- Controlled Group Rules: For corporations, controlled group rules may still apply, but the Section 179 family definition remains relevant for individual and pass-through entity transactions.
6. Example
Suppose Alice and Bob are siblings. Alice owns equipment and sells it to Bob, who uses it in his business. Bob may claim the Section 179 deduction for the equipment, as the purchase is not from a related party under the Section 179 definition. If Alice were Bob’s mother, the deduction would be disallowed.
Summary: The exclusion of siblings from the Section 179 family definition means that transactions between siblings are not subject to the related party disallowance for Section 179 expensing. This provides a planning opportunity for family businesses involving siblings, as such transactions can qualify for immediate expensing, unlike transactions between other close family members such as parents, children, or spouses.
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