How should tax planning strategies be adjusted given that siblings are not considered family under Section 179?
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Tax planning strategies involving Section 179 expensing must recognize that, for purposes of the related-party rules, siblings are not considered “family” under Section 179. This distinction is critical when determining whether property is “acquired by purchase” and thus eligible for the Section 179 deduction.
Legal Framework
Section 179 Related-Party Rules
- Section 179(d)(2)(A): Property is not considered “acquired by purchase” if it is acquired from a person whose relationship to the acquirer would result in the disallowance of losses under Section 267 or 707(b).
- Section 267(c)(4) (as modified for Section 179): For Section 179, the family of an individual includes only the taxpayer’s spouse, ancestors, and lineal descendants—not siblings.
- Treasury Regulation § 1.179-4(c)(1)(ii): Clarifies that, for Section 179, a purchase from a brother or sister qualifies as a purchase, because siblings are not included in the definition of “family” for this purpose.
Practical Implications for Tax Planning
1. Transfers Between Siblings
- Eligible for Section 179: If a taxpayer acquires property from a sibling, the acquisition is generally considered a purchase for Section 179 purposes, provided all other requirements are met. This is because siblings are not included in the restricted family group under Section 267(c)(4) as applied to Section 179.
- Planning Opportunity: Taxpayers can structure sales or transfers of depreciable business property between siblings without running afoul of the related-party purchase restriction that would otherwise disqualify the property from Section 179 expensing.
2. Transfers Among Other Family Members
- Not Eligible for Section 179: Transfers between spouses, ancestors (parents, grandparents), or lineal descendants (children, grandchildren) are not considered purchases for Section 179 purposes. Property acquired from these family members is not eligible for Section 179 expensing.
3. Planning Strategies
- Sibling-to-Sibling Sales: When business succession or asset transfers are contemplated within a family, consider structuring the transaction between siblings rather than between parents and children or between spouses, if Section 179 expensing is a priority.
- Documentation: Ensure that the transaction is a bona fide sale for fair market value and that the acquiring sibling will use the property in an active trade or business.
- Avoiding Disqualification: Do not structure the transaction in a way that would cause the property’s basis to be determined by reference to the transferor’s basis (e.g., gifts, certain corporate or partnership transfers), as this would also disqualify the property from Section 179 expensing.
4. Controlled Groups
- Controlled Group Rules: If siblings each own more than 50% of a corporation, the controlled group rules may apply, but for purposes of the related-party purchase rule under Section 179, the sibling relationship itself does not disqualify a purchase.
Summary: Tax planning should take advantage of the fact that siblings are not considered family for Section 179 related-party rules. This allows for Section 179 expensing on property acquired from a sibling, provided all other requirements are met. In contrast, property acquired from a spouse, ancestor, or lineal descendant is not eligible. Careful structuring and documentation are essential to ensure compliance and maximize the Section 179 deduction.
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