Small Businesses and Related-Party Transactions

gavelA recent Tax Court case highlights pitfalls frequently encountered by small businesses that engage in related-party transactions without appropriate planning. Povolny Group, Inc., T.C. Memo. 2018-37, an engaging opinion by Judge Mark V. Holmes, provides a helpful case-study of the following four issues:

1. Whether an entity's repayment of the debt of its sister entity constitutes a fresh loan between the entities, or a contribution to the second entity's capital;

2. Whether a contribution of capital constitutes a constructive dividend to the common shareholder;

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