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Wash Sale CPA discusses Bending the Related Party Rule for Controlled Corporations

wash sale CPA in Wilmington NC

Gary Bode, CPA: I try to stay abreast of gray areas in the tax code. For a free phone consult please call 399-2705.

This is an academic exercise showing that IRS wash sale rules, on re-acquisitions of identical securities by your controlled corporation, could be challenged. It is meant to show that, sometimes, the IRS can be challenged over ambiguous rules. And that a great CPA is aware of these potential opportunities. I am not advocating challenging wash sale rules deliberately. Every case is different. You cannot reasonably base a wash sale rule attack based on this post alone. Even when a wash sale could exploit this gray area, the financial consequences of pursuing it might be impractical. No one challenges the IRS on a whim.

I’m assuming that you understand wash sale basics. Buying, selling and re-purchasing identical securities are logical components of investing. The IRS’ forbidden period and tax consequences are only part of the wash sale scenario. No wash sale CPA advocates deliberately bending the rules. No wash sale CPA advocates fighting the IRS over some trivial disallowed loss. But what about, say, a $300,000 loss, potentially worth $90,000 in tax savings?

Related Party Wash Sales

So, let’s say there is some trading miracle in which you sell recently purchased stock at a loss. But, then a situation occurs where you could make a killing buying it back within the forbidden period. Logic dictates that making a profit and paying taxes on it is better than not making any profit at all. But how would you re-acquire it for the best chance of challenging the IRS rule? Would you buy it back personally? Would you have your spouse buy it back and file separate returns? How about your closely held corporation? Each of these violate IRS Publication 550 rules but they all allow some tax benefit as a fallback strategy.

What about buying it through your IRA? Definitely not. If your challenge to the rule fails, there is no fallback strategy. Your loss just disappears without any tax benefit.

The strongest position would be your controlled corporation re-acquiring identical securities, if the profit potential warrants violating IRS wash sale timing. The underlying tax precedent against controlled corporations is a 1935 tax case based on predecessor regulations to the (current) IRS Sec. 1091, enacted in 1956. And IRS Sec. 1091 doesn’t discuss related party transactions. If your completed wash sale transaction fits this fact pattern, and the tax consequences call for an IRS challenge, you might consider challenging it. But be ready for an expensive fight.

“A good CPA understands IRS Publication 550. A better CPA looks for gray areas behind the instructions.” 
– Gary Bode, wash sale CPA and tax accountant

For a free phone consult, please call (910) 399-2705.

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