What does lineal descendant mean on the CPA exam?
Last reviewed
Lineal descendant. A person in the direct downward line from an individual: child, grandchild, great-grandchild. The Sec. 267 family is only siblings, spouse, ancestors, and lineal descendants, so in-laws, nieces, nephews, and cousins fall outside it.
Defined against Sec. 267(c)(4).
Worked example
Martha sells shares with a basis of $50,000 to her grandson for $35,000, their fair market value. Two years later the grandson sells the same shares to an unrelated buyer for $45,000. Neither is a dealer in securities.
Can Martha deduct her loss, and how much gain does her grandson recognize on his later sale?
| Martha's loss on the sale50,000 - 35,000 | 15,000 |
| A grandson is a lineal descendant, so he is family under the related-party rules and Martha's $15,000 loss is disallowed. | |
| Grandson's gain before relief, on his $35,000 cost45,000 - 35,000 | 10,000 |
| Gain recognized after applying Martha's disallowed loss, which exceeds it10,000 - 10,000 | 0 |
Answer: Martha deducts nothing. Her grandson recognizes no gain: his $10,000 gain is offset by her disallowed loss, and the remaining $5,000 of that loss simply disappears.
The trap: Allowing the loss because the price was fair, or treating every relative as family. The list is narrow: siblings, spouse, ancestors and lineal descendants. A sale to a niece or a son-in-law at the same price would let Martha deduct the $15,000.
Based on IRC Sec. 267(b)(1); IRC Sec. 267(c)(4); IRC Sec. 267(d).
Which CPA exam sections use lineal descendant?
Lineal descendant appears in the REG section of the CPA exam.
Related terms
- related person: A person close enough to the taxpayer that the Code distrusts the transaction: family, controlled entities, and certain fiduciaries.