Accounting Articles > Business Continuation Planning:
What is a bona fide transaction?
By definition, transferring your business to a blood relative is not a bona fide or arm's length transaction.
In the event of an estate tax audit, a transaction must be bona fide in order to stand up to scrutiny. If it is found to be non-bona fide, then the applicable estate tax could be imposed.
Let's use an example.
We evaluate a business and determine its value to be $1,000,000, according to the guidelines of The Internal Revenue Service. Prior to the death of the owner, he sells the business to his son for $1. Obviously, this is not a bona fide transaction. What could happen? The estate may have to pay estate taxes on the million dollars.
The transaction has to occur as if a willing seller and a willing buyer had produced it without any time constraints. It has to be a regular market transaction. It also must be economic. Consideration must be exchanged. The business must either be sold, earned, or gifted away.
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