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What is a bona fide transaction?

All transactions must be arm's length, or bona fide, in order for them to stand up to audit. By definition, all transactions between blood relatives are not bona fide, unless they can be proven otherwise.

Let's use an example. We have a business where after doing an evaluation under the guidelines of The Internal Revenue Service, we have determined that the business is valued at $1,000,000. Prior to the death of the owner, he sells the business to his son for $1. Obviously not a bona fide transaction. What could happen? The estate might have to pay estate taxes on the bona fide value of the business, or additional tax on one million dollars.

The transaction has to occur as if a willing seller and a willing buyer had produced this transaction without any time constraints. It also must be economic. Consideration must be exchanged. The business must either be sold, earned, or gifted away.

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