In family-owned and closely held businesses, related-party transactions are common and often legitimate. However, under Internal Revenue Code Section 267, even properly structured deals can trigger unexpected tax consequences.

For business owners and tax professionals, understanding these rules is essential. What appears routine can result in denied losses, delayed deductions, and costly surprises.

What Is IRC Section 267?

Section 267 is designed to prevent tax benefits from transactions between related parties. The rule focuses on the relationship between the parties, not whether the deal was conducted at fair market value.

It primarily does two things:

1. Disallows Losses Between Related Parties

If you sell property at a loss to a related party, the deduction is generally denied.

Example:
Selling stock worth $10,000 to your brother for $8,000 results in a nondeductible $2,000 loss.

If the buyer later sells to an unrelated party at a gain, the previously disallowed loss may offset that gain. If the buyer sells at a loss, the original loss is permanently lost.

2. Delays Deductions for Unpaid Related-Party Expenses

Section 267 enforces a matching rule. An accrual-method taxpayer generally cannot deduct an accrued expense owed to a cash-method related party until the related party reports the income.

This prevents timing mismatches between deductions and income.

Who Is a Related Party?

The definition is broader than many expect. Related parties include:

• Spouses (unless legally separated)

• Parents and grandparents

• Children and grandchildren

• Siblings

• Corporations more than 50 percent owned by an individual

• Certain trusts, partnerships, and controlled corporate groups

Indirect ownership can also trigger related-party status.

The Attribution Trap

Section 267’s constructive ownership rules can deem you to own interests held by family members or entities.

Family attribution: You are treated as owning stock held by your spouse, parents, children, grandchildren, and siblings.

Entity attribution: Ownership held by partnerships, corporations, and trusts flows proportionally to owners and beneficiaries.

Not attributed: Ownership generally does not flow from individuals down to entities, options are not treated as owned stock, and in-laws are not considered family under Section 267.

Planning Tips for Business Owners

• Identify related parties before completing transactions

• Monitor the 50 percent ownership threshold

• Consider restructuring ownership when appropriate

• Avoid loss sales within the family when deductions matter

• Coordinate accrual and cash method timing

• Maintain strong documentation and fair market value support

Key Takeaway

Section 267 is a quiet but powerful rule that can undo otherwise sound transactions. The IRS focuses on relationships and deemed ownership, not intent.

For business owners and advisors, the difference between a valid deduction and a denied loss often depends on understanding attribution before the transaction takes place.