Internal Revenue Code (“IRC”) §267 imposes significant restrictions on the ability of related persons to recognize loss from a transaction that involves a sale or exchange of property. Hence, it is important for a tax attorney who advises on such a transaction to understand the concept of a “related person” in order to properly advise his client. In this article, I will discuss the general related person definition; in a future article, I will discuss the related person definition in a more specific context.
Related Person Definition: IRC §267(b) and IRC §267(a)(2)
The related person definition is set forth in two part of IRC §267. The first and most comprehensive description of related persons can be found in IRC §267(b) – this description is used throughout IRC §267. The second part is found §267(a)(2) and it applies for the purposes of §267(a)(2) only. Let’s discuss both parts of the related party definition in more detail.
Related Person Definition: Thirteen Categories of IRC §267(b)
IRC §267(b) describes the following thirteen categories of related persons:
1). Family Members;
2). A corporation and an individual shareholder who owns more than 50% of the value of the stock;
3). Two corporations which are members of the same controlled group. Pursuant to §267(b)(3), the term “controlled group” is similar to the definition used for the purposes of the affiliated corporation rules, but with merely a 50% instead of 80% common ownership requirement;
4). A grantor and a fiduciary of any trust;
5). Fiduciaries of different trusts if the same person is the grantor of both trusts;
6). A fiduciary of a trust and a beneficiary of that trust;
7). A fiduciary of a trust and a beneficiary of another trust as long as the same person is the grantor of both trusts;
8). A corporation and a fiduciary of a trust that owns more than 50% of the value of the stock (also, if the trust’s grantor owns more than 50% of the value of the stock);
9). A tax-exempt organization and a person or individual or the individual’s family member who controls the organization;
10). A corporation and a partnership if the same person owns more than 50% of the value of the corporate stock and more than 50% of the capital or profits interest in the partnership;
11). Two or more S-corporations owned more than 50% by the same person;
12). An S-corporation and a C-corporation if the same person owns more than 50% of the value of each; and
13). An executor and a beneficiary of an estate (there is an exception where a sale of property is made to satisfy a pecuniary bequest).
Related Person Definition: IRC §267(a)(2) Category
As it was mentioned above, the fourteenth category of related persons is described in §267(a)(2). This section contains the income-deduction matching provision (i.e. deduction can be taken in a related party transaction by a related party only when an income is recognized by the second party). For the purposes of §267(a)(2), a personal service corporation (within the meaning of IRC §441(i)(2)) and any employee-owner (within the meaning of §269A(b)(2), as modified by §441(i)(2)) are related as persons under IRC §267.
Related Person Definition: Special Rules for Pass-Through Entities
While I will not cover them over here, it is important to note that special rules exist with respect to pass-through entities such as partnerships and S-corporation. These rules can be found in two separate code provisions. IRC §707(b)(1) governs disallowance of losses on transactions between a partnership and its members. IRC §267(a)(1) governs losses on sales or exchanges between a partnership and any person other than a member of the partnership (a third party).
Related Person Definition: Constructive Ownership Rules
Moreover, I would like to emphasize that the determination of whether a person or entity satisfies any of the IRC §267 categories of the related person definition is not limited to the actual ownership percentage of such person or entity. Rather, §267(c) contains elaborate constructive ownership rules that force one to include in the analysis the ownership by closely connected individuals or entities.
Contact Sherayzen Law Office for Professional Help With IRC §267 Related Person Definition and Other Business Tax Issues
US tax law is incredibly complex; the related person definition of IRC §267 is just one example of this complexity. In order to safely navigate through the labyrinth of US tax laws, you need an experienced tax attorney.
This is why you should contact Sherayzen Law Office for professional help. Our legal team, headed by an international tax attorney Eugene Sherayzen, is highly experienced in helping US taxpayers with proper individual and business tax planning and tax compliance. We can help you!