What is a 'related party transaction' under IRC Section 267?

A related party transaction, under Internal Revenue Code (IRC) Section 267, refers to a transaction between individuals or entities that have a specific relationship, such as family members, a corporation and its controlling shareholder, or two corporations under common control. The primary purpose of Section 267 is to prevent taxpayers from artificially creating tax losses or deductions by transacting with related parties. It disallows losses on sales or exchanges of property between such parties and can defer certain expense deductions. This rule ensures transactions are treated as if they occurred at arm's length for tax purposes.

Who qualifies as a 'related party' for purposes of Section 267?

IRC Section 267(b) defines various relationships that qualify as related parties. These include family members (spouse, siblings, ancestors, lineal descendants), an individual and a corporation where the individual owns more than 50% of the stock, and two corporations that are members of the same controlled group. It also encompasses a grantor and a fiduciary of any trust, and a fiduciary of a trust and a beneficiary of such trust. Understanding these relationships is crucial for identifying transactions subject to the disallowance rules.

What types of transactions are impacted by Section 267?

Section 267 primarily impacts two types of transactions: losses from sales or exchanges of property and certain unpaid expenses. Specifically, IRC Section 267(a)(1) disallows losses on the sale or exchange of property directly or indirectly between related parties. IRC Section 267(a)(2) defers deductions for certain expenses (like interest and business expenses) owed by an accrual-basis taxpayer to a related cash-basis taxpayer until the payment is actually made. These provisions prevent taxpayers from manipulating the timing of income and deductions.

How does Section 267 affect the deductibility of losses on property sales?

IRC Section 267(a)(1) disallows any loss recognized on the sale or exchange of property between related parties. This means if you sell an asset to a related party for less than your basis, you cannot claim that loss on your tax return. However, if the related party later sells the property to an unrelated party at a gain, the disallowed loss can be used to offset that gain, but only to the extent of the gain. This rule prevents taxpayers from generating artificial losses to reduce taxable income.

Are there any exceptions to the loss disallowance rule under Section 267?

Generally, there are no broad exceptions to the loss disallowance rule under IRC Section 267(a)(1) for direct sales between related parties. However, the disallowed loss can be utilized by the related party transferee to reduce any subsequent gain realized on the disposition of the property to an unrelated party, as outlined in IRC Section 267(d). This carryover benefit ensures the economic loss is eventually recognized, albeit by a different taxpayer and under specific conditions. It's not a true exception but rather a mitigation of the initial disallowance.

How does Section 267 impact the timing of expense deductions?

IRC Section 267(a)(2) defers the deduction of certain expenses (like interest, rent, or business expenses) owed by an accrual-basis taxpayer to a related cash-basis taxpayer. The accrual-basis taxpayer cannot deduct the expense until the payment is actually made and includible in the gross income of the cash-basis related party. This prevents a mismatch where one party accrues a deduction while the other delays recognizing income, ensuring both sides of the transaction are treated consistently for tax purposes. This rule applies to expenses otherwise deductible under IRC Sections 162, 163, or 212.

What are the dollar limits or thresholds for Section 267 to apply?

There are no specific dollar limits or thresholds for Section 267 to apply. The rules apply regardless of the amount of the loss or expense. If a transaction meets the definition of a related party transaction under IRC Section 267(b), the loss disallowance or expense deferral rules will apply. This means even small transactions between related parties can trigger the provisions of Section 267, making careful consideration of all related party dealings essential.

What IRS forms are required to report transactions impacted by Section 267?

While there isn't a specific IRS form solely dedicated to Section 267, the impact of these rules is reflected on various tax forms. For disallowed losses, the loss would simply not be reported on forms like Schedule D (Form 1040) or Form 4797. For deferred expenses, the deduction would be delayed until payment is made, affecting forms like Schedule C (Form 1040) or Form 1120. Proper documentation and disclosure of related party transactions are crucial, even without a specific form.

What are common mistakes taxpayers make regarding Section 267?

Common mistakes include failing to identify related party relationships, especially indirect ones, and overlooking the expense deferral rules for accrual-basis taxpayers. Taxpayers often mistakenly believe they can deduct losses on sales to family members or controlled entities. Another error is not properly tracking disallowed losses for future offset against gains. These oversights can lead to incorrect tax filings and potential penalties.

What are audit red flags related to Section 267 transactions?

Audit red flags include frequent loss-generating transactions between entities with common ownership or individuals with family ties. Large or recurring expense deductions by an accrual-basis entity to a cash-basis related party without corresponding payment dates can also trigger scrutiny. The IRS looks for patterns that suggest artificial loss creation or income shifting. Disclosures of related party transactions on financial statements or tax returns can also prompt further examination.

How does Section 267 interact with other tax deductions or strategies?

Section 267 primarily acts as a limitation on other deductions. For instance, it can prevent the immediate deduction of a loss that would otherwise be allowed under IRC Section 165 (losses). It also overrides the normal timing rules for expense deductions under IRC Sections 162 or 212 when related parties are involved. Taxpayers attempting strategies like tax-loss harvesting must be particularly mindful of Section 267 to avoid disallowed losses. It ensures that related party transactions do not circumvent the intent of other tax provisions.

Can Section 267 apply to indirect sales or exchanges?

Yes, IRC Section 267(a)(1) explicitly states that losses from sales or exchanges of property, directly or indirectly, between related parties are disallowed. This means transactions structured through an intermediary to avoid the direct related party rule will still be caught. The IRS looks at the substance over the form of the transaction to determine if the ultimate economic effect is a transfer between related parties. This prevents easy circumvention of the rule.

Does Section 267 apply to transactions involving partnerships?

Yes, Section 267 can apply to transactions involving partnerships, though the rules are slightly more complex. IRC Section 267(e) extends the related party rules to certain transactions between a partnership and a person owning, directly or indirectly, more than 50% of the capital or profits interest in such partnership. It also applies to transactions between two partnerships in which the same persons own, directly or indirectly, more than 50% of the capital or profits interests. This ensures consistency across different entity types.

How does Section 267 interact with the wash sale rules (IRC Section 1091)?

Section 267 and the wash sale rules (IRC Section 1091) both disallow losses, but for different reasons and with different mechanisms. Wash sale rules disallow losses when substantially identical stock or securities are repurchased within 30 days. Section 267 disallows losses based on the relationship between the buyer and seller, regardless of the asset type or repurchase timing. While both prevent artificial losses, Section 267 is broader in scope regarding asset types and relationships. A transaction could potentially be subject to both, but Section 267's disallowance is generally more permanent for the seller.

Are there any specific record-keeping requirements for Section 267 transactions?

While no specific IRS form is dedicated solely to Section 267, robust record-keeping is essential. Taxpayers should maintain detailed records of all related party transactions, including the nature of the relationship, the property involved, the sale price, the basis, and the date of the transaction. For deferred expenses, documentation of the accrual date and the actual payment date is critical. This documentation supports the tax treatment and helps in case of an IRS inquiry.

What is the 'controlled group' definition for Section 267 purposes?

For Section 267, a 'controlled group' generally refers to a group of corporations connected through stock ownership, as defined in IRC Section 1563(a), but with a 50% ownership threshold instead of 80%. This includes parent-subsidiary controlled groups, brother-sister controlled groups, and combined groups. If two corporations are part of the same controlled group, they are considered related parties, and transactions between them are subject to Section 267 rules. This prevents loss shifting within a corporate family.

Does Section 267 apply to S corporations and their shareholders?

Yes, Section 267 applies to S corporations and their shareholders. An S corporation and any person who owns more than 50% of the value of its outstanding stock are considered related parties under IRC Section 267(b)(2). This means losses on sales of property between the S corporation and such a shareholder would be disallowed. Similarly, expense deferral rules would apply to payments between them. This ensures consistency with C corporations and their controlling shareholders.

How does Section 267 impact the basis of property for the related party buyer?

When a loss is disallowed under IRC Section 267(a)(1), the related party buyer's basis in the acquired property is its cost. The disallowed loss does not reduce the buyer's basis. However, as per IRC Section 267(d), if the buyer later sells the property at a gain to an unrelated party, the previously disallowed loss can be used by the buyer to offset that gain. This mechanism ensures the economic loss is eventually recognized, but only to the extent of the subsequent gain.

Are there any anticipated law changes to Section 267 in 2026 or beyond?

As of late 2023, there are no specific, widely anticipated legislative changes to IRC Section 267 scheduled for 2026 or beyond. The core principles of related party loss disallowance and expense deferral have been long-standing provisions of the tax code. While tax laws are always subject to potential reform, Section 267 is generally considered a fundamental anti-abuse provision. Taxpayers should always monitor legislative developments for any unexpected changes.

Where can I find more information about Section 267 from the IRS?

For more detailed information, taxpayers can refer directly to Internal Revenue Code Section 267 itself. Additionally, IRS Publication 544, 'Sales and Other Dispositions of Assets,' provides general guidance on property sales and may touch upon related party rules. For specific scenarios, consulting Treasury Regulations under Section 267 is crucial. It is always advisable to consult with a qualified tax professional for personalized advice regarding complex related party transactions.

Related Party Transaction Rules — Section 267 — Complete 2026 Guide

Overview: Understanding IRS Section 267 Related Party Transaction Rules for 2026

IRS Section 267 is a critical component of the U.S. tax code designed to prevent taxpayers from manipulating tax outcomes through transactions with related parties. These rules primarily disallow losses and defer deductions for certain expenses and interest between individuals and entities that share a specific relationship. For the 2026 tax year, understanding and adhering to these regulations is paramount for individuals, businesses, and fiduciaries to avoid costly errors and ensure compliance.

What are Related Party Transaction Rules (Section 267)?

Internal Revenue Code (IRC) Section 267 addresses transactions between related parties, specifically targeting situations where a taxpayer might attempt to gain a tax advantage by transacting with someone closely connected to them. The core principle is to prevent artificial losses or deductions that would not occur in an arm's-length transaction between unrelated parties [1].

Section 267 disallows deductions for losses arising from the sale or exchange of property, directly or indirectly, between related persons. It also mandates a matching principle for certain expenses and interest, meaning a deduction for the payor is only allowed when the corresponding income is includible by the payee. This prevents a mismatch where one party deducts an expense in one year, and the related party defers reporting the income to a later year.

Who Qualifies as a Related Party?

Section 267 defines related parties broadly to cover various relationships. For the 2026 tax year, these include, but are not limited to [1]:

Family Members: This includes brothers and sisters (whole or half-blood), spouse, ancestors (parents, grandparents), and lineal descendants (children, grandchildren).
An Individual and a Corporation: If an individual owns, directly or indirectly, more than 50% in value of the outstanding stock of a corporation.
Two Corporations: If they are members of the same controlled group (generally, more than 50% common ownership).
Grantor and Fiduciary of a Trust: The person who creates a trust and the person managing it.
Fiduciaries of Two Trusts: If the same person is the grantor of both trusts.
Fiduciary and Beneficiary of a Trust: The person managing the trust and the person who benefits from it.
Fiduciary of a Trust and a Corporation: If more than 50% of the corporation's stock is owned by or for the trust, or by or for a grantor of the trust.
Certain Tax-Exempt Organizations: A person and an organization exempt under Section 501 (e.g., charitable organizations) if the person (or their family) directly or indirectly controls the organization.
Corporation and Partnership: If the same persons own—more than 50% in value of the corporation's outstanding stock, and more than 50% of the capital interest, or the profits interest, in the partnership.
S Corporations: Two S corporations if the same persons own more than 50% of the outstanding stock of each.
S Corporation and C Corporation: If the same persons own more than 50% of the outstanding stock of each.
Executor and Beneficiary of an Estate: Except in cases of a sale or exchange in satisfaction of a pecuniary bequest.

Constructive ownership rules apply when determining stock ownership, meaning stock owned by certain family members, partners, or entities can be attributed to an individual [1].

How to Claim It (or How it Affects Your Claim)

Section 267 primarily acts as a disallowance or deferral rule, rather than a deduction you actively claim. Taxpayers must identify related party transactions and apply the rules accordingly. There isn't a specific IRS form to claim Section 267; instead, it dictates how you report losses and expenses on other forms.

Losses on Sales: If you sell property to a related party at a loss, that loss is generally disallowed. You would not report this loss on Form 8949, Sales and Other Dispositions of Capital Assets, or Schedule D, Capital Gains and Losses, as you would with an unrelated party sale. However, if the related party later sells the property at a gain, that gain is recognized only to the extent it exceeds the previously disallowed loss [1].
Expenses and Interest: For certain expenses (like salaries, rent, or interest) owed to a related party, the deduction is deferred until the amount is actually paid and includible in the related party's gross income. This ensures a matching of income and expense in the same tax period.

2026 Limits, Amounts, or Rates

Section 267 primarily deals with the disallowance or deferral of losses and deductions, rather than setting specific monetary limits or rates that change annually. The rules themselves, such as the definition of related parties and the matching principle, remain consistent unless Congress amends the statute. Therefore, for the 2026 tax year, the core principles of Section 267 regarding related party definitions and the treatment of losses and expenses are expected to remain the same as outlined in the statute [1].

It is crucial to stay informed about any potential legislative changes or new IRS guidance that might impact the application of Section 267 for the 2026 tax year. While the fundamental structure of the law is stable, interpretations or specific scenarios addressed by the IRS can evolve.

Common Mistakes That Cost Taxpayers Money

Ignoring Related Party Status: Many taxpayers overlook the broad definition of related parties, especially concerning family members, trusts, and controlled entities. Assuming a transaction is arm's length when it's not can lead to disallowed losses or deferred deductions.
Failing to Apply Constructive Ownership Rules: The constructive ownership rules can attribute stock ownership, making parties related even if they don't appear to be directly connected. Neglecting these rules can result in incorrect tax treatment.
Incorrectly Reporting Disallowed Losses: Taxpayers might mistakenly claim a loss on a sale to a related party, leading to an audit and potential penalties. Understanding that these losses are disallowed (though they can reduce future gains for the related party) is crucial.
Mismatched Expense/Income Reporting: For accrued expenses and interest, failing to apply the matching principle can lead to deductions being taken prematurely, resulting in adjustments and interest on underpayments.
Lack of Documentation: Poor documentation of related party transactions can make it difficult to defend the tax treatment if questioned by the IRS.

IRS Code Section Reference

The primary reference for these rules is Internal Revenue Code Section 267: Losses, expenses, and interest with respect to transactions between related taxpayers [1].

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Related Party Transactions Section 267