Section 267(c): Constructive Ownership, Family and Partner Attribution

The Section 267(c) constructive ownership rules attribute stock from entities to their owners, from family members to each other, and from one partner to another, so that the IRS can decide whether two parties are “related” under Section 267(b). You add your directly owned shares to every share attributed to you under the four attribution paragraphs, and if the total crosses the threshold in 267(b) (most often more than 50 percent of a corporation’s stock by value), the transaction gets related-party treatment: a loss on a sale is disallowed, a deduction may be deferred, or a gain may be recharacterized as ordinary income.¹

Four attribution rules do the work, and they interact through a fifth rule that controls chaining. Here is what each one actually says.

Stock Held by Entities Flows to Their Owners

Section 267(c)(1) says stock owned by a corporation, partnership, estate, or trust is treated as owned proportionately by its shareholders, partners, or beneficiaries.¹ Every owner picks up a share, no matter how small the interest. If a corporation holds 1,000 shares of another company, a 10 percent shareholder is treated as owning 100 of those shares and a 60 percent shareholder is treated as owning 600.

A common confusion is worth clearing up. There is no 50 percent prerequisite built into 267(c)(1) itself. The attribution flows regardless of ownership size. The 50 percent figure lives in 267(b)(2), which says an individual and a corporation are related only when the individual owns more than 50 percent of the stock. So attribution always happens; consequences depend on whether your direct plus attributed total then exceeds the 267(b) threshold.

The measure of “proportionately” follows the nature of the entity: share of stock for corporations, interest in profits or capital for partnerships, and beneficial interest for trusts. A multi-member LLC is treated according to its federal tax classification: as a partnership if it files as one, or as a corporation if it has elected corporate treatment.

Section 267(c)(1) is a one-way street. It pushes ownership downward from the entity to the owner. It does not push ownership upward from an individual back to an entity. If you personally hold shares in Corporation X and are also a partner in Partnership P, the partnership is not treated under 267(c) as owning your shares in X. That upward flow exists in Section 318, but not here.

Family Attribution: Who Counts as Family

Section 267(c)(2) treats you as owning any stock held by your family, and 267(c)(4) defines family as your spouse, brothers and sisters (including half-siblings), ancestors, and lineal descendants.¹ If you own 25 percent of a corporation and your spouse owns 30 percent, you are each treated as owning 55 percent for purposes of 267(b).

The attribution is mechanical. It does not depend on who controls the shares or where the money came from. A father is treated as owning his adult daughter’s stock even if she is financially independent and bought her shares herself. Adopted children are treated the same as biological lineal descendants under the Treasury regulations.²

The list is exhaustive. Several relationships people assume are covered are not:

In-laws. A brother-in-law or mother-in-law is not family for 267(c).
Step-relationships. Stepchildren and stepparents are excluded, as confirmed by IRS Revenue Ruling 71-50.
Extended relatives. Cousins, aunts, uncles, nephews, and nieces are not included.
Former spouses. Once a divorce decree is final, an ex-spouse drops out of the family definition.

The exclusion of stepchildren catches blended families off guard, but the statute draws a bright line and the IRS enforces it.

Partner-to-Partner Attribution

Section 267(c)(3) adds a sideways rule the other paragraphs don’t cover. If you own any stock in a corporation (other than stock you got only by family attribution), you are treated as owning the stock your partner holds in that same corporation.¹

Say you and a business partner each own 30 percent of Corporation X, and you are also partners together in a separate partnership. Under 267(c)(3), you are treated as owning your partner’s 30 percent on top of your own, giving you a constructive 60 percent. Your partner gets the same treatment. Both of you now exceed the 50 percent threshold for related-party status with Corporation X, even though neither of you individually holds a controlling stake.

The trigger is simply that both people are partners in any partnership. The size of the partnership interests does not matter, and there is no minimum for the stock being attributed. The one limit is that the stock attributed from your partner cannot be stock your partner holds only through family attribution under paragraph (2). This prevents an indirect chain from partner, to partner’s family, back to you.

What Can Be Re-Attributed and What Cannot

Section 267(c)(5) controls chaining. It decides whether stock attributed to you under one rule can be attributed again from you to someone else under another rule.¹

Stock you constructively own through entity attribution under paragraph (1) is treated as stock you actually own for every other attribution rule. So it can flow from you to your family under paragraph (2), and to your partners under paragraph (3). If a trust holds stock and you are a beneficiary, the trust’s stock is attributed to you under paragraph (1), and your spouse is then treated as owning it under paragraph (2). This chain is allowed because the first link was entity attribution.²

Stock you constructively own through family attribution or partner attribution cannot be re-attributed under either of those same two rules. Your brother’s stock is attributed to you, but it will not then jump from you to your spouse. Your partner’s stock is attributed to you, but it will not then jump from you to a different partner. Without these limits, constructive ownership would spiral outward through extended networks of relatives and business partners.

When you apply the rules, you work through them in the order that produces the highest possible attributed ownership. The IRS does not let you choose the path that minimizes your constructive ownership and avoids related-party status.

What Happens Once the Threshold Is Crossed

Attribution matters because of what 267(b) then does. The most common consequence is under Section 267(a)(1), which flatly disallows any loss on a sale or exchange of property between related persons.¹ Sell a depreciated asset to a corporation you control (whether directly or by attribution), and the loss is gone.

Section 267(b) lists the relationships that count. The most common is an individual and a corporation where the individual owns more than 50 percent of the stock by value. Others include two corporations owned by the same persons, a grantor and a fiduciary of a trust, and various combinations of fiduciaries and beneficiaries. Whether you cross the ownership line in any of these categories typically depends entirely on how 267(c) attributes stock to you.

Attribution under 267(c) also feeds Section 1239, which recharacterizes gain on the sale of depreciable property between related parties from capital gain to ordinary income when the seller owns more than 50 percent of the buyer. Section 1239 uses rules “similar to” 267(c) but specifically excludes the partner-to-partner attribution in paragraph (3).³ So the same tally you build for 267(b) will not always be the tally you use for 1239.

Do Not Confuse 267(c) With Section 318

Section 318 is the other main set of constructive ownership rules, and it does not apply to Section 267 questions. Taxpayers routinely mix them up. The two share a similar structure but differ in ways that change results:

Siblings. Section 267(c)(4) includes brothers and sisters. Section 318 does not. A transaction between siblings can trigger related-party treatment under 267 but not under 318.
Corporate attribution threshold. Under 267(c)(1), stock owned by a corporation flows to every shareholder regardless of ownership percentage. Under 318(a)(2)(C), it flows only to shareholders who own 50 percent or more.
Upward attribution. Section 318(a)(3) pushes an individual’s stock up to an entity the individual has an interest in. Section 267(c) has no upward rule.
Options. Section 318(a)(4) treats a person holding an option to buy stock as owning that stock. Section 267(c) has no option rule.

Which set applies depends on the Code section you are working under. Section 267(b) points to 267(c). Stock redemptions under Section 302 point to Section 318. Applying the wrong set can either miss a related-party designation or impose one that isn’t there.

Penalty Exposure for Getting the Math Wrong

A miscount of constructive ownership that produces an underpayment can trigger the accuracy-related penalty under Section 6662. The standard penalty is 20 percent of the underpayment attributable to negligence, disregard of rules, or a substantial understatement of income tax.⁴ For individuals, an understatement is substantial when it exceeds the greater of 10 percent of the correct tax or $5,000. For corporations other than S corporations, the threshold is the lesser of 10 percent of the correct tax (or $10,000 if that is more) and $10 million.

The exposure is real because attribution is easy to overlook. A taxpayer who claims a loss on a sale to a corporation without checking whether a sibling’s shares push constructive ownership past 50 percent has not made a reasonable attempt to comply. Keep a current record of every share held by family members and by entities in which you or your family have an interest, and run the four attribution rules before treating any transaction with a controlled entity as arm’s-length.

1
Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest with Respect to Transactions Between Related Taxpayers
2
eCFR. 26 CFR 1.267(c)-1 – Constructive Ownership of Stock
3
Office of the Law Revision Counsel. 26 USC 1239 – Gain from Sale of Depreciable Property Between Certain Related Taxpayers
4
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments