What Is IRC 267? Related Party Losses, Deductions, and Attribution

IRC Section 267 contains the related party rules that stop taxpayers from creating artificial losses or timing mismatches by transacting with people and entities they are closely connected to. It does two main things: it disallows any loss deduction on a sale or exchange of property between related parties, and it defers a related payer’s deduction for an accrued expense until the related recipient actually reports the matching income. Who counts as “related” is defined broadly, and constructive ownership rules pull in stock you may not think of as yours.

Who Section 267 Treats as Related

Section 267(b) lists thirteen relationship categories. The ones that catch most taxpayers:

Siblings (including half-siblings), spouses, ancestors, and lineal descendants. Aunts, uncles, and cousins are not included.¹
An individual and a corporation, if the individual owns more than 50% of the corporation’s stock by value, directly or indirectly.¹
Two corporations that are members of the same controlled group under Section 1563.²
A trust’s grantor and its fiduciary; two fiduciaries or a fiduciary and a beneficiary of trusts sharing a common grantor; and a trust and a corporation more than 50% owned by the trust or its grantor.
A person and a tax-exempt organization the person (or the person’s family) controls.³
A corporation and a partnership if the same people own more than 50% of the corporation’s stock and more than 50% of the partnership’s capital or profits.
Two S corporations, or an S corporation and a C corporation, under the same more-than-50% common ownership test.
An estate’s executor and its beneficiaries, except for a sale made to satisfy a specific dollar bequest.¹

A separate rule treats a personal service corporation and any employee-owner as related for the deduction timing rule, even if the employee-owner owns less than 50%. That prevents professional corporations from accruing year-end bonuses to owner-employees without paying them.¹

Constructive Ownership: Stock You Are Treated as Owning

The 50% thresholds throughout Section 267 would be easy to sidestep if only direct ownership counted. Section 267(c) closes the gap by attributing stock held by certain related people and entities to you.

Stock owned by a corporation, partnership, estate, or trust is attributed proportionally to its owners or beneficiaries. If a corporation owns 100 shares of a target company and you own 60% of that corporation, you constructively own 60 of those shares. Entity attribution is treated as actual ownership, so it can be re-attributed a second time, for example from you to a family member.⁴

Stock owned by your family (siblings, spouse, ancestors, and lineal descendants) is treated as yours. Stock owned by your business partner is also attributed to you. But family and partner attribution is not treated as actual ownership, so it cannot be re-attributed to another family member or another partner. Only entity attribution chains through.⁴

The distinction matters in practice. If your spouse directly owns 30% of a corporation and you directly own 25%, you are treated as owning 55%, and you and the corporation are related parties. But if your spouse’s 30% is itself only attributed to your spouse through a partnership, that constructively owned stock cannot be re-attributed to you.

Losses on Sales to a Related Party

Section 267(a)(1) prohibits any deduction for a loss on a sale or exchange of property between related parties.¹ If a parent sells stock with a $100,000 basis to a child for $60,000, the parent’s $40,000 loss is disallowed. The family still controls the asset, so the economic position has not genuinely changed.

The disallowed loss is not permanently destroyed. Under Section 267(d), when the related buyer later sells the asset to an unrelated third party, any gain the buyer realizes is recognized only to the extent it exceeds the previously disallowed loss.³

Take the parent-child example (parent’s basis $100,000; sale to child at $60,000; disallowed loss $40,000; child’s basis $60,000):

Child later sells for $120,000. Realized gain of $60,000, offset by the $40,000 disallowed loss, leaves $20,000 taxable.
Child sells for $80,000. Realized gain of $20,000 is fully absorbed by the disallowed loss. The remaining $20,000 of disallowed loss disappears.
Child sells for $50,000. The child has a $10,000 loss on their own basis and can claim it. The parent’s $40,000 disallowed loss is permanently lost because no gain arose to offset.

Two carve-outs limit the Section 267(d) offset. It does not apply if the original loss was disallowed under the wash sale rules of Section 1091 rather than Section 267. It also does not apply where the original seller was a tax-indifferent party whose loss, even if allowed, would not have reduced any tax liability.³

Deductions Accrued but Not Yet Paid to a Related Party

An accrual-method business normally deducts an expense when the obligation arises, whether or not it has paid. A cash-method recipient reports income only when actually paid. Between unrelated parties that mismatch is fine. Between related parties it lets the payer take a deduction in one year while the payee defers income to the next.

Section 267(a)(2) blocks that timing play. The accrual-method payer cannot deduct the expense until the day the cash-method related payee includes the amount in gross income.¹ In effect, the deduction is deferred until payment.

Say an accrual-basis corporation accrues a $50,000 December 31 bonus to its cash-basis majority shareholder. Without Section 267 the corporation would deduct $50,000 in Year 1 while the shareholder reports income in Year 2. The matching rule forces the corporation to wait until the shareholder receives payment and reports it. The rule reaches any otherwise deductible expense owed to a related cash-method party, including interest, rent, management fees, and compensation.

Amounts Owed to a Related Foreign Person

Section 267(a)(3) is stricter when the payee is foreign. Regardless of the foreign party’s method of accounting, the domestic payer must treat the item on the cash method: no deduction until the amount is actually paid. A related foreign person is a non-U.S. person who falls within any Section 267(b) category at the close of the payer’s tax year. For this rule, an amount is treated as paid when it would trigger withholding obligations under Sections 1441 or 1442.⁵

Partnerships and S Corporations

Section 267(e) extends the deduction timing rule to pass-through entities, and it does so without a minimum ownership threshold. The entity, any person who owns any capital or profits interest in the partnership (or any stock in the S corporation), any person who owns an interest in a partnership that itself owns an interest in the pass-through, and anyone related to those owners under Section 267(b) or Section 707(b)(1) are all treated as related to each other for the matching rule.¹ A 1% partner can trigger it.

The constructive ownership rules shift slightly in the pass-through context: C corporation stock is attributed to a shareholder only if that shareholder owns at least 5%, and partner-to-partner attribution under Section 267(c)(3) does not apply.³

Guaranteed Payments Are Not Deferred

Section 267(e)(4) exempts guaranteed payments under Section 707(c) from the matching rule. A guaranteed payment is compensation to a partner for services or for the use of capital, determined without regard to partnership income.⁶ Because the statute treats these payments as made to a non-partner for income and deduction purposes, they escape the timing rule.

Partnership Loss Sales Live Under Section 707(b)

Loss disallowance on sales between a partnership and its more-than-50% owner (or between two commonly controlled partnerships) is governed by Section 707(b)(1), not Section 267(a)(1) directly. The Section 267(d) offset still applies, so the buyer can use the disallowed loss against a future gain on the same property. Section 707(b)(2) adds a related twist: a gain on such a sale is recharacterized as ordinary income rather than capital gain if the property is not a capital asset in the buyer’s hands.⁶

Sales Between Members of a Controlled Corporate Group

Losses on sales between members of a controlled group are not permanently disallowed. Section 267(f) defers them, applying the same timing principles that govern intercompany transactions within a consolidated group. The loss is taken into account when a triggering event occurs, typically when the property leaves the group through a sale to an outsider.⁷

The Section 267(f) rules carry their own exceptions. Sales of inventory in the ordinary course of business between controlled group members are exempt from loss disallowance where one party is a foreign corporation. Transfers to a Domestic International Sales Corporation are excluded. And foreign currency losses on intercompany loans within a controlled group may be exempt to the extent provided in regulations.³

Exceptions Worth Knowing

Even where a Section 267(b) relationship exists, a few specific transactions escape loss disallowance:

Complete liquidations. Losses recognized by either the distributing corporation or the distributee in a complete liquidation are not subject to the disallowance rule.³
Transfers between spouses or incident to divorce. Section 267(g) exempts any transfer that qualifies under Section 1041(a).³
Redemptions by a regulated investment company that issues only redeemable stock, when the redemption is at the demand of another regulated investment company.

These are narrow. The complete-liquidation exception only covers actual liquidations; a partial distribution of appreciated or depreciated property to a related shareholder outside of a liquidation remains subject to the standard rules.

Penalties and How the Rules Show Up on a Return

Section 267 has no dedicated penalty. Improper deductions caught by Section 267 fall under the general accuracy-related penalty of Section 6662: 20% of any underpayment attributable to negligence, disregard of rules and regulations, or a substantial understatement of income tax. An understatement is substantial if it exceeds the greater of 10% of the correct tax or $5,000; for C corporations, the threshold is the lesser of 10% of the correct tax (or $10,000 if greater) and $10,000,000.⁸ “I did not know about Section 267” rarely qualifies as reasonable cause when the relationship is obvious from the return.

There is no form labeled a Section 267 disclosure. Compliance means applying the rules on the return itself: a disallowed loss simply does not appear, and a deferred deduction shifts to the year the recipient reports the income. Partnerships with any partner holding a 50% or greater interest must file Schedule B-1 with Form 1065 identifying that owner, which puts the IRS on notice that Section 267 relationships exist inside the partnership.⁹ The harder part is spotting the relationship in the first place, especially where constructive ownership pulls in stock you would not think of as yours.

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Office of the Law Revision Counsel. 26 USC 267 Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers
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Office of the Law Revision Counsel. 26 US Code 1563 – Definitions and Special Rules
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Office of the Law Revision Counsel. 26 US Code 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers
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eCFR. 26 CFR 1.267(c)-1 – Constructive Ownership of Stock
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eCFR. 26 CFR 1.267(a)-3 – Deduction of Amounts Owed to Related Foreign Persons
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Office of the Law Revision Counsel. 26 US Code 707 – Transactions Between Partner and Partnership
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eCFR. 26 CFR 1.267(f)-1 – Controlled Groups
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Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
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Internal Revenue Service. Schedule B-1 (Form 1065) Instructions