A client asks about a year-end bonus to a family shareholder. Another wants to sell depreciated property to a family member. A third is structuring a payment between commonly owned entities. Each time, the same question surfaces: does Section 267 apply, and if so, what does it actually disallow?
Getting the answer wrong means a disallowed loss the client expected to claim or a deduction that shows up a year later than planned. The rules are mechanical once you understand the statutory structure, but that structure spans multiple subsections with distinct triggers and outcomes.
This article covers who qualifies as a related party under IRC 267(b) and 267(e), how the two core mechanisms work (loss disallowance under 267(a)(1) and expense deferral under 267(a)(2)), and the step-by-step research workflow practitioners use to build defensible positions. You will also find the primary authorities governing each rule and worked examples illustrating common scenarios.
IRC 267(b) lists 13 categories of relationships that trigger Section 267 treatment. For individuals, related parties include a spouse, parents, grandparents, children, grandchildren, and siblings (whole or half blood). In-laws are not included.
For entities, the most common categories focus on ownership thresholds. A shareholder and a corporation are related if the shareholder owns more than 50% of the corporation's stock by value. Two corporations are related if more than 50% of each is owned by the same persons, including corporations in the same controlled group under IRC 1563. A partnership and a partner are related if the partner owns more than 50% of the partnership's capital or profits interest.
The remaining categories in the 267(b) list cover less common fact patterns, including a grantor and a fiduciary of the same trust, a fiduciary and a beneficiary of the same trust, and a corporation and a partnership when the same persons own more than 50% of each. Confirm the full list against the statute before ruling out a relationship.
Attribution matters. Section 267(c) applies constructive ownership rules that attribute stock or interests from family members and through entities. A taxpayer may be treated as owning shares held by a spouse or through a controlled entity, pushing indirect ownership above the 50% threshold even when direct ownership falls short. Before concluding that parties are unrelated, verify both direct and attributed ownership percentages.
IRC 267(a)(1) permanently disallows losses on sales or exchanges of property between related parties. The rule applies regardless of whether the transaction price reflects fair market value, and regardless of whether the transaction is otherwise bona fide.
Here is a worked example. Jane sells stock with a basis of $50,000 to her brother Mark for $40,000, its current fair market value. Jane realizes a $10,000 loss, but Section 267(a)(1) disallows it. She cannot deduct the loss on her return.
What happens if Mark later sells the stock at a gain? This is where Section 267(d) provides partial relief. Mark's basis in the stock remains his $40,000 purchase price; the disallowed loss does not step up his basis.
If Mark sells the stock for $55,000, he realizes a $15,000 gain before any adjustment. The $10,000 loss disallowed to Jane can offset that gain, reducing Mark's taxable gain to $5,000. The disallowed loss never produces a deduction for Jane, but it can reduce the related buyer's future taxable gain.
The 267(d) offset is limited to actual gain. If Mark sells the stock for $42,000, he realizes only a $2,000 gain before adjustment. Only $2,000 of the disallowed loss can be used to offset it. The remaining $8,000 disappears permanently; it cannot create a loss for Mark or carry forward.
IRC 267(a)(2) addresses timing mismatches between accrual-basis payors and cash-basis payees. When an accrual-basis taxpayer owes an amount to a related cash-basis taxpayer, the payor cannot deduct the expense until the payee includes it in income.
Consider this example. A C corporation on the accrual method accrues a $15,000 year-end bonus to its sole shareholder, who reports income on the cash method. The corporation records the accrual on December 31, 2024, but does not pay until February 2025.
Under Section 267(a)(2), the corporation cannot deduct the bonus in 2024. The deduction moves to 2025, when the shareholder includes the payment in income.
This rule prevents related parties from creating mismatched deductions and income. The payor's deduction and the payee's income must fall in the same taxable year.
Partnership loss disallowance runs through a different Code section than most practitioners expect. Section 267 itself does not disallow a loss on a sale between a partner and their partnership; IRC 707(b)(1) does that job, disallowing losses on sales or exchanges of property (other than a partnership interest) between a partnership and a person owning more than 50% of its capital or profits interest, or between two partnerships with more than 50% common ownership. Section 267(e) is cross-referenced into 707(b)(1) for the constructive ownership rules, and 707(b)(1) in turn incorporates 267(d), so a loss disallowed under 707(b)(1) can still offset the transferee's later gain the same way a 267(a)(1) loss can.
What Section 267(e) actually does is extend the expense-deferral rule of 267(a)(2), not the loss-disallowance rule, to pass-through entities. And it does so without the more than 50% threshold that governs everywhere else in the statute: under 267(e)(1)(B)(ii), any person who owns any capital interest, profits interest, or S corporation stock, even a 1% partner, is treated as related for purposes of the deferral rule. An accrual-basis partnership or S corporation cannot deduct an accrued amount owed to a related cash-basis owner, of any size, until that owner reports the income.
S corporations follow the same no-threshold deferral logic. Accrued but unpaid compensation, rent, or interest owed by an S corporation to any shareholder, however small their stake, is not deductible by the corporation until that shareholder reports the income. For loss disallowance specifically, an S corporation and a shareholder who owns more than 50% of its stock are related under 267(b), so a loss on a direct sale between them is disallowed under 267(a)(1) at the ordinary 50% threshold.
A third, distinct mechanism covers corporations in the same controlled group. IRC 267(f) borrows the controlled-group definition from section 1563(a), substituting "more than 50 percent" for "at least 80 percent." Losses between commonly controlled corporations under 267(f) are not permanently disallowed the way an ordinary 267(a)(1) loss is; they are deferred, recognized only when the property or interest carrying the loss actually leaves the controlled group. The IRS has applied this in ruled transactions involving intercompany sales inside a controlled REIT structure, where the loss stayed deferred until the relevant interest left the group.
Entity choice affects timing in more than one way here. When structuring transactions between owners and their entities, confirm which provision actually governs, 707(b)(1) for a direct partner-partnership sale, 267(f) for a controlled-group corporate sale, or 267(a)(2) via 267(e) for a timing mismatch, since choice of entity decisions made for other reasons can carry this consequence without anyone flagging it at the time. On a related-party loan itself, remember that the accrued interest has to be a real market rate in the first place, which is where the Applicable Federal Rates come in before Section 267's timing rules are even reached.
Getting Section 267 right means starting from the statute, not from a summary. Here is the workflow experienced tax attorneys and CPAs use to build defensible positions.
Section 267 operates through two distinct mechanisms. Loss disallowance under 267(a)(1) applies to sales or exchanges of property. Expense deferral under 267(a)(2) applies to accrued amounts owed to cash-basis related payees. Determine which transaction type you are analyzing before proceeding.
For a direct sale between a partner and their own partnership, the loss-disallowance question runs through IRC 707(b)(1), not 267(b), so confirm the more than 50% capital or profits interest there first. For corporations in the same controlled group, check 267(f). For everything else, review the full 267(b) list (family members, shareholder and corporation, commonly owned entities, or one of the less common categories such as a trust and its grantor or beneficiary), then apply the constructive ownership rules of 267(c) to capture attributed interests. Document the direct ownership percentages and any attribution that pushes total ownership above the applicable threshold.
If the transaction involves loss disallowance under 267(a)(1), trace the property forward. If the related buyer later sells at a gain, the 267(d) matching rule may allow the original disallowed loss to offset that gain. Note the limitation: the offset cannot exceed the gain realized, and the buyer's basis is not adjusted for the disallowed loss.
Secondary summaries and treatise commentary describe the rules, but they are not citable authority. Before finalizing a position, read the statute (IRC 267(a), (b), (c), (d), (e), and (f) as applicable, plus 707(b)(1) for partner-partnership sales) and the corresponding Treasury Regulations (Treas. Reg. 1.267(a)-1 and 1.267(b)-1). Confirm that your analysis matches the language of the governing provisions.
A defensible position requires documentation. Record the ownership percentages, the attribution analysis, the subsection applied, and the primary authority cited. This audit trail supports internal review and any future IRS inquiry.
Timing payments to match deductions is the primary planning lever. If you know an expense will be deferred under 267(a)(2), pay it before year-end so the payor's deduction and the payee's income land in the same year.
Avoid artificial loss transactions. A sale to a related party solely to recognize a loss will fail under 267(a)(1). The loss is disallowed regardless of fair market value, and the only partial recovery is through the 267(d) matching rule if the buyer later sells at a gain.
Document ownership percentages annually. Ownership can shift through stock issuances, redemptions, or changes in family member holdings. A relationship that fell below the 50% threshold last year may trigger Section 267 this year.
Entity structure affects exposure. A transaction that would be deductible between unrelated parties may face deferral or disallowance when the parties are commonly owned. Consider Section 267 early in transaction planning that could otherwise generate real tax benefits, not after the fact, especially for closely held C corporations already watching their retained-earnings exposure under the accumulated earnings tax.
Section 267 prevents timing games and artificial losses between related parties through loss disallowance under 267(a)(1) and expense deferral under 267(a)(2). Researching a position means identifying the applicable subsection, testing the relationship under 267(b) and 267(c), confirming any 267(d) matching rule for disallowed losses, and verifying each conclusion against the statute and regulations, not a secondary summary that may have simplified past the point of accuracy.
Bizora traces every Section 267 answer back to the IRC subsection and Treasury Regulation behind it, with View Steps showing the reasoning path so the position holds up on review. Research this topic and other related-party questions at bizora.ai.
Start by identifying which subsection applies: 267(a)(1) for loss disallowance on property sales, or 267(a)(2) for deferred deductions on accrued expenses to cash-basis payees. Test the relationship under 267(b) and apply the 267(c) constructive ownership rules. If 267(a)(1) applies, confirm whether 267(d) allows the disallowed loss to offset a later gain, then verify against IRC 267 and Treas. Reg. 1.267(a)-1 and 1.267(b)-1.
They follow a structured workflow: determine whether the issue is loss disallowance under 267(a)(1) or expense deferral under 267(a)(2), analyze the relationship under 267(b) and 267(c), trace disallowed-loss property forward under 267(d) if applicable, and verify each conclusion against the statute and Treasury Regulations before relying on any secondary source. The analysis gets documented with an audit trail supporting the position.
Family members under IRC 267(b) include a spouse, parents, grandparents, children, grandchildren, and siblings; in-laws are not included. For entities, the most common triggers are a shareholder owning more than 50% of a corporation, two corporations with more than 50% common ownership, and a partner owning more than 50% of a partnership. The full statute lists 13 categories, including trusts and their grantors or beneficiaries, so confirm against the complete list before ruling a relationship out.
Section 267 applies when a party owns more than 50%, by value for corporations or by capital or profits interest for partnerships. The threshold is "more than 50%," not 50% or more. Section 267(c) attribution rules add constructive ownership from family members and through controlled entities, so calculate both direct and attributed ownership before concluding the threshold isn't met.
IRC 267(d) provides partial relief when a loss is disallowed under 267(a)(1). If the related buyer later sells the property at a gain, the originally disallowed loss can offset that gain, without any adjustment to the buyer's basis. The offset is limited to the actual gain realized; if the buyer sells at a loss or at a gain smaller than the disallowed loss, the unused portion disappears permanently.
Yes, in two different ways. For loss disallowance, a shareholder owning more than 50% of an S corporation's stock is related under 267(b), so a direct sale between them triggers 267(a)(1). For expense deferral, 267(e) applies to any shareholder regardless of ownership size; accrued but unpaid compensation, rent, or interest owed to that shareholder cannot be deducted until they report the income.
Not directly. IRC 707(b)(1), not Section 267, disallows the loss when a partner owning more than 50% of a partnership's capital or profits interest sells property to that partnership, or when two partnerships share more than 50% common ownership. Section 267(e) is cross-referenced for the constructive ownership rules, and 707(b)(1) incorporates 267(d), so a disallowed loss can still offset the transferee's later gain.
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