It is common for individuals to make transactions with family members or businesses owned by family members. Did you know that such transactions could potentially have adverse tax consequence for you? The normal tax rules regarding the deductibility of losses are suspended in the case of certain sales between related parties. One specific provision within the Internal Revenue Code, Section 267, was created to prevent taxpayers from shifting ownership of stock or property to a related person or entity in an effort to take advantage of beneficial tax provisions while essentially still controlling their original interest through their related party. In order for any taxpayer to be able to identify if they will potentially be impacted by these related party provisions, they must first understand both the Internal Revenue Code’s definition of related parties and the “constructive ownership” rules of Section 267. Review these key terms and conditions while reviewing your tax planning goals this year.
Internal Revenue Code §267(b) has a complex set of rules to define who is a related party for tax purposes. The common related parties are defined as the following:
Note: In-laws and step relationships are not considered related parties.
Under constructive ownership rules of §267, taxpayers are deemed to own stock owned by certain relatives and related entities. There are two key attribution rules regarding constructive ownership:
While losses are disallowed on most related party transactions, the general rule is that capital gain taxes are imposed on all sales of non-depreciable property (land) between related parties, with the two exceptions below:
Related party transactions under the provisions of the Internal Revenue Code can be quite technical and complex. If you think you might fall within the related party rules or would like to know more about them, please reach out to Travis Koester, Associate, or contact our Tax Solutions team at Mahoney to be of help to you in any way.
Additional reading: Year-End Tax Planning Tips for Individuals