IRC Section 267 is one of the quietest ways the tax code can undo an otherwise well-planned transaction. There are no flashy penalties and no obvious red flags at first glance—just deductions that vanish, losses that don't count, and timing mismatches that surface long after the deal is done. For taxpayers and advisors who underestimate its reach, the consequences can be costly.
At the center of these pitfalls are Section 267's attribution rules. These rules can turn indirect ownership, family relationships, and entity structures into deemed ownership that triggers disadvantaged related-party treatment—often when no one expects it. Transactions that look arm's length on paper may still be caught, disallowing losses or deferring deductions solely because of who the parties are deemed to be.
This guide breaks down how IRC Section 267's attribution rules work, why they are so easy to trip over, and what planners and taxpayers can do to avoid unpleasant surprises. Understanding these rules before a transaction—not after—is the difference between a clean tax result and a deduction that never materializes.
What Is Section 267?
Section 267 aims to prevent tax manipulation through transactions with related parties. The section has two main components.
1. Disallowance of Losses
Under Section 267, no deduction is allowed for any loss from the direct or indirect sale or exchange of property between related parties. This rule applies even if the transaction is a genuine, bona fide sale with terms at fair market value. The law's focus is on the relationship between the parties, not the intent behind the transaction.
For example, selling stock worth $10,000 to your brother for $8,000 results in a disallowed $2,000 loss. The rationale is that the property has not truly left the control of the "economic family unit," and the loss is therefore not considered to have been fully realized.
Although the loss is permanently denied to the seller, it is not necessarily lost forever within the transaction chain. When property is sold at a loss to a related party, the selling taxpayer may not deduct the loss under Section 267. However, if the related-party buyer later sells the property to an unrelated person at a gain, the buyer—not the original seller—may use the previously disallowed loss to offset that gain. The gain is recognized only to the extent it exceeds the amount of the disallowed loss.
On the other hand, if the buyer later sells the property at a loss, the buyer kisses the prior disallowed loss goodbye—it provides no benefit and disappears entirely.
2. Disallowance of Unpaid Expenses and Interest
This provision addresses a different type of tax manipulation related to accounting methods. It prevents an accrual-method taxpayer from taking a deduction for an accrued but unpaid expense or interest when the related-party recipient is on the cash method of accounting.
The "matching principle" of Section 267 states that the deduction is allowed only when the corresponding income is includible in the gross income of the related payee. This prevents the accrual-method taxpayer from taking a current deduction for an expense that the cash-method related party won't report as income until a later tax period.
The key to both provisions lies in determining who qualifies as a "related party"—and this is where attribution rules come into play.
How the Attribution Rules Work
Section 267 provides a detailed list of relationships that trigger the rules:
- Family members. An individual's family includes their spouse (unless they are legally separated), siblings (including half-siblings), ancestors (parents and grandparents), and lineal descendants (children and grandchildren).
- Individuals and corporations. An individual and a corporation in which the individual owns, directly or indirectly, more than 50 percent in value of the outstanding stock.
- Controlled groups of corporations. Two corporations that are part of the same controlled group.
- Trusts. This relationship can be between a grantor and a fiduciary of any trust; a fiduciary of a trust and a beneficiary of the same trust; or a fiduciary of one trust and a fiduciary or beneficiary of another trust, if the same person is the grantor of both.
- Partnerships and corporations. A corporation and a partnership, if the same people own more than 50 percent of the value of the corporation's outstanding stock and more than 50 percent of the capital or profit interest in the partnership.
- S corporations and C corporations. An S corporation and a C corporation, if the same people own more than 50 percent in value of the outstanding stock of each.
To prevent taxpayers from circumventing these rules through indirect ownership, Section 267 establishes rules for constructive ownership. These rules attribute ownership from one person or entity to another.
Constructive Ownership Principles
1. Family Attribution
An individual is considered to own stock owned by their family members (as defined above).
Example: You own 30 percent of a corporation, your father owns 25 percent, and you're a 50 percent beneficiary of a trust owning 20 percent of the same corporation. You sell property to the corporation at a $10,000 loss.
- Your father's 25 percent is attributed to you, totaling 55 percent (30% + 25%)
- The trust's 20 percent is attributed at 50 percent (your beneficiary interest), adding 10 percent (0.5 × 20%)
- Total: 65 percent (55% + 10%)
Since you're deemed to own more than 50 percent, you and the corporation are related and the $10,000 loss is not deductible.
No double attribution. Stock attributed from one family member cannot be further attributed to another. For instance, your sibling's stock is attributed to you, but not from you to your parent.
2. Entity-to-Individual Attribution
Under IRC Section 267(c), for purposes of the loss disallowance and related-party definitions, stock owned by an entity is attributed to individuals based on their ownership interest.
- Partnerships. Stock owned by a partnership is attributed to partners in proportion to their interest. If you own 25 percent of a partnership, you're attributed 25 percent of the partnership's stock ownership in corporations.
- Corporations. Stock owned by a corporation is attributed to shareholders based on their stock ownership of the corporation's stock (by value). If you own 30 percent of a corporation, you're attributed 30 percent of its stock in the second corporation.
- Trusts or Estates. Stock owned by a trust or estate is attributed to beneficiaries proportionally to their actuarial interest. If you're a 50 percent beneficiary of a trust, you're attributed 50 percent of its stock.
Example: You own 30 percent of a partnership that holds 100 shares of a corporation. You're attributed 30 shares (30% of 100). If you also own 25 percent of the corporation directly, your total ownership is 55 percent (25% + 30%), making you a related party to the corporation.
3. Individual-to-Entity Attribution
Section 267 does not attribute an individual's personally owned stock to a corporation, a partnership, or another entity that the individual owns. Instead, its constructive ownership rules run from the entity to the owner.
For example, if Corporation Y owns stock in Corporation X, a shareholder of Corporation Y is treated as owning a proportionate share of Y's stock in X for Section 267 purposes. Section 267 provides no rule that would treat Corporation Y as owning stock in Corporation X merely because an individual who controls Y personally owns X stock.
Thus, if you own 60 percent of Corporation Y and personally own 100 shares of Corporation X, those 100 shares are not attributed to Corporation Y under Section 267. But if Corporation Y owns 100 shares of Corporation X, Section 267 treats you as owning 60 of those shares (60% of 100), making you a related party to Corporation X for Section 267 purposes.
Key point: Remember that Section 267's constructive ownership rules apply only for Section 267 purposes—primarily, identifying related parties for loss disallowance, certain interest and expense limitations, and similar related-party transactions.
4. Option Attribution
Option positions are not attributed under Section 267, as the Internal Revenue Code and its regulations do not explicitly extend Section 267 constructive ownership rules to options. The absence of an option attribution rule in Section 267 suggests that Congress did not intend options to be treated as constructively owned stock under this section.
Compliance and Planning Tips
Compliance and planning tips for Section 267 center on related-party transaction rules, disallowed losses, and matching accrual and cash basis expense and income timing to avoid IRS scrutiny. While Section 267 limits aggressive strategies, proactive planning can minimize its impact.
- Identify related parties early. Carefully review transactions to determine whether Section 267 related-party rules apply by identifying family members, entities under common control, and significant ownership stakes.
- Plan around constructive ownership. Break family attribution by gifting interests to non-family members or using grantor trusts when appropriate.
- Restructure ownership to avoid relatedness. Dilute ownership below 50 percent thresholds using trusts or third-party investors to prevent triggering related-party rules or deferring deductions. For family businesses, use non-voting shares or separate entities to break attribution chains.
- Avoid related-party losses. Losses on sales or exchanges of property between related parties cannot be deducted. To benefit from loss deductions, sell assets to unrelated parties rather than within the related group.
- Document transactions thoroughly. Keep detailed records of all related-party sales, loans, or service agreements. Include fair market value appraisals for property transfers to make sure that no loss disallowance applies.
- Properly time deductions. If necessary, defer accrual deductions until the income is reported by the related party. Use accrual accounting consistently, and reconcile your records with the related party's tax return.
Comprehensive Example
The example below shows how IRC Section 267 attribution combines family and business ownership into a comprehensive deemed ownership percentage for tax purposes.
Direct Ownership of Stock
- Taxpayer: 60%
- Daughter: 10%
- Spouse: 0%
- Taxpayer's Parent: 0%
- Granddaughter: 5%
- Great-Granddaughter: 0%
- Brother: 7%
- Corporation (55% owned by taxpayer): 10%
- Partnership (75% owned by taxpayer): 5%
- Trust (taxpayer is beneficiary): 2%
- Options: 1%
Total Deemed Ownership Calculations
- Taxpayer: 60% + 10% (daughter) + 5% (granddaughter) + 7% (brother) + 5.5% (55% of corporation's 10%) + 3.75% (75% of partnership's 5%) + 2% (trust) = 93%
- Daughter: 10% + 60% (taxpayer) + 5% (granddaughter) = 75%
- Spouse: 0% + 60% (taxpayer) + 10% (daughter) + 5% (granddaughter) = 75%
- Taxpayer's Parent: 0% + 60% (taxpayer) + 10% (daughter) + 5% (granddaughter) = 75%
- Granddaughter: 5% + 60% (taxpayer) + 10% (daughter) = 75%
- Great-Granddaughter: 0% + 60% (taxpayer) + 10% (daughter) + 5% (granddaughter) = 75%
- Brother: 7% + 60% (taxpayer) = 67%
- Corporation: 10% (no attribution to entities) = 10%
- Partnership: 5% (no attribution to entities) = 5%
- Trust: 2% (no attribution to entities) = 2%
- Options: 1% (not attributed) = 1%
Key Observations
- Family Attribution: The taxpayer, daughter, spouse, parent, granddaughter, great-granddaughter, and brother are all attributed under IRC Section 267.
- Entity Attribution: The corporation's 10% is attributed up to the taxpayer proportionally (55% of 10% = 5.5%). Stock owned by a partnership is attributed directly and proportionally (75% ownership, so 75% of the partnership's 5% goes to the taxpayer = 3.75%). A beneficiary is attributed all shares of the trust (here, 2%).
- In-Laws: In-laws are not family under Section 267. But beware of overlapping ownership in entities, which can make the entity (not the in-law) related under the test for more than 50 percent ownership.
Key Takeaways
- Loss Disallowance: Under Section 267, no deduction is allowed for losses from property sales or exchanges between related parties, even if the transactions occur at fair market value.
- Matching Principle: Accrual-method taxpayers are prevented from deducting unpaid expenses or interest owed to a cash-method related party until the related party reports the income.
- Related Parties Include: Family members (spouse, siblings, parents, children, etc.), individuals and corporations with greater than 50 percent ownership, controlled corporate groups, trusts, and partnerships/corporations with overlapping ownership.
- Constructive Ownership Rules:
- An individual is considered to own stock owned by their family members
- Stock owned by partnerships, corporations, or trusts is attributed to individuals based on their ownership interest
- There is no attribution of an individual's stock to an entity they own under Section 267
- Options are not treated as constructively owned stock under Section 267
- Planning Strategies:
- Identify related parties early to avoid triggering Section 267 rules
- Restructure ownership (e.g., dilute below 50 percent or use non-voting shares) to avoid relatedness
- Sell depreciable assets to unrelated parties to claim loss deductions
- Align expense deductions with related-party income recognition to avoid mismatches between accounting methods