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Related Party Transactions (Portfolio 564)

Tax Management Portfolio, Related Party Transactions, No. 564-2nd, examines and analyzes the dual purposes of §267.

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Tax Management Portfolio, Related Party Transactions, No. 564-2nd, examines and analyzes the dual purposes of §267.


First, as a definitional section, §267 establishes the degree of relationship that gives rise to the application of its operational provisions. The effect of identifying certain taxpayers as “related” may cause a transaction to obtain federal income tax consequences significantly different than a transaction consummated by parties that are not related. Because the core definition of “related parties,” as found in §267, is often cross-referenced by other sections throughout the Internal Revenue Code, an analysis of this definition is pivotal in determining the impact of other sections, as well.


Second, as an operational section, §267 defers certain deductions and denies certain losses incurred in related party transactions.


This Portfolio provides a detailed discussion of each of §267's definitional and operational rules. It also gathers, in one source, other provisions of the Internal Revenue Code that borrow the definition of related parties as provided for in §267 and analyzes their interrelation.


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AUTHORS

GEORGE C. KOUTOURAS
George C. Koutouras, LL.M. (Taxation), Georgetown University Law Center; J.D., University of Detroit School of Law; B.S.A., University of Michigan; bar membership, Illinois; formerly Attorney/Advisor to Special Trial Judge Stanley J. Goldberg, United States Tax Court; Co-Author, 767 T.M., Redemptions; Co-Author, 768 T.M., Stock Sales Subject to Section 304; Co-Author, 782 T.M., Boot Distributions and Assumption of Liabilities; Adjunct Professor, Golden Gate University, Master of Tax Program.

MARK Q. TIZABGAR
Mark Q. Tizabgar, LL.M. (Taxation), New York University School of Law; J.D. (cum laude), Southwestern University School of Law; B.S., California State University Northridge; State Bar of California; Co-Author, 768 T.M., Stock Sales Subject to Section 304; Co-Author, 782 T.M., Boot Distributions and Assumption of Liabilities; Adjunct Professor, Golden Gate University, Master of Tax Program.

JAMES E. CARREON
James E. Carreon, J.D., Southwestern University School of Law; B.S. and B.A., University of Southern California; State Bar of California; Adjunct Professor, Golden Gate University, Master of Tax Program.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. Scope of Portfolio

B. Common Related Party Transactions

II. Section 267

Introductory Material

A. Related Persons Defined

1. Family Members

2. Corporation/Shareholders

a. Individual

b. Corporation

c. 50 Percent Requirement

3. Controlled Groups of Corporations

a. Section 267(f)

b. Section 1563

(1) In General

(2) Parent-Subsidiary Controlled Group

(3) Brother-Sister Controlled Group

(4) Combined Group

(5) Insurance Company

(6) Certain Stock Excluded

(7) Rules for Determining Stock Ownership

(8) Constructive Ownership Under § 1563(e)

(a) Option Attribution

(b) Attribution from Partnerships

(c) Attribution from Estates or Trusts

(d) Attribution from Corporations

(e) Spousal Attribution

(f) Children, Grandchildren, Parents and Grandparents

(9) Other Operating Rules

4. Trusts, Grantors, Fiduciaries and Beneficiaries

5. Tax-Exempt Organizations

6. Partnerships and Partnerships

7. Corporations and Partnerships

8. S Corporations and Other S Corporations

9. S Corporations and Other C Corporations

10. Estates

11. Reconciliation of Related Party Rules in the Partnership Context

B. Constructive Ownership Under § 267(c)

1. Entity to Owner

2. Family Members

a. Form of Ownership and Title

b. No Family Hostility Exception

3. From Partners

4. Stock Constructively Owned Treated as Actually Owned

C. Section 267(a)

1. Deduction for Losses Disallowed

a. General Rule

b. Indirect Sales

2. Matching Rule

a. Regulations

b. Comparison of Changes Between Pre-1984 and Present Law

(1) Current Regulations

(2) Pre-1984 Regulations

3. Payments to Foreign Persons

a. General Rule

b. Exceptions

(1) Effectively Connected Income Subject to United States Tax

(2) Items Exempt from Tax by Treaty

(3) Items Subject to Reduced Rate of Tax by Treaty

(4) Amounts Owed to Foreign Personal Holding Company

(5) Amounts Owed to Controlled Foreign Corporation

(6) Amounts Owed to Passive Foreign Investment Company

D. Section 267(e) - Special Rules Related to Pass-Thru Entities

1. In General

2. Constructive Ownership - Partnerships

3. Matching Rule Not Applied to Certain Guaranteed Payments of Partnership

4. Exception for Expenses and Interest of Partnerships Owning Low-Income Housing

E. Section 267(f) - Special Rules Related to Controlled Groups

1. Controlled Group Defined

2. Deferral Rather than Denial of Loss

3. Loss Deferral Rules Not Applied in Certain Cases

a. Transfers to DISC

b. Certain Sales of Inventory

c. Certain Foreign Currency Losses

4. Application to Other Sections of Title

F. Section 267(d) - Amount of Gain Where Loss Previously Disallowed

G. Section 267(g) - Coordination with § 1041

H. Section 267 Not Applied in the Case of Liquidation

III. Section 707

A. In General

B. Section 707(b)

1. Disallowed Loss

2. Characterization of Gain

3. Constructive Ownership Rules

C. Direct and Indirect Sales

D. Section 707 v. § 267

IV. Section 108

A. In General

B. Related Persons Defined

1. Members of Family

2. Entities Treated as Single Employer

a. Controlled Groups of Corporations

b. Entities Under Common Control

(1) Parent-Subsidiary Group of Trades or Businesses Under Common Control

(2) Brother-Sister Group of Trades or Business Under Common Control

(3) Combined Groups of Trade or Businesses Under Common Control

c. Constructive Ownership Rules

C. Acquisition of Indebtedness by Person Related to Debtor

1. Direct Acquisitions of Indebtedness

2. Indirect Acquisitions of Indebtedness

a. In General

b. Proof of Anticipation of Relationship

c. Presumption if the Indebtedness Acquired Within Six Months of Becoming Related

d. Disclosure Requirements for Certain Potential Indirect Acquisitions

(1) More than 25% of Holder Group's Assets

(2) Indebtedness Acquired Between Six to 24 Months of Becoming Related

(3) Suspension and Tacking of Holding Period of Indebtedness

(4) Required Contents of the Disclosure Statement

(5) Failure to Disclose

3. Exceptions to Recognition of COD Income

a. Indebtedness Retired Within One Year

b. Acquisitions by Securities Dealers

4. Amount of COD Income

a. Indebtedness Acquired by Purchase On or Less than Six Months

b. Indebtedness Not Acquired by Purchase On or Less than Six Months

c. Avoidance Transactions

5. Treatment of Related Persons - Correlative Adjustments

a. Deemed Issuance

b. Treatment of Related Holder

c. Loss Deferral

6. Members of Consolidated Groups

V. Section 197

A. Section 197

B. Anti-Churning in General

C. Related Person Defined

1. Common Control Definition

a. Parent-Subsidiary Group

b. Brother-Sister Group

c. Combined Group

2. Timing of the Relationship

3. Disregarded Relationships

a. Stock Acquisition Followed by Liquidation

b. De Minimis Rule

4. Special Rule for § 338

D. Exception for Gain Recognition Transactions

1. Time and Manner of Gain Recognition Election

2. Election by Partnership, S Corporation, Estate, and Trust

VI. Section 336

VII. Section 355(d)(7) and (8)

VIII. Limitation on Interest Deductions

IX. Installment Sales

X. Involuntary Conversions

XI. Like-Kind Exchanges

A. In General

B. Exchanges Among Related Persons

XII. Gain from Sale of Depreciable Property

A. In General

B. Related Person Defined

XIII. Transfer of Intangible Property to Foreign Corporations


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Section 267 Relationship Master Flowchart

Worksheet 2 Family Members Flowchart

Worksheet 3 Shareholder and Corporate Flowchart

Worksheet 4 Controlled Group Flowchart

Worksheet 5 Trust, Grantors, Fiduciaries and Beneficiaries Flowchart

Worksheet 6 Tax Exempt Organizations Flowchart

Worksheet 7 Partner and Partnership Flowchart

Worksheet 8 Corporations and Partnerships Flowchart

Worksheet 9 S Corporations and Other S Corporations Flowchart

Worksheet 10 S Corporation and C Corporation Flowchart

Worksheet 11 Estates Flowchart

Bibliography