The Family Trap: Navigating Section 267 and Related Party Loss Disallowance
In the eyes of the IRS, a sale between family members or controlled entities isn\'t a real arm\'s-length transaction—it\'s a potential tax-evasion scheme. Under Section 267, if you sell an asset to a "related party" (such as a spouse, sibling, child, or a corporation you own) at a loss, that loss is explicitly disallowed for tax purposes. You cannot deduct it on your return, even if the price was perfectly fair and supported by an appraisal. This rule effectively forces families to "keep" their losses until the asset is sold to an outside third party. Our Private Client Group specializes in architecting asset reallocations that bypass the Section 267 disallowance.
Constructive Ownership and the Affiliate Web
The danger of Section 267 lies in its "Constructive Ownership" rules. You are considered to own stock that is owned by your family members or by partnerships and trusts in which you have an interest.
This means a sale between two different corporations you control can trigger 267 loss disallowance, even if you weren\'t personally a party to the transaction. For multi-generational family offices, the related-party web can be incredibly complex. We provide the "Nexus Mapping" needed to identify disallowed transaction paths before an execution. Furthermore, we architect "Basis-Shift" strategies where the disallowed loss is effectively "trapped" with the buyer—allowing the buyer to offset gain when they eventually sell the asset to a third party.
Section 267(e) and the Accrual Timing Trap
Beyond capital losses, Section 267 also governs the timing of deductions for bonuses, interest, and rent paid between related parties.
Ordinarily, an accrual-basis company can deduct an expense when it is incurred, even if it hasn\'t been paid yet. However, 267(e) forces the company to wait until the related party actually *receives* the income. If a family business accrues a $1M bonus for the founder in December 2025 but doesn\'t pay it until January 2026, the $1M deduction is disallowed in 2025. This can create a massive, unexpected tax bill for the company. We provide the liquidity management archetypes needed to ensure all intercompany payments are cleared before the fiscal year-end, protecting the deductibility of millions in operational expenses.