Related Party Transactions: IRC 267 Loss Disallowance, Constructive Ownership, and Controlled Group Rules

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated October 19, 2026 ·8 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

The IRS does not trust transactions between related parties because the parties can set prices and terms that no unrelated parties would accept. Under IRC 267, losses on sales or exchanges between related persons are disallowed, meaning you cannot sell an asset to a family member or a controlled entity at a loss and claim the deduction. Under IRC 482, the IRS can reallocate income, deductions, credits, and other items between two or more organizations, trades, or businesses owned or controlled by the same interests if necessary to prevent evasion of taxes or to clearly reflect income. These rules apply broadly: “related parties” include siblings, spouses, ancestors, lineal descendants, entities owned more than 50% by the same person (directly or through constructive ownership), and controlled groups of corporations under IRC 1563. The constructive ownership rules attribute stock ownership through family members, partnerships, trusts, and corporations, so a taxpayer may be “related” to an entity they do not directly own any shares in.

✓Key takeaway

Related party definitions (IRC 267(b)):

Related Parties	Examples
Family members	Siblings (including half-siblings), spouse, ancestors (parents, grandparents), lineal descendants (children, grandchildren). Does NOT include aunts, uncles, cousins, in-laws, or step-relatives
Individual and controlled entity	A person and a corporation where that person owns more than 50% (directly or constructively)
Two corporations in a controlled group	Brother-sister or parent-subsidiary corporations under common control
Grantor and fiduciary of a trust	The person who created the trust and the trustee
Trust and beneficiary	A trust and its beneficiaries
Two entities with common ownership	A partnership and a corporation both more than 50% owned by the same person(s)
Partnership and partner	A partner who owns more than 50% of the partnership (IRC 707(b))

Constructive ownership rules (IRC 267(c)):

Attribution	From	To
Family	Spouse, siblings, ancestors, descendants	The taxpayer is treated as owning their family members’ stock
Entity to owner	Partnership, corporation (C or S), trust, estate	Proportionate share attributed to partners/shareholders/beneficiaries
Partner to partner	Partner	An individual who owns stock in a corporation is treated as owning stock that their partner owns

Hypothetical example

Round numbers. A business owner (Parent) owns 100% of S-Corp A and 60% of LLC B and has two children who work in the businesses.

Family and entity structure:

Person/Entity	Ownership
Parent	100% of S-Corp A; 60% of LLC B
Child 1	Employee of S-Corp A; 20% of LLC B
Child 2	Employee of LLC B; 20% of LLC B

Scenario 1: Sale at a loss between related parties (IRC 267) Parent sells equipment from S-Corp A to LLC B:

Item	Amount
Equipment original cost	$100,000
Accumulated depreciation	$60,000
Adjusted basis	$40,000
Sale price (FMV)	$25,000
Loss on sale	($15,000)

Rule	Result
S-Corp A and LLC B are related (Parent owns >50% of both)	IRC 267(a)(1) disallows the loss
Loss deduction for S-Corp A	$0 (disallowed)
LLC B’s basis in the equipment	$25,000 (purchase price)
Future benefit	If LLC B later sells the equipment for more than $25,000, the previously disallowed loss offsets gain (IRC 267(d)), but only up to the amount of the disallowed loss

If LLC B later sells the equipment for $50,000: | Gain without 267(d) | $50,000 - $25,000 = $25,000 | | Reduction for previously disallowed loss | ($15,000) | | Recognized gain | $10,000 |

Scenario 2: Accrual/cash matching rule (IRC 267(a)(2)) S-Corp A (accrual basis) accrues a $50,000 management fee payable to Parent (cash basis) on December 31, 2025. Parent does not receive payment until March 2026.

| Without IRC 267 | S-Corp A deducts $50,000 in 2025; Parent reports $50,000 in 2026 | | With IRC 267(a)(2) | S-Corp A cannot deduct the $50,000 until Parent includes it in income (2026) | | Effect | Deduction delayed to match inclusion; no mismatched deduction/income timing |

This rule prevents accrual-basis entities from deducting expenses payable to related cash-basis parties before the payee reports the income.

Scenario 3: IRC 482 reallocation (arm’s length pricing) Parent charges LLC B $10,000/month in management fees, but comparable management services in the market cost $4,000/month.

| IRS position (IRC 482) | The IRS can reallocate $6,000/month ($72,000/year) of the management fee as a distribution or non-deductible payment | | Result | LLC B’s deduction reduced by $72,000; Parent’s income recharacterized | | Standard | Prices must be “arm’s length” (what unrelated parties would charge in comparable circumstances) |

Arm’s length methods:

Method	How It Works
Comparable uncontrolled transaction (CUT)	Compare to prices charged in comparable transactions between unrelated parties
Resale price method	Start with the resale price to third parties and subtract an appropriate gross margin
Cost plus method	Start with the cost of providing the service/product and add an appropriate markup
Comparable profits method	Compare operating profits to those of comparable unrelated companies
Profit split method	Allocate combined profits based on relative contributions

Scenario 4: Controlled group rules (IRC 1563) If Parent owns 100% of S-Corp A and 100% of C-Corp C, they form a controlled group:

Rule	Impact
Section 179 limit shared	The $2,500,000 Section 179 limit (2025) / $2,560,000 (2026) is shared across all members
Accumulated earnings credit	The group shares one $250,000 accumulated earnings credit (corporate tax is a flat 21%, so there are no graduated brackets to share)
FUTA/payroll	Each entity files separately, but aggregation rules may apply
Retirement plans	Controlled group employees must be treated as employees of a single employer for nondiscrimination testing
Health plans	ACA employer mandate applies based on combined employee count

Controlled group types:

Type	Definition
Parent-subsidiary	One corporation owns 80%+ of another
Brother-sister	Same 5 or fewer persons own more than 50% identical ownership of two or more corporations (some rules, such as retirement plan rules, also require 80%+ ownership)
Combined	A combination of parent-subsidiary and brother-sister

Scenario 5: Partner-partnership transactions (IRC 707) Parent (60% partner in LLC B) sells property to LLC B:

| IRC 707(b)(1) | If Parent sells at a loss, the loss is disallowed (same as IRC 267 for >50% partners) | | IRC 707(b)(2) | If Parent sells at a gain and the property is NOT a capital asset in the hands of the partnership, the gain is recharacterized as ordinary income (not capital gain) | | IRC 707(a)(2) | If the transaction is structured as a contribution followed by a distribution, the IRS may recharacterize it as a disguised sale |

Scenario 6: Below-market loans (IRC 7872) Parent loans $500,000 to S-Corp A at 0% interest:

Rule	Impact
IRC 7872	A below-market loan between a corporation and its shareholder results in imputed interest
Applicable Federal Rate (AFR)	IRS publishes monthly AFR rates; mid-term (3-9 years) ~4.5%
Imputed interest	$500,000 x 4.5% = $22,500/year
Treatment	Parent is treated as receiving $22,500 interest income; S-Corp A is treated as paying $22,500 interest (deductible if otherwise qualifiable)
Exception	Loans of $10,000 or less (aggregate between related parties) are generally exempt

Planning around related party rules:

Strategy	How It Works
Document arm’s length pricing	Get comparable market data, third-party quotes, or formal valuations
Use independent appraisals	For property transfers, get a qualified appraisal
Match accrual and payment timing	If accrual entity pays cash-basis related party, pay before year-end
Avoid losses in related party sales	If a loss would be disallowed, consider selling to an unrelated third party instead
Structure intercompany agreements	Written agreements with arm’s length terms, signed before transactions begin
Keep entities operationally independent	Separate bank accounts, separate management, documented business purposes

Illustrative numbers only, not a real client and not advice for your facts.

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Cite this page

Yarik Yarosh, CPA. "Related Party Transactions: IRC 267 Loss Disallowance, Constructive Ownership, and Controlled Group Rules." Blue Cloud CPA, September 5, 2026, updated October 19, 2026. https://bluecloudcpa.com/guides/small-business-related-party-transactions-irc-267-707-controlled-group

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.

Related Party Transactions: IRC 267 Loss Disallowance, Constructive Ownership, and Controlled Group Rules

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