If you’ve ever had a client try to “sell at a loss” to a family member or related business to generate a deduction, you’ve likely run headfirst into one of the Internal Revenue Code’s most unforgiving provisions: IRC § 267.

This rule is deceptively simple—but brutally effective.

What Is IRC § 267?

Under 26 U.S.C. § 267(a)(1):

“No deduction shall be allowed in respect of losses from sales or exchanges of property, directly or indirectly, between related persons.”

This means that even if a transaction is economically real, the IRS will disallow the loss if it occurs between certain related parties.

Who Counts as a “Related Party”?

IRC § 267(b) defines related persons broadly, including:

• Family members (siblings, spouses, ancestors, lineal descendants)
• Majority-owned corporations and their shareholders
• Partnerships and partners with >50% interest
• Trusts and beneficiaries

Treasury Regulations reinforce this interpretation:

“The term ‘related taxpayer’ includes those persons specified in section 267(b)… regardless of whether the transaction is at arm’s length.”
— Treas. Reg. § 1.267(b)-1

This is critical: even fair market value transactions are still disallowed if the parties are related.

Classic Real-World Example

Let’s say:

• Parent sells stock with a $20,000 loss to their child
• The sale is legitimate, documented, and priced at fair market value

Result:
👉 The $20,000 loss is completely disallowed

No deduction. No partial credit. Nothing.

But Here’s the Twist (The “Suspended Loss” Concept)

The story doesn’t end there.

Under IRC § 267(d):

If the related buyer later sells the property at a gain, the previously disallowed loss may reduce that gain.

This creates a kind of “shadow loss” that follows the property.

Example:

• Parent sells stock to child at $20,000 loss (disallowed)
• Child later sells stock at $30,000 gain

👉 Child can offset that gain by the parent’s disallowed loss
👉 Taxable gain becomes $10,000 instead of $30,000

Indirect Transactions Also Count

You can’t “work around” § 267 by using intermediaries.

The statute explicitly applies to:

“directly or indirectly”
— IRC § 267(a)(1)

Courts and the IRS will collapse transactions designed to avoid the rule.

Common Situations Where This Rule Bites

1. Family Asset Transfers

Parents trying to “harvest losses” by selling investments to children.

2. Closely Held Corporations

Shareholders selling depreciated assets to their own company.

3. Partnership Restructuring

Partners shifting assets between entities they control.

4. Divorce-Adjacent Planning

Even though divorce has its own rules, related-party concepts can still overlap in structuring.

Timing Rules for Expenses Between Related Parties

IRC § 267 also affects accrual accounting.

Under IRC § 267(a)(2):

Deductions for unpaid expenses between related parties are deferred until the recipient includes the amount in income.

Treasury Regulations clarify:

“The deduction is allowable only when the amount is includible in the gross income of the person to whom the payment is made.”
— Treas. Reg. § 1.267(a)-1(c)

Example:

• Corporation accrues bonus to owner (cash-basis taxpayer)
• Corporation cannot deduct until owner actually receives income

Why the IRS Cares

This rule exists to prevent:

• Artificial tax losses
• Income shifting within families
• Timing mismatches between related taxpayers

In short: no tax benefit without real economic separation.

Planning Considerations

✔ Legitimate Alternatives

• Sell to unrelated third parties
• Recognize gains/losses in open market transactions

⚠ Common Mistakes

• Assuming fair market value saves the deduction
• Using intermediaries (won’t work)
• Ignoring ownership attribution rules

Final Takeaway

IRC § 267 is one of those provisions that looks narrow—but applies everywhere once you start looking for it.

If your client is:

• Selling assets to family
• Moving property between entities they control
• Trying to recognize losses in “friendly” transactions

👉 You need to stop and analyze § 267 first.

Because once the IRS applies it, the deduction is gone—no matter how reasonable the transaction seemed.

At Dino Tax Co, we help clients navigate tax matters ranging from unfiled returns to IRS letters and levies and everything in between with clarity and confidence. If you’d like guidance on your situation, schedule a consultation today. Call or text (713) 397-4678 or email davie@dinotaxco.com. We’re here to help you take the next step.