26 U.S.C. § 267 — Losses, expenses, and interest with respect to transactions between related taxpayers

(a) In general. (1) Deduction for losses disallowed. If a loss comes from selling or trading property between two people or entities who are "related" under subsection (b), no tax deduction is allowed for that loss. This disallowance does not apply to a loss the distributing corporation (or the person receiving the distribution) has in a distribution that completely liquidates a corporation. (2) Matching of deduction and payee income item. This rule targets expenses and interest. It applies when, because of the payee's accounting method, the payment isn't included in the payee's taxable income unless actually paid — and at the end of the taxpayer's tax year, both the taxpayer and the payee are "related" under subsection (b). In that case, the payer cannot deduct the amount until the day the payee must include it in income (or later, if the deduction would otherwise be allowed later). For this rule, a personal service corporation and its employee-owners are also treated as "related." (3) Payments to foreign persons. (A) The Secretary must write regulations applying the same matching rule above to payments made to people who are not U.S. persons. (B) A special rule limits this for certain foreign entities: for amounts payable to a controlled foreign corporation or a passive foreign investment company, the payer can only deduct the amount for a year before it's paid to the extent a related amount is included that same year in the taxable income of a U.S. person who owns stock in that foreign corporation. The Secretary can write regulations exempting some transactions from this special rule — including ordinary-course business transactions where the accrued amount is paid within about 8½ months of accrual, or another period the Secretary sets. (b) Relationships. The related-party rules above apply between these pairs: (1) members of a family, as defined in subsection (c)(4); (2) an individual and a corporation where that individual owns, directly or indirectly, more than 50 percent of the corporation's stock value; (3) two corporations that are part of the same controlled group, as defined in subsection (f); (4) a trust's grantor and its fiduciary (trustee); (5) fiduciaries of two different trusts that share the same grantor; (6) a trust's fiduciary and its beneficiary; (7) a trust's fiduciary and the beneficiary of another trust, if the two trusts share the same grantor; (8) a trust's fiduciary and a corporation more than 50 percent of whose stock value is owned, directly or indirectly, by or for the trust or by or for a person who is the trust's grantor; (9) a person and a tax-exempt educational or charitable organization (under section 501) that the person, or the person's family, controls; (10) a corporation and a partnership, if the same people own more than 50 percent of the corporation's stock value and more than 50 percent of the partnership's capital or profits interest; (11) two S corporations, if the same people own more than 50 percent of each corporation's stock value; (12) an S corporation and a C corporation, if the same people own more than 50 percent of each corporation's stock value; and (13) an executor of an estate and a beneficiary of that estate, except when the sale or exchange satisfies a bequest of a specific dollar amount. (c) Constructive ownership of stock. These rules decide who "owns" stock for purposes of subsection (b): (1) stock owned by a corporation, partnership, estate, or trust is treated as owned proportionately by its shareholders, partners, or beneficiaries; (2) a person is treated as owning stock owned by members of their family; (3) a person who owns stock directly (not just through rule (2)) is also treated as owning stock owned by their business partner; (4) "family" for this purpose means only siblings (whole or half blood), a spouse, ancestors, and lineal descendants; and (5) stock a person is treated as owning under rule (1) counts as actually owned by them when applying rules (1), (2), or (3) again — but stock a person is treated as owning only under rule (2) or (3) does not get passed on again to make someone else a constructive owner. (d) Amount of gain where loss previously disallowed. (1) If a transferor's loss on a sale to the taxpayer was disallowed under subsection (a)(1), and the taxpayer later sells that same property (or other property whose basis is figured from it) at a gain, then the taxpayer only has to recognize the part of that gain exceeding the loss that was properly allocable to the property. (2) This rule does not apply if the transferor's loss was disallowed instead under the wash-sale rule of section 1091. (3) This rule also does not apply to the extent the transferor's loss, if it had been allowed, would not have counted in figuring a tax under section 1 or 11 (or a tax computed under either of those sections) — that is, transfers from "tax indifferent" parties. (e) Special rules for pass-thru entities. (1) For payments made by, to, or for a partnership or S corporation ("pass-thru entity"), and only for applying the expense/interest matching rule in subsection (a)(2), several people are treated as "related" under subsection (b): the entity itself; any person owning a capital or profits interest in the partnership, or any stock in the S corporation; any person who owns an interest in another partnership in which the pass-thru entity itself owns an interest (but only for transactions tied to that partnership's operations or to an interest in it); and anyone related, under subsection (b) or section 707(b)(1), to those people. (2) "Pass-thru entity" means a partnership or an S corporation. (3) For deciding who owns a capital or profits interest in a partnership, the constructive-ownership rules in subsection (c) apply, except the partner-to-partner rule in subsection (c)(3) does not apply, and interests owned by a C corporation only pass through to a shareholder who owns 5 percent or more of that corporation's stock value. (4) The expense/interest matching rule in subsection (a)(2) does not apply to a partnership's guaranteed payments covered by section 707(c). (5) A special exception covers certain expenses and interest a partnership pays on low-income housing to a "qualified 5-percent-or-less partner" (defined as a partner with a 5 percent or smaller interest who either owned the housing for the 2 years before transferring it to the partnership, or whose partnership acquired the housing from HUD or a state or local housing authority) or to someone related to that partner. This exception only covers "qualified expenses and interest" — amounts the partnership must unconditionally pay within 10 years of being incurred, with interest capped at a 12 percent annual rate. "Low-income housing" here means the kinds of property described in section 1250(a)(1)(B)(i)-(iv), or a partnership interest in property like that. (6) Section 707(b) has additional related-partnership rules. (f) Controlled group defined; special rules for controlled groups. (1) "Controlled group" has the meaning in section 1563(a), except "more than 50 percent" replaces "at least 80 percent" everywhere it appears, and the determination ignores section 1563(a)(4) and (e)(3)(C). (2) For a loss on a sale between members of the same controlled group that would otherwise be disallowed under subsection (a)(1): instead of being disallowed, the loss is deferred. It isn't recognized until the property leaves the controlled group and would be recognized under consolidated-return rules, or until another time set by regulations. (3) This deferral rule does not apply in some cases: (A) a DISC does not count as part of the "controlled group" when applying subsection (a)(1); (B) except as regulations provide, subsection (a)(1) does not apply to a sale of inventory-type property (described in section 1221(a)(1)) made in the ordinary course of business between controlled-group members, if the property stays inventory-type in the buyer's hands and either the buyer or seller is a foreign corporation; (C) as regulations provide, subsection (a)(1) does not apply to a loss from repaying a loan between controlled-group members if the loan is in a foreign currency and the loss comes from that currency losing value; (D) except as regulations provide, subsection (a)(1) does not apply to a redemption of stock in a fund-of-funds regulated investment company, if that company issues only stock redeemable on demand and the redemption is demanded by another regulated investment company. (4) Wherever another section of this title refers to a relationship that would disallow a loss under this section, a loss that is merely deferred under paragraph (2) counts as disallowed. (g) Coordination with section 1041. The loss-disallowance rule in subsection (a)(1) does not apply to a transfer of property between spouses, or incident to divorce, described in section 1041(a).