Related-Party Provisions Prevent Deduction by S Corp Shareholders Many routine transactions occur between related parties, including the payment or accrual of interest on indebtedness, license fees, salary or benefits to employees and/or shareholders, and trade invoices. The Tax Court recently found that accrued but unpaid payroll expenses owed to an employee stock ownership plan (ESOP) trust formed for the benefit of an S corp’s employees were not deductible by the S corp until the ESOP’s beneficiaries took the amounts into gross income.1'Related Party' – Section 267 Section 267(a)(2) of the Internal Revenue Code provides that, with respect to accrued but unpaid expenses that would otherwise be deductible under the payer’s method of accounting, if the accrued expense is owed to a “related party” defined under section 267(b), then the payer cannot take the deduction into account until it is taken into income by the recipient of the payment. Section 267(b) lists 13 relationships that are treated as related parties under these rules.2 For parties in these relationships, amounts accrued by a purported payer cannot be deducted until the recipient of the payment includes the payment into its gross income. Section 267(e)(1)(B)(ii) provides a special rule for determining the related-party status of an S corp and its shareholders with respect to payments of expenses between the parties under section 267(a)(2). It treats as related parties an S corp and “any person who owns (directly or indirectly) any of the stock of such corporation.” Thus, when determining the timing of a deduction with respect to a

in 2026, with the sunset of many other Code provisions enacted by the Tax Cuts and Jobs Act (Pub. L. 115-97).The 3.8 percent surtax on net investment income may also apply to this income. IRC Sec. 1411. IRC Sec. 1239. Thus, if a taxpayer were to sell an improved real property to a purchaser that is “related” to the taxpayer, the portion of the gain attributable to the depreciable improvement (say, a building) may be taxed as ordinary income.The underlying theory: a taxpayer should not be able to realize capital gain on a sale that provides a related party with a cost basis that may be recovered against ordinary income through depreciation. Not necessarily a partner. IRC Sec. 707(b)(2). For example, the entire gain from a sale of real property between related partnerships, may be taxed as ordinary income if the property is not a “capital asset” in the hands of the buyer. IRC Sec. 1221. For example, real property that is held for use by the taxpayer in the taxpayer’s trade or business. IRC Sec. 267(a)(1); Sec. 707(b)(1).The underlying theory: the property may still appreciate in the hands of the related buyer and, so, the related parties as a whole will not have realized a loss.It should be noted that if a taxpayer acquires property by purchase from a related transferor who, on the transaction, sustained a loss not allowable as a deduction by reason of IRC Sec. 267(a)(1) or Sec. 707(b)(1), then any gain realized by the taxpayer on a later sale of the property is recognized only to the extent that the gain exceeds the amount of the loss allocable to the property. IRC Sec. 267(d); Reg. Sec. 1.267(d)-1(a)(1); the penultimate sentence of Sec. 707(b)(1). IRC Sec. 707(b). IRC Sec. 267(b). The other covered relationships are as follows:A grantor and a fiduciary of any trust;A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts;A fiduciary of a trust and a beneficiary of such trust;A fiduciary of a trust and a beneficiary of another trust, if

Internal Revenue Code (IRC) Section 267(a)(2) defers deductions for expenses paid by a taxpayer to a “related person” until the payments are includible in the related person’s gross income. IRC Section 267(c) sets out constructive ownership rules for purposes of determining if certain persons are “related persons.” Section 267(c) provides that stock owned, directly or indirectly, by a trust shall be considered as being owned proportionately by its shareholders.

asis stock to a related corporation in which the shareholders have high basis stock. IRC Sec. 1(h). In general, a qualified dividend is one that is paid with respect to the share of stock of a domestic corporation with respect to which the shareholder has satisfied 121-day holding period. In either case, don’t forget to add the 5% NIIT. Including unrealized gains. Assets minus liabilities. Taxpayers who are treated as “illiquid” would be allowed to defer the tax on their nontradeable assets, but would be subject to a deferral charge when such assets were sold. Think IRC Sec. 453A or IRC Sec. 1291. IRC Sec. 754. Under IRC Sec. 734. Say a partnership makes a current distribution of property to a partner, and the partnership’s basis for such property exceeds the distributee-partner’s basis for the property. In that case, the partnership would increase the adjusted basis of the remaining partnership property by the amount of such excess. IRC Sec. 754, Sec. 734(b) and Sec. 732(a)(2). Think IRC Sec. 267(d). IRC 461(l). It is currently set to expire after 2028. The top rate before 2018 was 35%. This addresses two scenarios that may apply to an S corporation that was previously a C corporation or that acquired a C corporation on a tax-free basis. IRC Sec. 1374. IRC Sec. 11. IRC Sec. 1375. Until now, this limitation on deduction applied only to publicly held corporations and only with respect to payments made to certain individual employees. Certain types of compensation are not subject to the deduction disallowance and are not taken into account in determining whether other compensation exceeds $1 million, including (a) payments made to a tax-favored retirement plan, and (b) amounts that are excludable from the employee’s gross income, such as employer-provided health benefits and miscellaneous fringe benefits. The corporation would recognize the loss on the deemed sale of the distributed properties under IRC Sec. 336, and the shareholder would recognize loss in respect of its shares of s

xable income of the controlled taxpayer. “X Ո Y Ո Z” for fans of Venn diagrams. For purposes of this post, we are assuming the existence of the “relationship” that triggers application of the rules discussed. That said, it is imperative that one review the definition of “related” person found in each of the rules discussed – they are not identical. Also be mindful of attribution rules that create a relationship where ostensibly none is evident. Especially where the limitations period (6 years in New York) for demanding repayment expires, though it may be possible to revive a stale claim under certain conditions. But see Reg. Sec. 25.2512-8 re a sale, exchange, or other transfer of property made in the ordinary course of business; i.e., a transaction which is bona fide, at arm’s length, and free from any donative intent. In other words, there may have been a reasonably good business reasons for a below market transfer. IRC Sec. 453. IRC Sec. 453(g). IRC Sec. 453(g)(2). IRC Sec. 453(e). IRC Sec. 267(a)(1). An important exception to the loss disallowance rule involves the complete liquidation of a corporation, in which case the corporation and its shareholders may recognize their respective losses from the liquidating distribution. The fact that related parties could manipulate the tax consequences by varying the sale price is one reason for disallowing the loss. IRC Sec. 267(d). IRC Sec. 1031(a). IRC Sec. 1031(f). As compared to a 20% federal rate for long-term capital gain.These rules are less significant for C corporations, all the income of which is taxed at a flat federal rate of 21%. Of course, if the corporation has capital loss carryovers, the distinction between ordinary income and capital gain will still be important. IRC Sec. 167. Or amortizable. IRC Sec. 197(f)(7). IRC Sec. 1239(a). IRC Sec. 1001, Sec. 1222, Sec. 1(h). The cost basis under IRC Sec. 1012. It’s important to note that IRC Sec. 1239 is most relevant to real property. Because such property is depreciated on a str

A similar rule is provided for partners and partnerships. In addition, certain relationships described in IRC Sec. 267(b) are treated as controlled entity relationships. IRC Sec. 1239(c)(1)(C).

Additionally, section 318(a)(3)(C) and §1.318-1(b) are not applied so as to consider a U.S. corporation as being a reporting corporation if, but for the application of such sections, the U.S. corporation would not be 25-percent foreign owned.Related Party—The term “related party” means:Any direct or indirect 25 percent foreign shareholder of the reporting corporation;Any person who is related (within the meaning of IRC 267(b) or IRC 707(b)(1)) to the reporting corporation or to a 25 percent foreign shareholder of the reporting corporation; andAny other person who is related within the meaning of IRC 482 to the reporting corporation.Foreign Person—For purposes of IRC 6038A, the term “foreign person” generally means:Any individual who is not a citizen or resident of the United States;Any individual who is a citizen of any possession of the United States and who is not otherwise a citizen or resident of the United States;Any partnership, association, company, or corporation that is not created or organized in the United States or under the law of the United States or any State thereof;Any foreign trust or foreign estate, as defined in IRC 7701(a)(31); orAny foreign government (or agency or instrumentality thereof).RecordsGenerally, the records that must be maintained pursuant to IRC 6038A are required to be maintained within the U.S. However, a reporting corporation may maintain such records outside the U.S.

You’ll note that Sch. L to IRS Form 1065 refers to “[l]oans to partners (or to persons related to partners)” while Sch. L to Form 1120 does not include a reference to “persons related to shareholders.” The “related persons” are described in IRC 267(b) and 707(b). The balance sheet asks for the amounts owing at the beginning and at the end of the year.

, as amended.[2]The termination rule would not apply to an otherwise qualifying intangible property repatriation, and annual inclusions would continue to be required, unless the original domestic transferor reported certain information about the repatriation. This information would include the original domestic transferor’s original basis in the outbound intangible property, a copy of Form 926 that the original domestic transferor filed for the original outbound transfer, and the qualified domestic person’s name, address, and taxpayer identification number. Relief for a failure to report the information would be available, however, if the original domestic transferor promptly provided the information upon becoming aware of the failure.[3] Related persons for purposes of the proposed Regulations are certain U.S. individuals and domestic corporations. In the case of a domestic partnership, the proposed Regulations define a related person by reference to certain relationship described in Sections 267 and 707(b)(1).[View source.]

et than what is summarized here. The provisions dealing with foreign operations and foreign-source income of U.S. taxpayers alone are a bear.The endnotes try to explain the reason for the proposed change.[v] IRC Sec. 356(a)(1) and (2).[vi] Described in IRC Sec. 368.[vii] Determined by treating a target shareholder as having received qualifying stock consideration which is then redeemed. The characterization of the deemed redemption as a dividend is determined by applying IRC Sec. 302.[viii] If, as part of a corporate reorganization, a shareholder receives in exchange for stock of the target corporation both stock and property not permitted to be received without the recognition of gain (often referred to as “boot”; for example, money), the exchanging shareholder is required to recognize gain equal to the lesser of the gain realized in the exchange or the amount of boot received. Thus, it is possible for a shareholder not to be taxed on cash received in excess of the gain realized.[ix] IRC Sec. 267.[x] In general, if a corporation distributes its property in complete liquidation, the shareholders of the corporation recognize gain or loss on their stock under IRC Sec. 331, and the corporation recognizes gain or loss on the property distributed to the shareholders under IRC Sec. 336.Under IRC Sec. 332, however, if the same corporate shareholder owns 80 percent or more (by vote and value) of the distributing corporation’s stock, then the 80 percent corporate shareholder does not recognize gain or loss on the liquidation and, under IRC Sec. 337, the liquidating corporation does not recognize gain or loss on property distributed to the 80 percent shareholder.There is a concern that a parent corporation may intentionally reduce its ownership of a subsidiary below 80 percent (through a transfer to a related entity) to recognize a loss on liquidation of the subsidiary notwithstanding that the parent hasn’t disposed of its investment.[xi] IRC Sec. 368(c). At present, “control,” as define