Determining if taxpayers are related parties.

• Author: Ellentuck, Albert B.

Facts: LEMON Corporation is owned equally by Larry, Ed, Mark, Orson and Nelson, Inc. * Nelson, Inc. is owned equally by Ed and Sandra. * Sandra is married to Orson. Larry and Mark are brothers. * Mark and Orson own a 5% interest each in Klaxton Partnership. Issue: Which shareholders of LEMON Corporation are considered related to the corporation under Sec. 267?

Analysis

The Code has several provisions aimed at ensuring that the tax laws are not circumvented or misused in transactions in which both parties are controlled by the same interests. One of these provisions is Sec. 267, which deals with matching of deductions and income and disallowance of losses in transactions involving related taxpayers.

Situations in which the parties are considered related (and the constructive ownership rules that define and expand these relationships) are set forth in Sec. 267, which provides that the following parties are considered related:

1. Family members, which include an individual's brothers, sisters, spouse, ancestors and lineal descendants.

2. An individual and a corporation in which the individual owns (directly or indirectly) more than 50% of the value of the corporation's outstanding stock.

3. Two corporations that are members of the same controlled group.

4. A fiduciary of a trust and its grantor.

5. The fiduciaries of two trusts if the grantor of the trusts is the same.

6. A fiduciary and beneficiary of the same trust.

7. A fiduciary of one trust and the beneficiary of another trust if the grantor of both trusts is the same.

8. A corporation and the fiduciary of a trust, if more than 50% of the corporation's outstanding stock value is owned (directly or indirectly) by or for the trust or the grantor of the trust.

9. A person and a tax-exempt educational or charitable organization controlled (directly or indirectly) by the person or by the person's family if the person is an individual.

10. A partnership and a corporation, if more than 50% of the corporation's outstanding stock value and more than 50% of the partnership's capital or profits interest are owned by the same persons.

11. Two S corporations, or an S corporation and a C corporation, if more than 50% of each corporation's outstanding stock value is owned by the same persons.

    For purposes of the rule regarding matching of deductions and income, a personal service corporation and any employee-owner are treated as related taxpayers.

    Indirect ownership occurs when an individual is deemed to own stock...