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IRC 267- RELATED PARTIES AND

SCHEDULE B-1 PARTS I AND II ON


FORM 1065

IRC 267(C) CONTINUED

Internal Revenue Code (IRC) Section 267 is one of the most


referred to code sections in the entire tax code. Many other code
sections refer to it when attempting to determine when a
particular tax law will or will not apply.

The code section exists for 2 reasons. One is that when two
entities are controlled by the same person or group, the end result
is consistent within a particular transaction. At its most basic level
if one group experiences an expense, the other controlled group
experiences gain. The other reason is so that in the event of a
sale within a controlled group (related party group) that results in
a loss, the loss doesnt get recognized until the item sold leaves
the controlled group. This means you cant sell something to
yourself and take a loss on the transaction. Additionally IRC 267
defines what are to be considered related parties and it is there
that we will focus our attention.

IRC 267 (C) CONTINUED


Section 267(c) reads as follows: (c)Constructive ownership of stock
For purposes of determining, in applying subsection (b), the ownership of stock
(1)Stock owned, directly or indirectly, by or for a corporation, partnership, estate,
or trust shall be considered as being owned proportionately by or for its
shareholders, partners, or beneficiaries;
(2)An individual shall be considered as owning the stock owned, directly or
indirectly, by or for his family;
(3)An individual owning (otherwise than by the application of paragraph (2)) any
stock in a corporation shall be considered as owning the stock owned, directly or
indirectly, by or for his partner; (note this section isnt considered for Schedule B-1)
(4)The family of an individual shall include only his brothers and sisters (whether
by the whole or half blood), spouse, ancestors, and lineal descendants; and
(5)Stock constructively owned by a person by reason of the application of
paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated
as actually owned by such person, but stock constructively owned by an individual
by reason of the application of paragraph (2) or (3) shall not be treated as owned by
him for the purpose of again applying either of such paragraphs in order to make
another the constructive owner of such stock.

IRC 267 (C) CONTINUED


IRC 267 (c)(4) refers to the family and its
important to take away a couple of things here.
One is that cousins are not related parties and
the other is nieces and nephews and aunts and
uncles arent considered related parties either.
Ancestors here means direct ancestors, IE
grandparents. Lineal descendents means a direct
descendent son, daughter, grandson,
granddaughter. So cousins while not related
parties in relation to each other are related
parties between themselves and their
grandparents.

IRC 267 (C) CONTINUED


For Schedule B-1, IRC 267 (c)(3) is not considered
Looking at the form we can see that theyre two
parts Part 1 and Part 2.
Part 1 is where we list entities such as
corporations, partnerships, trusts, non-profits
that own 50% or more of the partnership
Part 2 is where we list individuals and estates
that own 50 % or more of the partnership
The trick to this form is that it requires us to
consider entities and individuals who may own
stock indirectly and that includes related parties.

IRC 267(C) CONTINUED


If you have 4 individuals and a partnership
that own equal interests in a partnership,
then no one person owns more than 20%. Yet
Schedule B-1 may need to be filled out. It
also becomes necessary to know who owns
the partnership. If 2 of the partners are
brother and sister and the partnership is 50
% owned by their father and the other 50%
owned by an unrelated party, then the 50%
threshold is met. 20% + 20% +10% = 50%

IRC 267 (C) CONTINUED


To report this the Partnership owned
in part by the father would be listed
in Part I and the brother and sister
would each be listed in Part II.
Their interests would be listed as
50% for each individual on Part II and
50% for the Partnership listed in Part
1