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Definition of Related Parties Pursuant to Sections 267(b) and 707(b)(1)

The term "related person" or "related party" means any person or party, including entities, that has a relationship to the taxpayer described in Section 267(b) or Section 707(b)(1) of the Internal Revenue Code ("IRC"), including: 

  • Members of the same family unit (siblings, spouse, ancestors, and lineal descendants);
  • Corporation where more than 50% of the value of the stock is owned directly or indirectly by or for one particular individual;
  • Two (2) corporations that are in the same controlled group (as defined in subsection (f);
  • A grantor and a fiduciary of any trust;
  • A fiduciary of one trust and the fiduciary and/or beneficiary of another trust where the same person is the grantor for both trusts;
  • A fiduciary of a trust and a beneficiary of the same trust;
  • Corporation where more than 50% of the value of the stock is owned directly or indirectly by or for one particular trust or by or for the grantor or fiduciary of the trust;
  • An organization qualified under Section 501 of the Internal Revenue Code (relating to certain educational or charitable non-profit organizations) which is controlled directly or indirectly by a specific person or (if such person is an individual) by members of the family of such individual;
  • A corporation and a partnership if the same person or persons own:
    • more than 50% in value of the outstanding stock of the corporation, and
    • more than 50% of the capital interest, or the profits interest, in the partnership;
  • An S corporation and another S corporation or a C corporation if the same person or persons own more than 50% in value of the outstanding stock of each corporation;
  • A partnership and a person owning, directly or indirectly, more than a 50% capital interest or a 50% profits interest, in such partnership;
  • Two partnerships in which the same person or persons own, directly or indirectly, more than a 50% capital interest or a 50% profits interest, in both partnerships;
  • An executor of an estate and the beneficiaries of the estate.

One trust created and formed by a husband and one trust created and formed by a wife are not related persons because the two (2) trusts have different grantors.  Investors may be able to eliminate related party transaction issues by changing the ownership of the related party such as transferring or disposing of interests in a partnership or shares in a corporation to an unrelated third-party in order to get the related party's ownership interest below the 50% level.  

It appears that the constructive ownership rules under Section 267(c) of the Internal Revenue Code apply in determining the ownership of stock, capital interest, or profits interest.  

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