[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.267(b)-1]

[Page 578-579]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.267(b)-1  Relationships.

    (a) In general. (1) The persons referred to in section 267(a) and 
Sec. 1.267 (a)-1 are specified in section 267(b).
    (2) Under section 267(b)(3), it is not necessary that either of the 
two corporations be a personal holding company or a foreign personal 
holding company for the taxable year in which the sale or exchange 
occurs or in which the expenses or interest are properly accruable, but 
either one of them must be such a company for the taxable year next 
preceding the taxable year in which the sale or exchange occurs or in 
which the expenses or interest are accrued.
    (3) Under section 267(b)(9), the control of certain educational and 
charitable organizations exempt from tax under section 501 includes any 
kind of control, direct or indirect, by means of which a person in fact 
controls such an organization, whether or not the control is legally 
enforceable and regardless of the method by which the control is 
exercised or exercisable. In the case of an individual, control 
possessed by the individual's family, as defined in section 267(c)(4) 
and paragraph (a)(4) of Sec. 1.267 (c)-1, shall be taken into account.
    (b) Partnerships. (1) Since section 267 does not include members of 
a partnership and the partnership as related persons, transactions 
between partners and partnerships do not come within the scope of 
section 267. Such transactions are governed by section 707 for the 
purposes of which the partnership is considered to be an entity separate 
from the partners. See section 707 and Sec. 1.707-1. Any transaction 
described in section 267(a) between a partnership and a person other 
than a partner shall be considered as occurring between the other person 
and the members of the partnership separately. Therefore, if the other 
person and a partner are within any one of the relationships specified 
in section 267(b), no deductions with respect to such transactions 
between the other person and the partnership shall be allowed:
    (i) To the related partner to the extent of his distributive share 
of partnership deductions for losses or unpaid expenses or interest 
resulting from such transactions, and

[[Page 579]]

    (ii) To the other person to the extent the related partner acquires 
an interest in any property sold to or exchanged with the partnership by 
such other person at a loss, or to the extent of the related partner's 
distributive share of the unpaid expenses or interest payable to the 
partnership by the other person as a result of such transaction.
    (2) The provisions of this paragraph may be illustrated by the 
following examples:

    Example 1. A, an equal partner in the ABC partnership, personally 
owns all the stock of M Corporation. B and C are not related to A. The 
partnership and all the partners use an accrual method of accounting, 
and are on a calendar year. M Corporation uses the cash receipts and 
disbursements method of accounting and is also on a calendar year. 
During 1956 the partnership borrowed money from M Corporation and also 
sold property to M Corporation, sustaining a loss on the sale. On 
December 31, 1956, the partnership accrued its interest liability to the 
M Corporation and on April 1, 1957 (more than 2 1/2 months after the 
close of its taxable year), it paid the M Corporation the amount of such 
accrued interest. Applying the rules of this paragraph, the transactions 
are considered as occurring between M Corporation and the partners 
separately. The sale and interest transactions considered as occurring 
between A and the M Corporation fall within the scope of section 267 (a) 
and (b), but the transactions considered as occurring between partners B 
and C and the M Corporation do not. The latter two partners may, 
therefore, deduct their distributive shares of partnership deductions 
for the loss and the accrued interest. However, no deduction shall be 
allowed to A for his distributive shares of these partnership 
deductions. Furthermore, A's adjusted basis for his partnership interest 
must be decreased by the amount of his distributive share of such 
deductions. See section 705(a)(2).
    Example 2. Assume the same facts as in Example 1 of this 
subparagraph except that the partnership and all the partners use the 
cash receipts and disbursements method of accounting, and that M 
Corporation uses an accrual method. Assume further, that during 1956 M 
Corporation borrowed money from the partnership and that on a sale of 
property to the partnership during that year M Corporation sustained a 
loss. On December 31, 1956, the M Corporation accrued its interest 
liability on the borrowed money and on April 1, 1957 (more than 2 1/2 
months after the close of its taxable year) it paid the accrued interest 
to the partnership. The corporation's deduction for the accrued interest 
is not allowed to the extent of A's distributive share (one-third) of 
such interest income. M Corporation's deduction for the loss on the sale 
of the property to the partnership is not allowed to the extent of A's 
one-third interest in the purchased property.