Area IV.C Master Notes: Related-Party Dispositions and Imputed Interest

Arm's Length Transaction

A deal where two independent parties bargain for the best price.

Related Party

Individuals or entities that have a close relationship, which affects their dealings for tax purposes.

IRC §267

A rule that disallows losses on sales or exchanges between related parties.

Family Members (Under §267(b))

Includes brothers, sisters, spouse, ancestors, and lineal descendants.

Controlled Group

Two corporations that are under common control.

Loss Disallowance Rule

Disallows losses on sales or exchanges of property between related parties under IRC §267(a)(1).

Cost Basis

The purchase price paid for an asset, which generally remains unaffected by disallowed losses.

§267(d) Gain Offset

Allows a buyer to reduce recognized gain by a previously disallowed loss if sold to an unrelated party.

Ordinary Income Trap

A situation where gain from the sale of depreciable property is treated as ordinary income under IRC §1239.

Installment Sale Acceleration

A rule under IRC §453(e) that requires gain recognition to be accelerated if a related party quickly disposes of property.

Two-Year Holding Rule

Under IRC §1031(f), if exchanged property is disposed within two years, original gain recognition is triggered.

Deemed Transfers (Under §7872)

Two hypothetical transactions created for tax purposes, treating foregone interest as a gift or transfer.

Below-Market Loan

A loan where the stated interest is less than the applicable federal rate (AFR).

Gift Loan

A loan to a relative that typically has no or below-market interest rates, treated as a gift under tax law.

Accrual-Basis Taxpayer

A taxpayer who recognizes income when it is earned and expenses when they are incurred.

Cash-Basis Taxpayer

A taxpayer who recognizes income when it is actually received and expenses when they are actually paid.

Imputed Interest

Interest that is deemed to be paid or received for tax purposes, even if not actually transacted.

Installment Method

A tax method allowing a seller to recognize gain over time as payments are received.

Tax-Favored Exchange

A like-kind exchange that allows deferral of gain for qualifying property trades.

Ordinary Income vs. Capital Gain

Ordinary income is typically taxed at higher rates than capital gains.

Installment Sale

A sale where payments are made over time rather than all at once.

Gift Treatment

The IRS may treat forgiven interest on a loan as a gift if the loan is below-market.

Original Issue Discount (OID)

Interest that must be accrued even without cash payments, often associated with below-market loans.

Matching Rule (IRC §267(a)(2))

Prevents accrual-basis taxpayers from deducting expenses owed to cash-basis taxpayers until those amounts are included in income.

Attribution Rules

Rules that may treat one person as owning property owned by related parties for tax purposes.