Special Relationships and Constructive Ownership of Stock

Section 267 operates to disallow losses and defer deductions only between related parties. This could be important when transferring stock between family members at a loss and can have significant tax playing consequences.

 

Special Relationships and Constructive Ownership of Stock

Losses or deductions generated by similar transactions with an unrelated party are allowed. Related parties under IRS regulations and code sections include the following family members: Brothers and sisters (whether whole, half, or adopted), spouse, ancestors (parents and grandparents), and lineal descendants (children and grandchildren) of the taxpayer.

 

What does Constructively Own Mean?

The term “Constructively Owns” means ownership determined through the application of the constructive ownership rules of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The term “Constructively Owns” means ownership determined through the application of the constructive ownership rules of Section 318 of the Code, as modified by Section 856(d)(5) of the Code

 

Constructive Ownership of Stock

Constructive ownership provisions are applied to determine whether the taxpayers are related to apply the loss restriction rules. Under these provisions, stock owned by certain relatives or related entities is deemed to be owned by the taxpayer for purposes of applying the loss and expense deduction disallowance provisions. This will prevent taxpayers from attempting to harvest stock losses by transferring the stock to a family member who might then give it back.

 

Who can be constructive owners of stock?

A taxpayer is deemed to own not only his or her stock but also the stock owned by lineal descendants, ancestors, brothers and sisters or half-brothers and half-sisters, and spouse. The taxpayer is also deemed to own his or her proportionate share of stock owned by any partner-ship, corporation, estate, or trust of which the taxpayer is a member. An individual is deemed to own any stock owned, directly or indirectly, by his or her partner.

 

Constructive Ownership of Stock

However, constructive ownership by an individual of the partnership’s and the other partner’s shares does not extend to the individual’s spouse or other relatives (no double attribution).