Transactions Between Related Taxpayers
BY THOMAS J. GRAVES PARTNER, WASHINGTON OFFICE
Presented at the Second Annual Institute of Taxation, University of Houston—Houston, Texas, November, 1955
Many of the complexities of the present tax laws have arisen out of past attempts at tax avoidance. As alert taxpayers have sought and found loopholes that seemed to permit tax avoidance, Congress has been forced in turn to enact new rules to maintain the equity and integrity of the taxing system. In so doing it has gradually created a complex structure of law that may well trap the unwary or uninformed taxpayer, whether or not the intent underlying his transactions is solely one of obtaining tax reductions.
One of the areas in which this development has occurred has to do with transactions between related taxpayers. While many such transactions may be completely bona fide and may be made with no underlying
tax saving motive, the possibility that closely related taxpayers might not deal at arms length and the accompanying opportunity for tax reductions could not be ignored. Leaving the question of good faith to be answered by the courts would not have provided an adequate safeguard;
the intent of the parties to a transaction is often too elusive for factual determination, especially when they are related. This problem, together with the recognition that these transactions frequently do not represent a real change in economic interests, led Congress to enact a series of rules that prevent certain transactions between related taxpayers
from receiving the treatment that would otherwise be available.
LOSSES ON SALES OR EXCHANGES
Section 267 of the Internal Revenue Code disallows all losses on sales or exchanges between related taxpayers except for losses resulting
from distributions in corporate liquidations. This is not merely a presumption subject to rebuttal; all such losses are disallowed regardless
of whether the parties deal completely at arms length and in good faith.
The disallowance applies to indirect sales as well as to direct sales between related taxpayers. Thus a loss would not be recognized