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Section 267 Rules Not Needed When Section 707 Rules Are Enough to Aggregate Corporation and Limited Partnership

(Posted July 25, 2008)

Question 295: I am a bit confused about the interaction/overlap of the Section 267 and the Section 707 attribution rules for management function groups under 414(m)(5). I am trying to determine whether a limited partnership is a related entity to a corporation. The corporation is 50/50 owned by two brothers. The corporation (not the brothers individually) owns a 90% interest in the LP. Section 267 won't allow attribution of the corporation's LP interest back to the brothers, but will Section 707?
Answer: The related party rules are complex enough without examining issues that don't really bear on the question. For this question, we don't need attribution rules and we don't need Section 267.
The management function group rules use the related party rules of Section 144 to determine if organizations are related. Section 144 tells us parties are related if losses between those persons would be disallowed under Sections 707 or 267. Section 707(b)(1)(A) disallows losses between "a partnership and a person owning, directly or indirectly, more than 50 percent of the capital interest, or the profits interest, in such partnership."
That is exactly what you have in your situation. The corporation owns more than 50% of the partnership. (Incidentally, Section 7701(a)(1) tells us that the term "person" includes not only individuals, but also corporations, associations, partnerships, estates and trusts.) As a result, the partnership and corporation are related parties, without regard to their status under Section 267.
In this case, simplicity works best.

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