Advanced Tax Concept 175 Practice Test

Loss disallowance under § 267 of the Internal Revenue Code refers to the treatment of losses in transactions between related parties. The law defines related parties in a specific way to prevent taxpayers from manipulating their losses through transactions with individuals who have significant relationships.

The correct understanding is that related parties primarily include family members in direct lines such as siblings, parents, children, and spouses. However, aunts, uncles, and cousins are not included in the list of specified related parties under the provisions of § 267. Therefore, an aunt does not qualify as a related party for the purposes of loss disallowance under this section of the tax code.

This means that if a taxpayer engages in a transaction that results in a loss with an aunt, that loss remains deductible because the relationship does not meet the criteria set forth in § 267. The lack of a direct financial connection or familial relationship as defined by the IRS impacts the ability to treat transactions with an aunt as comparable to those conducted with closer relatives.