What is the purpose of the § 267 loss disallowance rule?

The purpose of the § 267 loss disallowance rule is to disallow losses from transactions between related parties. This rule exists to prevent taxpayers from manipulating their reported income and expenses through transactions with entities they have a close relationship with, such as family members or controlled corporations. If one related party sells an asset to another at a loss, allowing the selling party to recognize that loss would lead to an inaccurate representation of income and distort tax liabilities. By disallowing these losses, the IRS aims to ensure that the transactions reflect economic reality and are not merely used to generate tax benefits. This helps maintain fairness in the tax system by preventing abuse that could arise from special relationships between taxpayers.