Related Party Transactions – In General
To avoid the manipulation of tax consequences to which transactions between certain related[i] taxpayers may be susceptible, the IRS and the Courts generally require that such transactions be closely scrutinized to ensure that the form of the transaction reflects its underlying economic reality,[ii] and that the tax consequences arising therefrom are consistent with those arising from transactions between unrelated parties dealing at arm’s length with one another.[iii]
Similarly, the Code and the regulations promulgated thereunder have long recognized that a taxpayer who engages in certain transactions with another party should be denied a particular tax benefit that would otherwise be realized from the transaction if the taxpayer and the other party bear a certain relationship to one another and if the sought-after tax benefit is inconsistent with the economic consequences of the transaction.
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