§318 Partnership Attribution | International Corporate Tax Lawyers

This article continues a series of articles on the Internal Revenue Code (“IRC”) §318 constructive ownership rules. In this essay, we will discuss the §318 partnership attribution rules – i.e. attribution of ownership of shares from partnership to partners and vice versa.

§318 Partnership Attribution Rules: Two Types

There are two types of the IRC §318 partnership attribution rules: downstream and upstream. The downstream attribution rules attribute the ownership of corporate stocks owned by a partnership to its partners. The upstream attribution rules attribute the ownership of corporate stocks owned by partners to the partnership. Let’s explore both types of attribution rules in more detail.

§318 Partnership Attribution Rules: Attribution from Partnership to Partners

Pursuant to §318(a)(2)(A), corporate stocks owned, either directly or indirectly, by or on behalf of a partnership is deemed constructively owned by its partners proportionately. Interestingly, the attribution of corporate stock from a partnership to its partners continues to happen even if the partnership does not do any business or stops all of its operation. See Baker Commodities, Inc. v. Commissioner 415 F.2d 519 (9th Cir. 1969); Sorem v. Commissioner 40 T.C. 206 (1963), rev’d on other grounds, 334 F.2d 275 (10th Cir. 1964).

The biggest problem with applying §318(a)(2)(A) is determining what “proportionate attribution” means. Where a partner owns the same interest in capital, profits and losses of a partnership, the proportionality is easy to apply. However, in situations where a partner owns varying interests in capital, profits and losses, it is much more difficult.

Unfortunately, this problem is not addressed at all by the IRS or courts – the proportionality of attribution is not defined in any IRC provision, Treasury Regulations and even the case law. Looking at Treas. Reg. §1.318-2(c) Ex. 1, however, it is likely that the IRS will accept a position where proportionality of attribution is based on the “facts-and-circumstances” test of §704(b).

§318 Partnership Attribution Rules: Attribution from Partners to Partnership

Under §318(a)(3)(A), a partnership constructively owns corporate stocks owned by a partner. There are no limitations on the attribution – all stocks held by a partner are deemed to be owned by the partnership irrespective of the percentage of an ownership interest in the partnership held by the partner. There is no de minimis rule that would apply to §318(a)(3)(A).

For example, assume that partner P (an individual) owns 25% in a partnership X. P also owns 100 shares out of the total 200 shares outstanding of Y corporation; X owns the remaining 100 shares. Under §318(a)(3)(A), X actually owns 100 shares of Y and constructively owns P’s 100 shares of Y; in other words, X owns 100% of Y.

§318 Partnership Attribution Rules: Certain Attributions Not Allowed

There are two special §318 rules concerning partnership attributions that I would like to mention in this article. First, there is no partner-to-partner attribution of stock under the §318 partnership attribution rules. In other words, stocks owned by a partner will not be owned by another partner simply by virtue of both partners having an ownership interest in the same partnership (however, this does not mean that stocks may not be attributed through another provision of §318).

Second, §318(a)(5)(C) prevents re-attribution of stocks that were already attributed from a partner to the partnership. This means that, where stocks are attributed from a partner to a partnership, they cannot be then re-attributed from the partnership to another partner.

§318 Partnership Attribution Rules: S-Corporations

Under §318(a)(5)(E), an S-corporation and its shareholders are respectively considered to be a partnership and its partners. Hence, corporate stocks owned by an S-corporation are attributed to its shareholders proportionately to each shareholder’s ownership of the S-corporation’s stock. Also, stocks owned by shareholders are deemed to be owned by the S-corporation.

It is important to emphasize that §318 partnership attribution rules do not apply to the stock of the S-corporation. Id. In other words, §318 does not treat shareholders in an S-corporation as being constructive owners of the stock of the S-corporation itself.

§318 Partnership Attribution Rules: Comprehensive Example

I would like to finish this article with a comprehensive example of how §318 partnership attribution rules work. Let’s suppose that A and B own Y partnership in equal portions (i.e. 50% each); Y owns 120 shares of X, a C-corporation, out of the total 200 outstanding shares; another 80 shares are owned by A.

Let’s analyze each parties’ actual and constructive ownership of X. A actually owns 80 shares and constructively owns half of Y’s ownership of X shares (60 shares) under §318(a)(2)(A) – i.e. he owns a total of 140 shares.

B constructively owns half of Y’s ownership of X shares – i.e. 60 shares. He does not constructively own any of A’s shares, because there is no partner-to-partner attribution of stocks and there is no attribution to B of A’s shares that were attributed to Y.

Finally, Y actually owns 120 shares and constructively owns all of A’s 80 shares. In other words, Y is deemed to be a 100% owner of X.

Contact Sherayzen Law Office for Professional Help With §318 Partnership Attribution Rules

The constructive ownership rules of §318 are crucial to proper identification of US tax reporting requirements with respect domestic and especially foreign business entities. Hence, if you a partner in a partnership that owns stocks in a domestic or foreign corporation, you need to contact Sherayzen Law Office for professional help with §318 partnership attribution rules.

Contact Us Today to Schedule Your Confidential Consultation!

Ukrainian FATCA IGA Enters Into Force | FATCA Tax Lawyer & Attorney

On November 18, 2019, the Ukrainian FATCA IGA entered into force. Sherayzen Law Office already wrote on this subject a little more than three years ago. This essay updates the status of the Ukrainian FATCA IGA.

Ukrainian FATCA IGA: Background Information

The Foreign Account Tax Compliance Act (FATCA) was enacted into law in 2010 and quickly caused a revolution in the area of international tax information exchange. While FATCA is very complex, its basic purpose is clear – improving US international tax compliance through new information reporting standards. The revolutionary aspect of FATCA was to force foreign financial institutions (“FFIs”) to comply these new information reporting standards through what essentially amounted to FATCA tax withholding penalties. In other words, FATCA turned FFIs throughout the world into IRS informants.

Using brutal economic force on the FFIs, however, may be considered by many foreign countries as a violation of their sovereignty, because FFIs are not US taxpayers. In order to enforce FATCA effectively, the United States has worked to enlist the cooperation of the FFIs’ home countries. The ultimate products of these negotiations have been FATCA implementation treaties, officially called FATCA IGAs (Intergovernmental Agreements). The Ukrainian FATCA IGA is just one example of such a treaty.

Ukrainian FATCA IGA: History and Current Status

On November 9, 2016, the Ukrainian government authorized the Ukrainian FATCA IGA for signature. On February 7, 2017, the IGA was signed. Since November 18, 2019, it has been in force.

Ukrainian FATCA IGA: Model 1 FATCA Agreement

The Ukrainian FATCA IGA is a Model 1 FATCA Agreement. In order to understand what this means, we need to explore the two types of FATCA IGAs – Model 1 and Model 2. The Model 2 FATCA treaty requires FFIs to individually enter into an FFI Agreement with the IRS in order to report the required FATCA information directly to the IRS (for example, Switzerland signed a Model 2 treaty).

On the other hand, the Model 1 treaty requires FFIs in a “partner country” (i.e. the country that signed a Model 1 FATCA agreement) to report the required FATCA information regarding US accounts to the local tax authorities. Then, the tax authorities of the partner country share this information with the IRS.

Thus, the Ukrainian FFIs will report FATCA information to the Ukrainian tax authorities first. Then, the Ukrainian IRS will turn over this information to the IRS.

Impact of Ukranian FATCA IGA on Noncompliant US Taxpayers

The implementation of the Ukrainian FATCA IGA means that the Ukrainian FFIs either have already implemented or will soon implement the necessary KYC (Know Your Client) procedures. Using these procedures, the FFIs will collect the required FATCA information concerning their US customers and send this information to the Ukranian tax authorities, which, in turn, will share this information with the IRS.

Then, the IRS will process this information in order to identify noncompliant US taxpayers. Once it reaches this point, the IRS will most likely investigate these persons and determine whether to conduct a civil audit or proceed with a criminal prosecution.

In other words, since November 18, 2019, US taxpayers who have undisclosed foreign accounts in Ukraine have been at an ever-increasing risk of the IRS detection. Once their noncompliance is verified by the IRS, these taxpayers, may face the imposition of draconian IRS penalties and potentially even a criminal prosecution.

Contact Sherayzen Law Office for Professional Help Undisclosed Ukrainian Foreign Accounts and Other Assets

If you have undisclosed Ukrainian assets (including Ukrainian bank accounts) and/or Ukrainian-source income, contact Sherayzen Law Office for professional help as soon as possible. We have successfully helped hundreds of US taxpayers around the globe (including Ukrainians) to resolve their past US tax noncompliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

2019 FBAR Conversion Rates | FBAR Tax Lawyer & Attorney

The 2019 FBAR conversion rates are highly important in US international tax compliance. The 2019 FBAR and 2019 Form 8938 instructions both require that 2019 FBAR conversion rates be used to report the required highest balances of foreign financial assets on these forms (in the case of Form 8938, the 2019 FBAR conversion rates is the default choice, not an exclusive one). In other words, the 2019 FBAR conversion rates are used to translate foreign-currency highest balances into US dollars for the purposes of FBAR and Form 8938 compliance.

The U.S. Department of Treasury  already published the 2019 FBAR conversion rates online (they are called “Treasury’s Financial Management Service rates” or the “FMS rates”).

Since the 2019 FBAR conversion rates are highly important to US taxpayers, international tax lawyers and international tax accountants, Sherayzen Law Office provides the table below listing the official 2019 FBAR conversion rates (note that the readers still need to refer to the official website for any updates).

Country – Currency Foreign Currency to $1.00
AFGHANISTAN – AFGHANI77.6250
ALBANIA – LEK108.2100
ALGERIA – DINAR118.7800
ANGOLA – KWANZA475.0000
ANTIGUA – BARBUDA – E. CARIBBEAN DOLLAR2.7000
ARGENTINA – PESO59.8700
ARMENIA – DRAM475.0000
AUSTRALIA – DOLLAR1.4250
AUSTRIA – EURO0.8900
AZERBAIJAN – NEW MANAT1.7000
BAHAMAS – DOLLAR1.0000
BAHRAIN – DINAR0.3770
BANGLADESH – TAKA85.0000
BARBADOS – DOLLAR2.0200
BELARUS – NEW RUBLE2.1040
BELGIUM – EURO0.8900
BELIZE – DOLLAR2.0000
BENIN – CFA FRANC582.0000
BERMUDA – DOLLAR1.0000
BOLIVIA – BOLIVIANO6.8300
BOSNIA – MARKA1.7410
BOTSWANA – PULA10.5490
BRAZIL – REAL4.0200
BRUNEI – DOLLAR1.3450
BULGARIA – LEV1.7410
BURKINA FASO – CFA FRANC582.0000
BURMA-KYAT1,475.0000
BURUNDI – FRANC1,850.0000
CAMBODIA (KHMER) – RIEL4,051.0000
CAMEROON – CFA FRANC578.1200
CANADA – DOLLAR1.3000
CAPE VERDE – ESCUDO99.2910
CAYMAN ISLANDS – DOLLAR0.8200
CENTRAL AFRICAN REPUBLIC – CFA FRANC578.1200
CHAD – CFA FRANC578.1200
CHILE – PESO751.4800
CHINA – RENMINBI6.9610
COLOMBIA – PESO3,278.7500
COMOROS – FRANC439.0600
CONGO – CFA FRANC578.1200
COSTA RICA – COLON569.6500
COTE D’IVOIRE – CFA FRANC582.0000
CROATIA – KUNA6.4900
CUBA – Chavito1.0000
CYPRUS – EURO0.8900
CZECH REPUBLIC – KORUNA22.1650
DEM. REP. OF CONGO – FRANC1,650.0000
DENMARK – KRONE6.6520
DJIBOUTI – FRANC177.0000
DOMINICAN REPUBLIC – PESO52.6600
ECUADOR – DOLARES1.0000
EGYPT – POUND16.0000
EL SALVADOR – DOLARES1.0000
EQUATORIAL GUINEA – CFA FRANC578.1200
ERITREA – NAKFA15.0000
ESTONIA – EURO0.8900
ETHIOPIA – BIRR31.8000
EURO ZONE – EURO0.8900
FIJI – DOLLAR2.1420
FINLAND – EURO0.8900
FRANCE – EURO0.8900
GABON – CFA FRANC578.1200
GAMBIA – DALASI51.0000
GEORGIA – LARI2.8700
GERMANY – EURO0.8900
GHANA – CEDI5.6600
GREECE – EURO0.8900
GRENADA – EAST CARIBBEAN DOLLAR2.7000
GUATEMALA – QUENTZAL7.6900
GUINEA BISSAU – CFA FRANC582.0000
GUINEA – FRANC9,380.0000
GUYANA – DOLLAR215.0000
HAITI – GOURDE87.6550
HONDURAS – LEMPIRA25.0000
HONG KONG – DOLLAR7.7860
HUNGARY – FORINT294.2900
ICELAND – KRONA120.7600
INDIA – RUPEE71.0000
INDONESIA – RUPIAH13,895.0000
IRAN – RIAL42,000.0000
IRAQ – DINAR1,138.0000
IRELAND – EURO0.8900
ISRAEL – SHEKEL3.4540
ITALY – EURO0.8900
JAMAICA – DOLLAR136.0000
JAPAN – YEN108.5300
JERUSALEM – SHEKEL3.4540
JORDAN – DINAR0.7080
KAZAKHSTAN – TENGE381.1800
KENYA – SHILLING101.2500
KOREA – WON1,153.7000
KOSOVO – EURO0.8900
KUWAIT – DINAR0.3030
KYRGYZSTAN – SOM69.6000
LAOS – KIP8,865.0000
LATVIA – EURO0.8900
LEBANON – POUND1500.0000
LESOTHO – MALOTI14.0560
LIBERIA – DOLLAR186.9900
LIBYA – DINAR1.3960
LITHUANIA – EURO0.8900
LUXEMBOURG – EURO0.8900
MADAGASCAR – ARIARY3,627.2000
MALAWI – KWACHA760.0000
MALAYSIA – RINGGIT4.0890
MALDIVES – RUFIYAA15.4200
MALI – CFA FRANC582.0000
MALTA – EURO0.8900
MARSHALL ISLANDS – DOLLAR1.0000
MARTINIQUE – EURO0.8900
MAURITANIA – OUGUIYA37.0000
MAURITIUS – RUPEE36.2000
MEXICO – PESO18.8920
MICRONESIA – DOLLAR1.0000
MOLDOVA – LEU17.1000
MONGOLIA – TUGRIK2,733.5200
MONTENEGRO – EURO0.8900
MOROCCO – DIRHAM9.5970
MOZAMBIQUE – METICAL 60.8500
NAMIBIA – DOLLAR14.0560
NEPAL – RUPEE113.7500
NETHERLANDS – EURO0.8900
NETHERLANDS ANTILLES – GUILDER1.7800
NEW ZEALAND – DOLLAR1.4830
NICARAGUA – CORDOBA33.8000
NIGER – CFA FRANC582.0000
NIGERIA – NAIRA361.0000
NORWAY – KRONE8.7820
OMAN – RIAL0.3850
PAKISTAN – RUPEE154.8500
PANAMA – BALBOA1.0000
PANAMA – DOLARES1.0000
PAPUA NEW GUINEA – KINA3.3110
PARAGUAY – GUARANI6,442.3301
PERU – SOL3.3140
PHILIPPINES – PESO50.6400
POLAND – ZLOTY3.7890
PORTUGAL – EURO0.8900
QATAR – RIYAL3.6400
REP. OF N MACEDONIA – DINAR54.7600
REPUBLIC OF PALAU – DOLLAR1.0000
ROMANIA – NEW LEU4.2560
RUSSIA – RUBLE62.2730
RWANDA – FRANC925.0000
SAO TOME & PRINCIPE – NEW DOBRAS22.1220
SAUDI ARABIA – RIYAL3.7500
SENEGAL – CFA FRANC582.0000
SERBIA – DINAR104.9200
SEYCHELLES – RUPEE13.6200
SIERRA LEONE – LEONE9,639.5898
SINGAPORE – DOLLAR1.3450
SLOVAK REPUBLIC – EURO0.8900
SLOVENIA – EURO0.8900
SOLOMON ISLANDS – DOLLAR8.0650
SOMALI – SHILLING575.0000
SOUTH AFRICA – RAND14.0560
SOUTH SUDANESE – POUND160.0000
SPAIN – EURO0.8900
SRI LANKA – RUPEE181.3000
ST LUCIA – E CARIBBEAN DOLLAR2.7000
SUDAN – SUDANESE POUND45.0000
SURINAME – GUILDER7.5200
SWAZILAND – LANGENI14.0560
SWEDEN – KRONA9.3010
SWITZERLAND – FRANC0.9660
SYRIA – POUND435.0000
TAIWAN – DOLLAR29.9420
TAJIKISTAN – SOMONI9.6500
TANZANIA – SHILLING2,293.0000
THAILAND – BAHT29.7700
TIMOR – LESTE DILI1.0000
TOGO – CFA FRANC582.0000
TONGA – PA’ANGA2.2090
TRINIDAD & TOBAGO – DOLLAR6.6970
TUNISIA – DINAR2.7720
TURKEY – LIRA5.9420
TURKMENISTAN – NEW MANAT3.4910
UGANDA – SHILLING3,660.0000
UKRAINE – HRYVNIA23.6900
UNITED ARAB EMIRATES – DIRHAM3.6730
UNITED KINGDOM – POUND STERLING0.7580
URUGUAY – PESO37.1300
UZBEKISTAN – SOM9,500.0000
VANUATU – VATU112.8000
VENEZUELA – BOLIVAR SOBERANO70,675.7400
VENEZUELA – FUERTE (OLD)248,832.0000
VIETNAM – DONG23,171.0000
WESTERN SAMOA – TALA2.5370
YEMEN – RIAL480.0000
ZAMBIA – NEW KWACHA14.0500
ZIMBABWE – RTGS16.2800

2020 Streamlined Domestic Offshore Procedures: Pros and Cons

Noncompliant US taxpayers with undisclosed foreign assets and foreign income should consider their voluntary disclosure options in this new year 2020. Similarly to 2019, I expect that this year Streamlined Domestic Offshore Procedures will continue to be the flagship voluntary disclosure option for such taxpayers who reside in the United States. In order for the readers to better understand why I make this assertion, I would like to discuss the advantages and disadvantages of participating in the 2020 Streamlined Domestic Offshore Procedures.

2020 Streamlined Domestic Offshore Procedures: Background Information and Purpose

The IRS created the Streamlined Domestic Offshore Procedures (sometimes abbreviated as “SDOP”) on June 18, 2014, though the Certification forms became available only a few months later. Since its introduction, Streamlined Domestic Offshore Procedures quickly eclipsed the then-existing IRS Offshore Voluntary Disclosure Program (“OVDP”) and became the most popular offshore voluntary disclosure option.

The main purpose of the Streamlined Domestic Offshore Procedures is to encourage noncompliant US taxpayers to voluntarily resolve their prior non-willful noncompliance with US international tax compliance requirements. These requirements include all US international information returns such as FBAR, Form 8938, Form 5471, Form 8621, Form 3520, Form 926, et cetera.

2020 Streamlined Domestic Offshore Procedures: Main Advantages

In exchange for this voluntary disclosure of their prior tax noncompliance, US taxpayers escape income tax penalties and pay only a one-time Miscellaneous Offshore Penalty with respect to their prior failures to file the required US international information returns. The Miscellaneous Offshore Penalty is usually far below the potential penalties normally associated with failure to file these forms. In other words, noncompliant taxpayers can greatly reduce their IRS noncompliance penalties through their participation in the Streamlined Domestic Offshore Procedures. This is one of the most important SDOP benefits.

Another advantage of the Streamlined Domestic Offshore Procedures is the limited scope of this voluntary disclosure option. Taxpayers only need to file a small number of amended US tax returns (usually three) and FBARs (usually six) – in other words, the filings are limited to regular statute of limitations without any expansions (as opposed to OVDP which required filings for the past eight years).

Moreover, despite the limited scope of the SDOP filings, taxpayers who utilize the Streamlined Domestic Offshore Procedures are able to fully resolve their prior US international tax noncompliance issues even if these years are not included in the actual SDOP filings. This means that the participating taxpayers are able “wipe the slate clean” – i.e. to erase their prior US international tax noncompliance from the time when it began.

The last major advantage of the Streamlined Domestic Offshore Procedures is that this option only requires to establish non-willfulness rather than reasonable cause. Non-willfulness is a much easier legal standard to satisfy (be careful, I am not saying that this is an “easy standard”, just an easier one) than reasonable cause.

2020 Streamlined Domestic Offshore Procedures: Main Disadvantages

For the purpose of this article, I will discuss only two major disadvantages to the Streamlined Domestic Offshore Procedures. First, the eligibility requirements are strict. This voluntary disclosure option is open only to taxpayers who filed their US tax returns for prior years and who are able to certify under the penalty of perjury that their prior noncompliance was non-willful. This certification has to be made specifically with respect to unreported foreign income, FBARs and each other international information return.

Most cases have positive and negative facts at the same time. Hence, a lot of taxpayers are actually in the “gray” area between willfulness and non-willfulness. This means that it is not easy to make a decision on whether a taxpayer is eligible to participate in the Streamlined Domestic Offshore Procedures. This decision should be done only by an experienced international tax attorney who specializes in this area of law, such as Mr. Eugene Sherayzen of Sherayzen Law Office.

The second major disadvantage of the Streamlined Domestic Offshore Procedures is lack of a definitive closure; there may be a follow-up audit after the IRS processes your voluntary disclosure package Unlike OVDP, Streamlined Domestic Offshore Procedures does not offer a Closing Agreement without an audit. This means that going through Streamlined Domestic Offshore Procedures may not be the end of your case; the IRS can actually audit you over the next three years. If this happens, the audit of your voluntary disclosure will focus not only on the correctness of your disclosure, but also on the truthfulness and correctness of your non-willfulness certification.

Contact Sherayzen Law Office for Professional Help With 2020 Streamlined Domestic Offshore Procedures

If you have undisclosed foreign accounts or any other foreign assets, contact Sherayzen Law Office for professional help with your offshore voluntary disclosure. We have successfully helped hundreds of US taxpayers around the world with their offshore voluntary disclosures, including Streamlined Domestic Offshore Procedures. We can also help you!

Contact Us Today to Schedule Your Confidential Consultation!

IRC §318 Family Attribution | International Tax Law Firm Minnesota

In a previous article, I outlined six main relationship categories of the Internal Revenue Code (“IRC”) §318. In this article, I will focus on the first of these categories: the IRC §318 family attribution rules.

§318 Family Attribution: General Rule

§318(a)(1)(A) describes the §318 family attribution rule . It states that an individual is a constructive owner of shares owned (directly and indirectly) by his spouse, children, grandchildren and parents. While it appears to be simple, this general rule has a number of exceptions and complications.

§318 Family Attribution: Certain Exceptions for Spouses

Under §318(a)(1)(A)(i), ownership of stock held by a spouse who is legally separated under a decree of divorce or separate maintenance is not attributed to her spouse. However, based on the §318 legislative history and Commissioner v. Ostler, 237 F.2d 501 (9th Cir. 1956), it appears that an interlocutory decree of divorce would not prevent the attribution of stock ownership between spouses, because such decree is not final.

§318 Family Attribution: Special Cases Involving Children and Grandchildren

§318(a)(1)(B) expands the attribution of shares from children to shares held by legally adopted children. Without legal adoption, however, shares owned by a step-child cannot be attributed to step-parents and step-grandparents. Similarly, absent legal adoption of a step-child, there is no attribution from a step-parent to the step-child.

Treas. Reg. §1.318-2(b) also makes it clear that there is no attribution of shares owned by grandparents to their grandchildren. Only shares owned by grandchildren can be attributed to their grandparents. For example, if a grandfather and a grandson each own 100 shares of X, a C-corporation, the grandfather will be deemed to own 200 shares while the grandson’s stock ownership will be based only on his actual ownership of 100 shares.

Also, note that great-grandchildren are not listed under §318(a)(1). Hence, the shares owned by great-grandchildren are not attributed to great-grandparents; this is different from §267.

§318 Family Attribution: Other Relatives

The §318 definition of family excludes aunts, uncles, nieces, nephews and cousins; this treatment is identical to that of §267. Moreover, unlike §267(c)(4), there is no attribution of stock between siblings under §318(a)(1).

§318 Family Attribution: Prohibition of Double Attribution

Treas. Reg. §1.318-4(b) explains that §318 family attribution rules do not allow double attribution of stock among family members. Under §318(a)(5)(B), stock deemed owned through a family member under §318(a)(1)(A) may not be re-attributed to another family member under the family attribution rules of §318.

For example, let’s say that mother M, daughter D and son S each own one-third of the outstanding shares of X corporation; each of them owns 100 shares. Under §318(a)(1)(A), M owns 100 shares and is deemed to own her children’s 200 shares. On the other hand, D actually owns 100 shares and is deemed to own her mother’s 100 shares – i.e. 200 shares total; under §318(a)(5)(B), while M is deemed to own 100 of S, there is no re-attribution of S’ 100 shares to D. In other words, §318(a)(5)(B) prevents the attribution of brother’s stock to his sister through the deemed ownership of brother’s stock by their mother. Also, as explained above, there is no family attribution of stocks between siblings.

§318 Family Attribution: Special Rule Concerning §302(c)(2)

IRC §302(c)(2) relates to redemptions of corporate stock and contains a special rule concerning the waiver of §318 family attribution of stocks. This section permits the termination of attribution of stock from family members when a shareholder severs ties with the corporation. The purpose of this rule is to allow such shareholder report capital gains instead of dividends upon the redemption of corporate stock.

§318 Family Attribution: Multiple Control of Corporation Possible

The upshot of the §318 rules is the expansion of stock ownership to an extent where multiple related parties may be deemed to be in control of a corporation (and even be deemed as owners of all shares of the corporation) at the same time.

For example, let’s suppose that there are five family members: husband (H), wife (W), son (S), H’s mother (i.e. grandmother – M) and son of S (i.e. grandson – G). Each of them actually owns 100 shares of corporation Y; there are 500 shares outstanding in total. Let’s analyze each of these person’s actual and constructive ownership of shares under the §318 family attribution rules.

H owns all 500 shares under the §318 family attribution rules. He actually owns 100 shares; the rest of the shares are attributed to him from his mother, his wife, son and grandson.

W owns 400 shares under the §318 family attribution rules. She actually owns 100 shares and constructively owns 300 shares that belong to her husband, son and grandson. However, she does not own 100 shares owned by her mother-in-law and the re-attribution of ownership of these shares through her husband is prevented by §318(a)(5)(B).

M owns 300 shares under the §318 family attribution rules. She actually owns 100 shares and is deemed to own 100 shares owned by her son and 100 shares owned by her grandson. M, however, is not deemed to own stocks held by her daughter-in-law W and her great-grandson G.

S owns 400 shares under the §318 family attribution rules. He actually owns 100 shares and constructively owns 200 shares owned by his parents and 100 shares owned by his son. S, however, does not constructively own shares held by his grandmother.

Finally, G owns 200 shares under the §318 family attribution rules. He actually owns 100 shares and constructively owns 100 shares held by his father S. G, however, does not constructively own shares held by his grandparents H and M as well as his great-grandmother M.

Thus, even though each family member actually owns only 100 shares, four of them (out of the total five) are deemed to be in control of the corporation and H is deemed to own the entire corporation. If we transfer this scenario to US international tax law, we can immediately see that the application of §318 constructive ownership rules through family attribution may greatly increase the tax compliance burden for this family.

Contact Sherayzen Law Office for Professional Help With US International Tax Law

IRC §318 is but a tiny part of the incredible voluminous US domestic and international tax law. US international tax law is not only very complex, but it is also very severe with respect to noncompliant taxpayers. In other words, it is very easy to get yourself into trouble with respect to US international tax compliance and, once this happens, you may be subject to high IRS penalties.

In order to avoid such an undesirable result, you need the help of Sherayzen Law Office. We are a highly-experienced US international tax law firm that has helped clients from over 70 countries with their US international tax compliance. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!