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§318 Sidewise Attribution Limitation | US International Tax Attorney

This article explores the third main limitation on the general IRC (Internal Revenue Code) §318 corporate stock re-attribution rules – §318 Sidewise Attribution Limitation.

§318 Sidewise Attribution Limitation: What is “Sidewise Attribution”?

A sidewise attribution occurs when corporate stock owned by an owner of a business entity (or a beneficiary of a trust or estate) is first attributed to this business entity (or estate or trust) and then re-attributed again to another owner of the same business entity (or another beneficiary of the same trust or estate). In other words, stock deemed to be owned by an entity due to the ownership of that stock by an owner or beneficiary of the entity is re-attributed “sidewise” to another owner or beneficiary of the same entity.

Sidewise attribution may have far-reaching income tax and tax reporting consequences, because it may result in a person with no real ownership of a corporation being treated as an owner of this corporation’s stock simply because a member of another entity (in which the first person also has an ownership interest) happens to own corporate stock of this corporation.

§318 Sidewise Attribution Limitation: §318(a)(5)(C) Prohibition

§318(a)(5)(C) describes the §318 Sidewise Attribution Limitation. Under §318(a)(5)(C), stock constructively owned by a partnership, estate, trust or corporation pursuant to §318(a)(3) is not treated as owned by this partnership, estate, trust or corporation for the purpose of treating a partner, beneficiary, or shareholder as owner of the stock. In other words, the sidewise attribution limitation prevents re-attribution of corporate stock to an owner of an entity where such stock is constructively-owned by an entity solely by virtue of ownership of this stock by another owner of the entity.

Let’s look at the following example to illustrate the §318 Sidewise Attribution Limitation: A and B are unrelated persons, they equally own a partnership P and A owns 100 shares of corporation X’s stock. In this situation, partnership P is a constructive owner of A’s 100 shares of X under §318(a)(3)(A). Without any sideways limitation, B would have been also treated as an owner of these 100 shares of X due to §318(a)(2)(A). Under §318(a)(5)(C), however, none of these stocks are attributed to B.

§318 Sidewise Attribution Limitation: Attribution from Actual Ownership Not Affected

It is important to emphasize that §318(a)(5)(C) applies only to the re-attribution of stock constructively owned as a result of the application of §318(a)(3). This prohibition does not affect the §318(a)(2) attribution of stock actually owned by an entity to its beneficiary, partner, or shareholder.

§318 Sidewise Attribution Limitation: Re-Attribution Under Other Rules

Additionally, stock constructively owned under §318(a)(3) may still be re-attributed under an attribution rule other than §318(a)(2). In other words, stock constructively owned under §318(a)(3) may still be re-attributed under the upstream corporate attribution rules or the option attribution rules of §318(a)(4) (see Treas. Reg. §1.318-4(c)(2)).

Moreover, re-attribution under the §318 family attribution rules still possible. A potential situation for such re-attribution would arise in a situation where corporate stock is attributed from an entity to its member and from this member to a qualified family member of the same entity. Berenbaum v. Commissioner, 369 F.2d 337 (10th Cir. 1966), rev’g T.C. Memo 1965-147.

Let’s look at a couple of examples to understand better the interaction between the §318 Sidewise Attribution Limitation and the re-attribution rules other than §318(a)(2).

Here is the first hypothetical fact pattern: A is a beneficiary of a trust T, B is another beneficiary of T, T is a beneficiary of an estate, and A owns 100 shares of a c-corporation X. Under §318(a)(3)(B), T is a constructive owner of 100 shares of X. Since T is a constructive owner of A’s shares of X, these shares are re-attributed to the estate under §318(a)(3)(A); §318(a)(5)(C) does not apply to this type of a re-attribution since it is not a sidewise attribution. On the other hand, the §318 Sidewise Attribution Limitation would prevent the re-attribution of A’s shares of X to B that otherwise would have occurred under §318(a)(2)(B).

Note, however, that, if B is A’s son (or other qualified relative under the §318 family attribution rules), then the re-attribution of A’s stocks of X to B is possible under §318(a)(1)(A).

Let’s now look at another fact pattern to understand the power of the option rule attribution vis-a-vis §318(a)(5)(C): A and B are beneficiaries of a trust T; T has an option to buy corporate stock from A. The most important point to understand here is the fact that T is considered here as an owner of A’s stock not under the upstream trust attribution rules of §318(a)(3)(B), but under the option attribution rules of §318(a)(4). Hence, the sidewise attribution limitation under §318(a)(5)(C) does not apply and B becomes a constructive owner of a his proportional part of A’s stock under the downstream trust attribution rules of §318(a)(2)(B).

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

US international tax law is incredibly complex and the penalties for noncompliance are exceptionally severe. This means that an attempt to navigate through the maze of US international tax laws without assistance of an experienced professional will most likely produce unfavorable and even catastrophic results.

Contact Sherayzen Law Office for professional help with US international tax law. We are a highly experienced, creative and ethical team of professionals dedicated to helping our clients resolve their past, present and future US international tax compliance issues. We have helped clients with assets in over 70 countries around the world, and we can help you!

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Family Re-Attribution Limitation Under §318 | International Tax Lawyers

This article explores the second limitation on the IRC (Internal Revenue Code) §318 re-attribution rule – family re-attribution limitation.

Family Re-Attribution Limitation: General §318 Re-Attribution Rule

The general §318 re-attribution rule states that a constructively-owned corporate stock should be treated as actually owned for the purpose of further re-attribution of stock to other persons. §318(a)(5)(A). This re-attribution should occur with respect to other persons considered related persons under §318.

As I stated in another article, unless checked, the general §318 re-attribution rule may ultimately cause persons completely unrelated to the actual owners of corporate stock to be considered as constructive owners of this stock. For this reason, the IRS imposed a number of limitations on this re-attribution rule. One of the limitations concerns specifically §318 family attribution rules.

Family Re-Attribution Limitation: No Family Re-Attribution

Under §318(a)(5)(B), corporate stock constructively owned by a person pursuant to the §318 family attribution rules is not considered as owned by this person for the purpose of re-attributing stock ownership to another family member.

This rule is clear: stock attributed to one family member cannot be re-attributed for the second time to another family member. The idea of this rule is also very clear – to prevent re-attribution of stock to remote family members.

Family Re-Attribution Limitation: Examples

Let’s look at a couple of hypothetical examples to gain deeper understanding of the family re-attribution limitation.

First hypothetical: grandfather GF owns 100 shares of X corporation. Under the family attribution rules, this ownership is attributed to GF’s son, A. However, due to §318(a)(5)(B), this constructively-owned stock cannot be attributed for the second time to A’s wife and A’s son.

Second hypothetical: X, a C-corporation has 200 shares outstanding; A owns 100 shares, S (A’s son) owns 40 shares and D (A’s daughter) owns 60 shares. Under §318(a)(1)(A)(ii): A actually owns 100 shares and constructively owns his children’s 100 shares; S actually owns 40 shares and constructively owns his mother’s 100 shares; D actually owns 60 shares and constructively owns her mother’s 100 shares.

However, due to the re-attribution limitations under §318(a)(5)(B), the shares A constructively owns are not re-attributed from one child to another. Hence, 40 shares of S are not re-attributed to D through their father’s constructive ownership of shares actually owned by S. Similarly, D’s 60 shares are not re-attributed to S through A’s constructive ownership of D’s shares.

Family Re-Attribution Limitation: Interaction with the §318 Option Attribution Rule

It is important to understand that §318(a)(5)(B) does not per se prohibit the re-attribution of stock to another family member. Rather, this re-attribution limitation only applies to stock constructively owned under the §318 family attribution rules. However, the stock may still be re-attributed to another family member through the operation of another rule such as the §318 option attribution rule.

The most prominent example of such a situation is situations where ownership of stock is imputed under both §318 family attribution rule and §318 option attribution rule at the same time. Under §318(a)(5)(D), if a stock is attributed under both, §318 family attribution rules and §318 option attribution rules, then the option rules take priority. This means that, if both rules apply, the option rule governs and the person is deemed to own stock under the option rule rather than under the family rule.

In situations where corporate stock is deemed to be owned under both, family and option attribution rules, the option rule will allow the re-attribution of stock to another family member. In such cases, §318(a)(5)(B) is powerless to stop the application of re-attribution due to the precedence of the option rules.

Family Re-Attribution Limitation: Example of the Option Rule Family Re-Attribution

Let’s look at an example to illustrate the §318 option attribution rule and the §318 family attribution rules interaction with respect to family re-attribution limitation. Let’s suppose that S, son of F, directly owns 100 shares of X, a C-corporation; F has an option to buy all 100 shares from S; D, F’s daughter and S’ sister, does not actually own any shares of X or a contract to buy any shares of X. The issue is whether D is deemed to own any shares of X.

F constructively owns all of his son’s shares of X under the family attribution rules and the option attribution rules. Normally, no shares would be attributed to D due to the family re-attribution limitations, but, in this case, F actually owns an option to buy all 100 shares. The option attribution rule holds preeminence over the family re-attribution limitation. Hence, F is deemed to own S’ shares under the option rule first and foremost; as a consequence, these shares are then re-attributed to D. Thus, D is treated as an owner of all of S’ 100 shares of X.

Family Re-Attribution Limitation: Advanced Summary of Family Attribution Rules

Now that we have a more advanced understanding of the family attribution rules and the limits placed on the family re-attribution limitations, we can modify our earlier definition of the §318 family attribution rules in the following manner: where A and B are family members within the meaning of §318(a)(1), A is deemed to own: (1) all corporate stocks actually owned by B; (2) all corporate stocks constructively owned by B under the §318 option attribution rules; and (3) all stocks constructively owned by B pursuant to §318(a)(2) – i.e. due to the fact that he is a beneficiary of a trust, a partner in a partnership or a shareholder of a corporation.

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

US international tax law is incredibly complex and the penalties for noncompliance are severe. This means that an attempt to navigate through the maze of US international tax laws without assistance of an experienced professional will most likely produce unfavorable and even catastrophic results.

Contact Sherayzen Law Office for professional help with US international tax law. We are a highly experienced, creative and ethical team of tax professionals dedicated to helping our clients resolve US international tax compliance issues. Led by our founder, Mr. Eugene Sherayzen (an international tax attorney), we have helped hundreds of clients with assets in over 70 countries around the world, and we can 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 a shareholder to 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!

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2019 Tax Filing Season for Individual Filers Opens on January 27 2020

On January 6, 2020, the IRS announced that the 2019 tax filing season will commence on Monday, January 27, 2020. In other words, on that date, the IRS will begin accepting and processing the 2019 tax returns.

This year the deadline for the filing of the 2019 tax returns as well as any payment of taxes owed is April 15, 2020. The IRS expects that individual taxpayers will file more than 150 million tax returns for the tax year 2019; the vast majority of them should come in prior to the April deadline.

This is not the case, however, for US taxpayers with exposure to international tax requirements. Usually, most of these taxpayers file extensions in order to properly prepare all of the required international information returns by the extended deadline in October. Often, such tax filing extensions are necessary in order to obtain the necessary information from foreign countries which may operate on a fiscal year rather than a calendar year. However, even in such cases, taxpayers are expected to pay at least 90% of the tax owed by April 15, 2020.

Moreover, it should be mentioned that taxpayers who reside overseas receive an automatic tax filing extension. For such taxpayers, the 2019 tax filing season will commence also on January 27, 2020, but their tax return filing deadline is June 15, 2020.

The IRS is certain that it will be ready for the 2019 tax filing season by January 27, 2020. In other words, the agency believes that it will not only be able to process the returns smoothly, but all of its security systems will be operational by that date. The IRS also believes that, by January 27, 2020, it will address the potential impact of recent tax legislation on 2019 tax returns

The IRS encourages everyone to e-file their 2019 tax returns. This, however, is not always possible for US taxpayers who have to file international information returns due to software limitations.

Contact Sherayzen Law Office for Professional Help With Your 2019 Tax Filing Season If You Have To Comply With US International Tax Filing Requirements

Sherayzen Law Office helps US and foreign persons with their US international tax compliance requirements, including the filing of all required international information returns such as FBAR, FATCA Form 8938, Form 3520, Form 3520-A, Form 5471, Form 8865, Form 8858, Form 926 and other relevant forms.

With respect to taxpayers who have not been in full compliance with these requirements in the past, Sherayzen Law Office helps you to choose, prepare and file the relevant offshore voluntary disclosure option, including Streamlined Domestic Offshore Procedures, Streamlined Foreign Offshore Procedures, Delinquent International Information Return Submission Procedures, Delinquent FBAR Submission Procedures, Reasonable Cause Noisy Disclosures and Modified IRS Traditional Voluntary Disclosures.

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§267 Constructive Ownership Rules | International Tax Lawyer & Attorney

In a previous article, I discussed the related person definition for the purposes of the Internal Revenue Code (“IRC”) §267. That article, however, focused on the definition itself rather than on a host of supplementary rules necessary to fully understand this definition. In this article, I would like to discuss one set of these rules – §267 constructive ownership rules.

§267 Constructive Ownership Rules: Purpose of §267(c)

During my initial discussion of the §267 related person definition, I focused only on the actual ownership by related persons. Congress, however, realized that the actual ownership limitations can be easily circumvented by utilizing individuals and entities closely connected to the related persons.

Hence, it enacted §267(c) and §267(e)(3) to expand the application of the related person definition to include the ownership by closely-connected individuals and entities. In other words, even where an individual or entity does not meet any of the §267(a) and (b) tests through his actual ownership, these tests may be met when his actual ownership is added to other persons’ ownership through the operation of §267(c) and §267(e) rules. These are the so-called §267 constructive ownership rules.

§267 Constructive Ownership Rules: Two Parts of the Rules

As explained in a previous article, the related person definition can be found in two different parts of §267 – thirteen categories of §267(b) and one category of §267(a)(2). Similarly, the constructive ownership rules are divided into two separate sections: §267(c) applies to the entire section and §267(e)(3) applies only to §267(a)(2).

§267 Constructive Ownership Rules: Three General Types of Ownership Attribution

§267(c) sets forth three general types of constructive ownership attribution rules:

  1. Entity-to-owner or beneficiary stock attribution – i.e. “stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries” §267(c)(1). I wish to emphasize there that §267(c)(1) applies to any type of an entity: corporations, partnerships, estates and trusts;
  2. Family member stock attribution – i.e. stocks owned by family members are treated as constructively owned by the related person (see §267(c)(2)). §267(c)(4) defines “family of an individual” to include: “only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants”; and
  3. Partner-to-partner stock attribution – i.e. “an individual owning … any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner” §267(c)(3). This is a unique rule which is rarely found among other constructive ownership rules of the Internal Revenue Code.

§267 Constructive Ownership Rules: Chain Ownership Attribution

Generally, a taxpayer who is deemed to own stock under the §267 constructive ownership rules is treated as the actual owner of the stock. In other words, the stock that he constructively owns can be used for further attribution of ownership to others – this is the so-called “chain ownership attribution”.

There are three exceptions to this rule. I will mention here only one: §267(c)(5) limits attribution of ownership through a chain of related persons in the case of family member or partnership attribution.

§267 Constructive Ownership Rules: Fourth Type of Ownership Attribution

§267(e)(3) sets forth special constructive ownership rules for determining ownership of a capital or profits interest in a partnership; as it was mentioned above, this rule applies only to the deduction limitation rules of §267(a)(2). This fourth type of ownership attribution is basically an exception to the first three types of §267(c).

§267(e)(3) states that, for the purposes of determining ownership of a capital interest or profits interest of a partnership, §267(c) constructive ownership rules apply except that: (1) partner-to-partner stock attribution of §267(c)(3) shall not apply, and (2) with respect to interest owned (directly and indirectly) by and for C-corporation “shall be considered as owned by or for any shareholder only if such shareholder owns (directly or indirectly) 5 percent or more in value of the stock of such corporation” §267(e)(3)(B).

Contact Sherayzen Law Office for Professional Help With US Tax Law

US tax law is extremely complex, especially US international tax law. An ordinary person will simply get lost in this labyrinth of tax rules, exceptions and requirements. Once you get into trouble with US tax law, it is much more difficult and expensive to extricate yourself from it due to high IRS penalties.

This is why it is important to contact Sherayzen Law Office for professional help with US tax law as soon as possible. We have helped hundreds of US taxpayers around the world to successfully resolve their US tax compliance and US tax planning issues. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!