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§318 Downstream Trust Attribution | Foreign Trust Tax Lawyer & Attorney

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The attribution of stock ownership to constructive owners is a highly important feature of US domestic and international tax law. The Internal Revenue Code (“IRC”) §318 contains complex constructive ownership rules concerning corporate stock; these rules vary depending on a specific §318 relationship. This article focuses on an important category of §318 relationships – trusts. Since these rules are very broad, I will discuss today only the §318 downstream trust attribution rules; the upstream rules and important exceptions to both sets of rules will be covered in later articles.

§318 Trust Attribution: Downstream vs. Upstream Attribution

Similarly to other §318 attribution rules, there are two types of §318 trust attribution: downstream and upstream. The downstream attribution rules attribute the ownership of corporate stocks owned by a trust to its beneficiaries. The upstream attribution rules are exactly the opposite: they attribute the ownership of corporate stocks owned by beneficiaries to the trust. As I stated above, this article focuses on the downstream attribution.

§318 Downstream Trust Attribution: Attribution from Trust to Beneficiary

Under §318(a)(2)(B)(i), corporate stocks owned, directly or indirectly, by or for a trust are considered owned by the trust’s beneficiaries in proportion to their actuarial interests in the trust.

Notice that the size of the actuarial interest does not matter. Moreover, §318(a)(2)(B) will apply even if the beneficiary does not have any present interest in a trust, but only a remainder interest (also calculated on an actuarial basis). This rule is the exact opposite of the §318 estate attribution rules.

Furthermore, the decision to attribute shares based on the actuarial interest, rather than actual one, may result in a paradoxical result where stocks are attributed to a person who will never become the actual owner of the shares.

§318 Downstream Trust Attribution: Determination of Actuarial Interest

Treas. Reg. §1.318-3 stated that, in determining a beneficiary’s actuarial interest in a trust, the IRS will use the factors and methods prescribed (for estate tax purposes) in 26 CFR § 20.2031-7.

The attribution of shares from the trust to its beneficiary should be made on the basis of the beneficiary’s actuarial interest at the time of the transaction affected by the stock ownership.

§318 Downstream Trust Attribution: Unstable Proportionality

The adoption of the attribution of stock based on the actuarial interest in a trust creates a constant calculation problem for beneficiaries, because the actuarial interest of the beneficiary in a trust varies from year to year. The variation of actuarial interest means that the number of shares attributed from a trust to its beneficiary will change every year.

For example, the actuarial interest of a beneficiary with a life estate in a trust will decrease every year as he ages. On the other hand, the actuarial interest of the owner of the remainder interest in the trust will increase with each year. Hence, the number of stocks attributed to the life tenant will decrease each year, while the attribution of stocks to the holder of the remainder interest will increase each year.

§318 Downstream Trust Attribution: Special Presumption Concerning Power of Appointment

Based on 95 Rev. Proc. 77-37, §3.05 (operating rules for private letter rulings), the IRS has adopted a special presumption with respect to when children will be considered beneficiaries for the purpose of §318 trust attribution rules. In order to understand this rule, we need to describe the setting in which it will most likely apply.

Oftentimes, estate plans are set up where the surviving spouse will have a life interest in a trust’s income and a power of appointment over the trust corpus. In such situation, estate planners often insert a clause that, if a spouse fails to exercise the power of appointment, the trust corpus will automatically go to the children.

In this situation, the IRS stated that, absent evidence that the power of appointment was exercised differently, it is presumed that it was exercised in favor of the children. By adopting this presumption, the children are immediately considered beneficiaries for the purpose of the stock attribution rules under §318.

§318 Downstream Trust Attribution: Planning to Avoid Attribution

In order to prevent the application of the trust attribution rules under §318, a beneficiary must renounce his entire interest in the trust. See Rev. Rul. 71-211. Such renunciation is valid only if it is irrevocable and binding under local law.

§318 Downstream Trust Attribution: Special Case of Voting Trusts

Under Rev. Rul. 71-262 and CCA 200409001, §318(a)(2)(B) does not apply in the context of a voting trust (i.e. where trustee has the right to vote the stock held in trust, but the dividends are paid to the certificate holder). This is because the certificate holder is deemed to be the owner of the shares and there is no attribution of ownership from the trust.

§318 Downstream Trust Attribution: Grantor Trusts and Employee Trusts

While it is beyond the scope of this article to describe them in detail, there are special rules that apply to the attribution of stock from grantor trusts and employee trusts. I will discuss these rules in more detail in the future.

Contact Sherayzen Law Office for Professional Help With US Tax Issues Concerning Foreign Trusts

If you are considered an owner or a beneficiary of a foreign trust, contact Sherayzen Law Office for professional help with your US tax compliance issues. Our firm is highly experienced in US international tax law, including foreign trust compliance. We have also helped taxpayers around the world with their offshore voluntary disclosures involving foreign trusts.

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§318 Upstream Estate Attribution | International Tax Lawyer & Attorney

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This article continues a series of articles concerning the constructive ownership rules of the Internal Revenue Code (“IRC”) §318. Today’s focus is on the §318 upstream estate attribution rules.

§318 Estate Attribution Rules: Downstream Attribution vs. Upstream Attribution

There are two types of the IRC §318 estate attribution rules: downstream and upstream. In a previous article, I discussed the downstream attribution rules concerning attribution of ownership of corporate stocks held by an estate to its beneficiaries. This brief article focuses on the upstream attribution rules, which means rules governing the attribution to the estate of corporate stocks held by its beneficiaries.

§318 Upstream Estate Attribution: Main Rule

The IRC §318(a)(3)(A) states the general rule for the upstream estate attribution of beneficiaries’ corporate stock: irrespective of the proportion of his beneficiary interest in the estate, all corporate stocks owned directly or indirectly by a beneficiary are deemed to be owned by the estate.

Notice the difference here between the downstream and the upstream estate attribution rules. §318 downstream estate attribution rules attribute the ownership of corporate stock proportionately from an estate to its beneficiaries. The upstream attribution rules under §318, however, completely disregard the proportionality rule; instead, all of the stocks of a beneficiary are attributed to the estate even if he has only 1% interest in the estate.

For example, let’s suppose that W owns 100 shares in corporation X; then, H dies and leaves one-tenth of his property to W. Due to the fact that W is a beneficiary of H’s estate, the estate constructively owns all of W’s 100 shares in X.

§318 Upstream Estate Attribution: No Re-Attribution

I already stated this rule in another article on estate attribution, but it is also important to re-state it here. §318 estate attribution rules contain a prohibition on re-attribution of stocks. Under §318(a)(5)(C), a beneficiary’s stock constructively owned by an estate through the operation of the §318 estate attribution rules cannot be attributed to another beneficiary.

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

If you have questions concerning US business tax in general and US international business tax law specifically, contact Sherayzen Law Office for professional help. We are a highly-experienced tax law firm that specializes in US international tax law, including offshore voluntary disclosures, US international tax compliance for businesses and individuals and US international tax planning.

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§318 Downstream Estate Attribution | International Tax Lawyer & Attorney

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This article continues a series of articles on the Internal Revenue Code (“IRC”) §318 constructive ownership rules. Today, the topic is §318 estate attribution rules – i.e. attribution of ownership of corporate stock from estate to its beneficiaries and vice versa. Since this is a long topic, I will divide it into three articles. This article focuses on the §318 downstream estate attribution rules.

§318 Estate Attribution Rules: Two Types

There are two types of the IRC §318 estate attribution rules: downstream and upstream. The downstream attribution rules attribute the ownership of corporate stocks owned by an estate to its beneficiaries. On the other hand, the upstream attribution rules attribute the ownership of corporate stocks owned by beneficiaries to the estate. As I stated above, this article focuses on the first type – i.e. §318 downstream estate attribution rules.

§318 Downstream Estate Attribution: Attribution from Estate to Beneficiary

Under the IRS §318(a)(2)(A), corporate stock owned directly or indirectly by or on behalf of an estate is deemed to be owned proportionately by its beneficiaries. It is very important to understand that the actual disposition of estate property by the testator does not matter to the proportionate attribution of estate property between the beneficiaries. Thus, even if the will demands that all corporate stocks be inherited by only one beneficiary, the ownership of these stocks will be attributed to all beneficiaries in proportion to their respective interests in the estate.

Three questions arise with respect to the application of this §318 downstream estate attribution rule: (1) What stocks are considered to be owned by the estate? (2) Who is deemed to be a beneficiary of an estate? and (3) How does the proportionality rule work?

§318 Downstream Estate Attribution: Stocks Owned by Estate

Treas. Regs. §1.318-3(a) defines when an estate is deemed to be an owner of corporate stock for the §318 attribution purposes. It states that corporate stocks (as well as any other property) shall be considered as owned by an estate if “such property is subject to administration by the executor or administrator for the purpose of paying claims against the estate and expenses of administration.” This is the case even if the legal title to the stock vests immediately upon death in the decedent’s heirs, legatees, or devisees under local law. Id.

§318 Downstream Estate Attribution: Definition of a Beneficiary

I address the definition of a beneficiary for the §318 attribution purposes in more detail in another article. Here, I will only state the general rule.

Treas. Regs. §1.318-3(a) states that “the term beneficiary includes any person entitled to receive property of a decedent pursuant to a will or pursuant to laws of descent and distribution.” Hence, in order to be considered a beneficiary under §318, a person must have a direct present interest in the property of the estate or in income generated by that property.

§318 Downstream Estate Attribution: Proportionality

As in many other cases concerning attribution proportionality, there is very little guidance from the IRS and Treasury regulations concerning determination of a beneficiary’s proportionate interest in an estate. Hence, an attorney has a considerable freedom in determining the reasonable methodology with respect to the application of the proportionality requirement. It appears that one method may be particularly acceptable to the IRS: measuring the relative values of each beneficiary’s interest.

§318 Downstream Estate Attribution: No Re-Attribution

Similarly to many other IRC provisions concerning constructive ownership, §318 estate attribution rules contain a prohibition on re-attribution of stocks. Under §318(a)(5)(C), a beneficiary’s stock constructively owned by an estate through the operation of the §318 estate attribution rules cannot be attributed to another beneficiary.

§318 Downstream Estate Attribution: Example

Let’s conclude this article with an illustration of how the §318 downstream estate attribution rules actually work. The proposed hypothetical scenario is as follows: an estate owns 100 of the total 200 outstanding shares of X, a South Dakota C-corporation; A is entitled to 50% of the property of the estate and actually owns 24 shares of X; B owns 36 shares of X and has a life estate in the other 50% of the estate; and C owns 40 shares of X and only has a remainder interest in the estate after the death of B. Here is how the §318 estate attribution constructive rules would work in this case:

A actually owns 24 shares of X and constructively owns another 50 shares of X through his 50% beneficiary interest in the estate. In other words, A’s total ownership of X equals 74 shares.

B actually owns 36 shares of X and constructively owns another 50 shares of X through his life estate; his total number of shares of X equals 86.

Finally, C owns 40 shares of X only. He does not have any constructive ownership of any shares of X, because his remainder interest in the estate is not a present interest in the estate; hence, he is not a beneficiary of the estate.

Contact Sherayzen Law Office for Professional Help With §318 Downstream Estate 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 beneficiary of an estate or an executor/administrator of an estate that owns stocks in a domestic or foreign corporation, contact Sherayzen Law Office for professional help with §318 estate attribution rules.

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§318 Partnership Attribution | International Corporate Tax Lawyers

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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 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 are a partner in a partnership that owns stocks in a domestic or foreign corporation, contact Sherayzen Law Office for professional help with §318 partnership attribution rules.

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

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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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