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§318 Re-attribution: General Rule | International Tax Lawyers Miami

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This article continues a series of articles on the Internal Revenue Code (“IRC”) §318 constructive ownership rules. Today, I would like to focus on the §318 re-attribution rule. In this article, I will explain the general §318 re-attribution rule and mention the exceptions. I will discuss the exceptions in more detail in future articles.

§318 Re-attribution: General Rule

Generally, under the IRC §318(a)(5)(A), stock constructively owned by a shareholder under any of the §318 attribution rule is deemed to be actually owned for the purposes of re-attribution to others. In other words, except for limitations mentioned below, the constructive ownership of stock can be further attributed to other persons.

For example, if a husband owns stocks in Corporation Y and his wife is deemed to owned these stocks under the family attribution rules of §318(a)(1)(A)(i), then these constructively-owned stocks can be further attributed from the wife to Corporation X under the shareholder-to-corporation rules of §318(a)(3)(C) if the wife owns 50% or more of the value of stocks issued by Corporation X.

§318 Re-attribution: Great Burden on Taxpayers

The breadth of the §318 re-attribution rule can present a huge challenge to taxpayers. Both individuals and entities must maintain correct ownership records to allow their tax attorneys to properly determine their ownership of stock under §318 and their consequent tax obligations.

The dangerous reach of the §318 re-attribution rule can be demonstrated by the following example. Let’s suppose that corporation X has 200 shares outstanding and all of the shares are owned as follows: H owns 100 shares, his wife W owns 60 shares and his son S owns 40 shares. Additionally, H owns 25% in partnership P.

Under the §318 family attribution rules, H actually owns 100 shares and constructively owns another 100 shares (i.e. his wife’s and his son’s shares) of X. Under §318(a)(5)(A), H’s constructive ownership of 100 shares is deemed to be actual ownership for the purposes of re-attribution of stock. Consequently, under the partner-to-partnership rules of §318(a)(3)(A), 100% ownership of X is now attributed to P.

This can get even worse. Assuming the same facts, what if P also actually owns 50% of the value of the stock of corporation Y? Then, under §318(a)(3)(C), Y would be a constructive owner of 100% of X, because these shares were attributed first to H and, then, from H to P.

§318 Re-attribution: Restrictions

It is obvious that, without any limitations, such an extensive re-attribution of stock can easily get out of hand and spread to cover persons who have no relationship to the original owners. For this purpose, the US Congress imposed certain restrictions on the re-attribution of stock under §318(a)(5)(A). Each provision §318(a)(5)(B)–§318(a)(5)(D) imposes limitations on re-attribution of stock where the relationship between the original owner and the person subject to stock re-attribution no longer justifies the assertion of constructive ownership. I will detail these restrictions in future articles.

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If you own foreign assets, including foreign business entities, you have the daunting obligation to meet all of your complex US international tax compliance requirements; otherwise, you may have to face the wrath of the IRS in the form of high noncompliance penalties. In order to successfully meet your US international tax compliance obligations, you need the professional help of Sherayzen Law Office.

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Indian US Dollar Remittances | International Tax Lawyer & Attorney

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For some years now, India has remained at the top of all countries that receive remittances in US dollars. A lot of these funds flow from Indian-Americans and Indians who reside in the United States. The problem is that a lot of them are not in compliance with respect to their US international tax obligations that arise as a result of these Indian US dollar remittances.

Indian US Dollar Remittances: India Has Been the Top Recipient

For many years now, India has been one of the top countries in turn of US dollar remittances; lately it has occupied the number one spot. For example, in 2018, India received about $78.6 billion from overseas; China was a distant with only $67.4 billion followed by Mexico ($35.7 billion), the Philippines ($33.8 billion) and Egypt ($28.9 billion).

One of the biggest (if not the biggest) sources of these Indian US dollar remittances has been the United States. In fact, according to the World Bank, one of the reasons why Indian US dollar remittances were so high in 2018 was a better economic performance of the US economy. Hence, we can safely conclude that a large number of Indian-Americans and Indians who reside in the United States send a large portion of their US earnings back to India.

Indian US Dollar Remittances: US International Tax Compliance Issues

The biggest problem with Indian US dollar remittances is their potential for triggering various US international tax compliance requirements, because these remittances are made by US tax residents. Oftentimes, the repatriated funds are sitting in Indian bank accounts or they are invested in Indian stocks, bonds, mutual funds and structured products. Moreover, some of these funds are used to purchase real estate which is rented out to third parties. Still other funds are used to finance business ventures in India.

Such usage of repatriated funds may result in the obligation not only to report Indian income in the United States , but also to file numerous US information returns such as: Report of Foreign Bank and Financial Accounts (FinCEN Form 114 better known as FBAR), Forms 8938, 8621, 5471 and others. Failure to report foreign income and file these information returns may result in the imposition of draconian IRS penalties and even a criminal prosecution.

Indian US Dollar Remittances: Unawareness Among Indians of US Tax Compliance Requirements

The high potential of Indian US dollar remittances to give rise to US tax compliance issues is combined with a widespread unawareness of these issues among Indians and Indian-Americans. Many of these taxpayers are not even aware of the fact that they are considered US tax residents. Others simply have never heard of the requirement to disclose foreign accounts and other foreign assets in the United States. Still others cling to erroneous ideas and various incorrect myths concerning US tax system.

The rise of various US tax compliance requirements as a result of remittances of funds to India and the widespread ignorance of these requirements among Indians is a bad combination, because it creates the potential for the imposition of the aforementioned draconian IRS penalties on Indians who are not even conscious of the fact that they need to report their worldwide income.

Contact Sherayzen Law Office for Professional Help With US International Tax Compliance and Offshore Voluntary Disclosures Concerning Remittances of US Earnings to India

If you are an Indian who resides in the United States and you sent part of your US earnings to India, contact Sherayzen Law Office for professional help. We have successfully helped hundreds of Indians and Indian-Americans to resolve their US international tax compliance issues, including conducting offshore voluntary disclosures (such as Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures) with respect to past US tax noncompliance. We can help you!

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§318 Estate Beneficiary Definition | US International Tax Law Firm

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The Internal Revenue Code (“IRC”) §318 contains corporate stock attribution rules between an estate and its beneficiaries. In order to apply these rules correctly, one must understand how §318 defines “beneficiary” for the purposes of upstream and downstream estate attribution rules. This articles will introduce the readers to this §318 estate beneficiary definition.

§318 Estate Beneficiary Definition: General Rule

Treas. Regs. §1.318-3(a) defines “beneficiary” for the purposes of §318 attribution rules (on a separate note, pursuant to Rev. Rul. 71-353, the attribution rules for the personal holding company provisions, collapsible corporation provisions (now repealed), and affiliated group provisions also use this definition of a beneficiary).

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.

Moreover, a person entitled to property not subject to administration by the executor is not a beneficiary for purposes of the §318 estate attribution rules unless the property is subject to the executor’s claim for a share of the federal estate tax.

§318 Estate Beneficiary Definition: Certain Specific Cases

This definition of beneficiary produces interesting results in some specific cases which are actually quite common.

Let’s first see the result of the application of the §318 estate beneficiary definition to life estates. A person with a life estate in estate property is a beneficiary. On the other hand, if a person owns only a remainder interest (i.e. an interest that vests only after the death of the life tenant), then he is not a beneficiary.

A beneficiary of life insurance proceeds is not considered a beneficiary for the §318 estate attribution rule purposes. This is because this is not a property subject to administration by the executor.

Similarly, an executor or administrator is usually not a beneficiary simply by virtue of occupying either of these positions. The main exception to this rule is a situation where an executor or administrator is otherwise considered a beneficiary.

Finally, a residuary testamentary trust presents a very interesting and complex issue. Under Rev. Rul. 67-24, it may be treated as a beneficiary of an estate before the residue of the estate is actually transferred to it. Moreover, it appears that such a trust (in that case, it was an unfunded testamentary trust) needs to worry about the §318(a)(3)(B) trust attribution rules.

§318 Estate Beneficiary Definition: Cessation of Beneficiary Status

It is important to note that §318 estate attribution rules cease to operate with respect to a person who stops being a beneficiary. See Tres. Reg. §1.318-3(a). There is an exception to this rule though: pursuant to Rev. Rul. 60-18, a residuary legatee does not stop being a beneficiary until the estate is closed. “Residual legatee” is a person named in a will to receive any residue left in an estate after the bequests of specific items are made.

When does a person stop being a beneficiary for the purposes of §318? Treas. Reg. Reg. §1.318-3(a) sets forth the following criteria that must be met for a person to no longer be considered a beneficiary: (a) the person has received all property to which he is entitled; (b) ”when he no longer has a claim against the estate arising out of having been a beneficiary”; and (c) “when there is only a remote possibility that it will be necessary for the estate to seek the return of property or to seek payment from him by contribution or otherwise to satisfy claims against the estate or expenses of administration”.

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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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IRC §318 Family Attribution | International Tax Law Firm Minnesota

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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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IRC §318 Importance | International Tax Lawyer & Attorney

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It is difficult to overstate the significant role the Internal Revenue Code (“IRC”) §318 plays in US corporate tax law and US international tax law. In this article, I will explain the §318 importance and list out major IRC provisions which reference §318.

IRC §318 Importance: Fundamental Purpose

§318 sets forth the circumstances when the ownership of stock is attributed from one person or entity to another. This is one of the most important sections of the Internal Revenue Code, because it contains a set of constructive stock ownership rules which affect a bewildering variety of IRC tax provisions.

It is important to point out that §318 constructive ownership rules do not apply throughout the IRC. Rather, §318 applies only when it is expressly adopted by a specific tax section.

IRC §318 Importance: Non-Exclusive List of IRC Sections

The IRC §318 importance is extensive in both domestic and international tax provisions of the Internal Revenue Code. The CFC (controlled foreign corporation) rules, FIRPTA, FTC (foreign tax credit rules), BEAT, FATCA and so on – all of these US international tax laws adopted §318 for at least one purpose. The §318 importance can even be seen in the 2017 tax reform (for example, the FDII rules).

The following is a non-exclusive list of major IRC sections which adopted the §318 constructive stock ownership rules:

• §59A(g)(3) (related party under BEAT rules)
• §105(h)(5)(B)
• §168(h)(6)(F)(iii)(III)
• §250(b)(5)(D) (sales or services to related party under FDII rules by reference to §954(d)(3) and §958)
• §263A(e)(2)(B)(ii)
• §267A(b)(2) (related party amounts in hybrid transaction by reference to §954(d)(3) and §958)
• §269A(b)(2)
• §269B(e)(2)(B)
• §301(e)(2)
• §302(c) (stock redemptions)
• §304 (redemptions by related corporations)
• §306(b)(1)(A) (disposition or redemption of §306 stock)
• §338(h)(3)
• §355(d)(8)(A)
• §356(a)(2)
• §367(c)(2)
• §382(l)(3)(A) (net operating loss carryovers)
• §409(n)(1)
• §409(p)(3)(B)
• §414(m)(6)(B)
• §416(i)(1)(B) (key employee for top heavy plans)
• §441(i)(2)(B)
• §453(f)(1)(A)
• §465(c)(7)(D)(iii), §465(c)(7)(E)(i) (at-risk loss limitations)
• §469(j)(2)(B) (passive activity loss limitations)
• §512(b)(13)(D)(ii) (unrelated business taxable income from controlled entity)
• §856(d)(5) (REIT rental income)
• §871(h)(3)(C) (portfolio interest withholding tax exemption)
• §881(b)(3)(B) (portfolio interest withholding tax exemption)
• §897(c)(6)(C) (FIRPTA rules)
• §898(b)(2)(B) (adopting §958‘s modified §318 rules for determination of foreign corporation’s tax year)
• §904(h)(6) (foreign tax credit re-sourcing rules)
• §951(b) (U.S. shareholder of controlled foreign corporation (CFC) by reference to §958(b))
• §954(d)(3) (CFC related party rules by reference to §958)
• §958(b) (CFC rules)
• §1042(b)(2)
• §1060(e)(2)(B)
• §1061(d)(2)(A) (transfer of partnership interest received for performance of services)
• §1239(b)(2)
• §1372(b)
• §1471(e) (imposing FATCA reporting requirements on foreign financial institution members of an expanded affiliated group determined under §954(d)(3)’s control test, which adopts §958‘s modified §318 rules)
• §2036(b)(2)
• §6038(e)(2) (information reporting for controlled foreign corporations)
• §6038A(c)(5)
• §7704(d)(3)(B)

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

Trying to comply with the extremely complex provisions of US international tax law on your own is even worse than playing Russian roulette. In all likelihood, you will soon find yourself in the ever-deepening pit of legal problems and IRS penalties from which it will be very difficult to extricate yourself.

This is why, if you are US taxpayer with US international tax law issues, you need to contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the globe to bring themselves into full compliance with US tax laws, and we can help you!

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