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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.

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50% Offshore Penalty of the 2014 OVDP

The 50% Offshore Penalty is a unique feature of the 2014 OVDP. What is so unusual about this penalty is that its impact widens with each passing month and year to include and affect more and more US taxpayers. In this article, I would like to explore the emergence of the 50% Offshore Penalty and its importance to US international tax compliance.

2014 OVDP Penalty Structure

On June 18, 2014, the IRS completely changed the entire legal landscape of US voluntary disclosure. The unwieldy and uncompromising penalty structure of the 2012 OVDP was replaced by the new Streamlined Procedures and a completely modified 2014 OVDP.

Under the new rules, the IRS eliminated the 5% and 12.5% penalties of the 2012 OVDP and replaced them with milder and more flexible Streamlined Domestic Offshore Penalty of 5% and Streamlined Foreign Offshore Penalty of 0%. On the other hand, the old default 25% penalty of the 2012 OVDP evolved into a new stringent system of dual penalty structure: 27.5% default Offshore Penalty and 50% Offshore Penalty.

FAQ 7.2 and 50% Offshore Penalty

The 27.5% default Offshore Penalty applies unless the participating US taxpayer has foreign accounts in a bank on a special IRS list as described in FAQ 7.2.

FAQ 7.2 states that, starting August 4, 2014, any taxpayer who enters OVDP will be subject to a 50% Offshore Penalty if, at the time the Preclearance letter is submitted to the IRS-CI (Criminal Investigation), a “public disclosure” has already occurred.

FAQ 7.2. further states that a “public disclosure” has occurred if one of the following three events occurs. First, if the foreign financial institution (FFI) where the undisclosed foreign account is held or another “facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement” (“facilitator”) is under IRS or US DOJ investigation. The investigation should be the one that is related to accounts that are beneficially owned by a US person.

Second, the FFI or facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person. In other words, where a foreign bank signs a Non-Prosecution Agreement with US DOJ; this means every Swiss bank that reached resolution with the DOJ under the Swiss Bank Program; OR

Third, the FFI or facilitator has been identified in a John Doe Summons seeking information about U.S. taxpayers who may hold financial accounts at this FFI or have accounts established or maintained by the facilitator.

FAQ 7.2 provides an example of when a public disclosure occurs: “a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.

It is easy to see now why the 50% Offshore Penalty has been increasing in influence – every Non-Prosecution Agreement, every DOJ investigation, every John Doe summons automatically expands the application of the 50% Offshore Penalty to another FFI or even a set of FFIs.

Entire Penalty Base is Subject to 50% Offshore Penalty

If a public disclosure occurs with respect to the FFI or facilitor where the US taxpayer has one or more foreign accounts, the 50% Offshore Penalty applies not only to these accounts but to all of the taxpayer’s assets included in the penalty base. For example, if a US taxpayer has one account at UBS, ten accounts in an Australian bank (for which no public disclosure occurred) and a foreign rental property that generated unreported foreign income, the 50% Offshore Penalty will apply to all of these assets.

List of FFIs and Facilitators

The IRS published the list of all FFIs and Facilitators for which public disclosure has occurred with the dates when the 50% penalty is activated with respect to these FFIs and Facilitators. Here, I am only providing the list up to date through January 7, 2016:

UBS AG
Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
Wegelin & Co.
Liechtensteinische Landesbank AG
Zurcher Kantonalbank
swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG
CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates
Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates (effective 12/19/14)
Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd, Bank Leumi (Luxembourg) S.A., Leumi Private Bank S.A., and Bank Leumi USA (effective 12/22/14)
BSI SA (effective 3/30/15)
Vadian Bank AG (effective 5/8/15)
Finter Bank Zurich AG (effective 5/15/15)
Societe Generale Private Banking (Lugano-Svizzera) SA (effective 5/28/15)
MediBank AG (effective 5/28/15)
LBBW (Schweiz) AG (effective 5/28/15)
Scobag Privatbank AG (effective 5/28/15)
Rothschild Bank AG (effective 6/3/15)
Banca Credinvest SA (effective 6/3/15)
Societe Generale Private Banking (Suisse) SA (effective 6/9/15)
Berner Kantonalbank AG (effective 6/9/15)
Bank Linth LLB AG (effective 6/19/15)
Bank Sparhafen Zurich AG (effective 6/19/15)
Ersparniskasse Schaffhausen AG (effective 6/26/15)
Privatbank Von Graffenried AG (effective 7/2/15)
Banque Pasche SA (effective 7/9/15)
ARVEST Privatbank AG (effective 7/9/15)
Mercantil Bank (Schweiz) AG (effective 7/16/15)
Banque Cantonale Neuchateloise (effective 7/16/15)
Nidwaldner Kantonalbank (effective 7/16/15)
SB Saanen Bank AG (effective 7/23/15)
Privatbank Bellerive AG (effective 7/23/15)
PKB Privatbank AG (effective 7/30/15)
Falcon Private Bank AG (effective 7/30/15)
Credito Privato Commerciale in liquidazione SA (effective 7/30/15)
Bank EKI Genossenschaft (effective 8/3/15)
Privatbank Reichmuth & Co. (effective 8/6/15)
Banque Cantonale du Jura SA (effective 8/6/15)
Banca Intermobiliare di Investimenti e Gestioni (Suisse) SA (effective 8/6/15)
bank zweiplus ag (effective 8/20/15)
Banca dello Stato del Cantone Ticino (effective 8/20/15)
Hypothekarbank Lenzburg AG (effective 8/27/15)
Schroder & Co. Bank AG (effective 9/3/15)
Valiant Bank AG (effective 9/10/15)
Bank La Roche & Co AG (effective 9/15/15)
Belize Bank International Limited, Belize Bank Limited, Belize Corporate Services Limited, their predecessors, subsidiaries, and affiliates (effective 9/16/15)
St. Galler Kantonalbank AG (effective 9/17/15)
E. Gutzwiller & Cie, Banquiers (effective 9/17/15)
Migros Bank AG (effective 9/25/15)
Graubundner Katonalbank (effective 9/25/15)
BHF-Bank (Schweiz) AG (effective 10/1/15)
Finacor SA (effective 10/6/15)
Schaffhauser Kantonalbank (effective 10/8/15)
BBVA Suiza S.A. (effective 10/16/15)
Piguet Galland & Cie SA (effective 10/23/15)
Luzerner Kantonalbank AG (effective 10/29/15)
Habib Bank AG Zurich (effective 10/29/15)
Banque Heritage SA (effective 10/29/15)
Hyposwiss Private Bank Genève S.A. (effective 10/29/15)
Banque Bonhôte & Cie SA (effective 11/3/15)
Banque Internationale a Luxembourg (Suisse) SA (effective 11/12/15)
Zuger Kantonalbank (effective 11/12/15)
Standard Chartered Bank (Switzerland) SA, en liquidation (effective 11/13/15)
Maerki Baumann & Co. AG (effective 11/17/15)
BNP Paribas (Suisse) SA (effective 11/19/15)
KBL (Switzerland) Ltd. (effective 11/19/15)
Bank CIC (Switzerland) Ltd. (effective 11/19/15)
Privatbank IHAG Zürich AG (effective 11/24/15)
Deutsche Bank (Suisse) SA (effective 11/24/15)
EFG Bank AG (effective 12/3/15)
EFG Bank European Financial Group SA, Geneva (effective 12/3/15)
Aargauische Kantonalbank (effective 12/8/15)
Cornèr Banca SA (effective 12/10/15)
Bank Coop AG (effective 12/10/15)
Crédit Agricole (Suisse) SA (effective 12/15/15)
Dreyfus Sons & Co Ltd, Banquiers (effective 12/15/15)
Baumann & Cie, Banquiers (effective 12/15/15)
Bordier & Cie Switzerland (effective 12/17/15)
PBZ Verwaltungs AG (effective 12/17/15)
PostFinance AG (effective 12/17/15)
Edmond de Rothschild (Suisse) SA (effective 12/18/15)
Edmond de Rothschild (Lugano) SA (effective 12/18/15)
Bank J. Safra Sarasin AG (effective 12/23/15)
Coutts & Co Ltd (effective 12/23/15)
Gonet & Cie (effective 12/23/15)
Banque Cantonal du Valais (effective 12/23/15)
Banque Cantonale Vaudoise (effective 12/23/15)
Bank Lombard Odier & Co Ltd (effective 12/31/15)
DZ Privatbank (Schweiz) AG (effective 12/31/15)
Union Bancaire Privée , USP SA (effective 1/6/16)

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