§318 Upstream Corporate Attribution | International Tax Lawyers Florida
In a previous article, I discussed the rules for the downstream attribution of corporate stocks under the IRC (Internal Revenue Code) §318. Today, I would like to discuss the §318 upstream corporate attribution rules.
§318 Upstream Corporate Attribution: Two Types of Attribution
There are two types of §318 corporate attribution rules: downstream and upstream. Under the downstream corporate attribution rules, stocks owned by a corporation are attributed to this corporation’s shareholders. The upstream corporate attribution rules are exactly the opposite: stocks (in another corporation) owned by shareholders are attributed to the corporation. This article will focus on the upstream attribution rules.
§318 Upstream Corporate Attribution: Main Rule
Under §318(a)(3)(C), a corporation is deemed to be the constructive owner of all stocks owned directly or indirectly by its 50% shareholder. The 50% threshold is determined by value of the stock in the corporation. Id.
Of course, this rule applies only to stocks owned by shareholders in another corporation; a corporation can never be a constructive owner of its own stock under §318(a)(3)(C). Treas. Reg. §1.318-1(b)(1).
§318 Upstream Corporate Attribution: 50% Threshold
“In determining the 50-percent requirement of section 318(a)(2)(C) and (3)(C), all of the stock owned actually and constructively by the person concerned shall be aggregated.” Treas. Reg. §1.318-1(b)(3). In other words, for the purpose of upstream corporate attribution under §318, all actual and constructive ownership of a shareholder should be considered in order to determine whether th 50% value ownership threshold is met.
Let’s consider the following hypothetical to illustrate this rule: H owns 50% of value of the stock of X, a C-corporation, while his wife W owns 50% of the value of stock in Y, another C-corporation; the rest of Y’s stock is owned by unrelated third-parties. The question is how much of X’s stock ownership is attributed to Y.
We should begin our analysis by stating that, under the family attribution rules of §318(a)(1)(A), H’s shares in X are attributed to W; in other words, W is a constructive owner of 50% of the value of X’s stock. Since W is a 50% value-owner of Y’s stock, Y is deemed to own the stock actually and constructively owned by W under the operation of §318 upstream corporate attribution rules. This means that Y constructively owns 50% of X’s stock, even though W has no actual ownership of X.
§318 Upstream Corporate Attribution: S-Corporations
It should be emphasized that the §318 upstream corporate attribution rules do not apply to S-corporations with respect to attribution of corporate stock between an S-corporation and its shareholders. Rather, in such cases, S-corporation is treated as a partnership and its shareholders as partners. See §318(a)(5)(E). Hence, corporate stocks owned by a shareholder are fully attributed to the S-corporation irrespective of the value ownership of a shareholder in the S-corporation.
Keep in mind, however, that the usual constructive ownership rules for corporations and shareholders apply for the purpose of determination of whether any person owns stock in an S-corporation.
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