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§318 Relationship Categories | International Business Tax Lawyer & Attorney

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In a previous article I discussed the importance of the Internal Revenue Code (“IRC”) §318 constructive stock ownership rules. Today, I would like to introduce the readers to the various §318 relationship categories – i.e. what types of taxpayers are affected by this section’s constructive ownership rules.

§318 Relationship Categories: Related Persons

Congress created IRC §318 constructive ownership rules to prevent or minimize the possibility of using business transactions between related persons for tax avoidance purposes. In other words, in order for §318 to be relevant, there must be some type of a close relationship between persons engaged in a business transaction.

It is important to point out that one should not confuse §267 definition of related persons with the one described in §318. These are two completely separate sets of rules that apply to different situations.

§318 Relationship Categories: Six Main Categories

§318 deals specifically with six main categories of related individuals and entities. I will list them here with only a general description; in future articles, I will address each of these §318 relationship categories specifically.

  1. Family members: certain family members are treated as related persons for §318. Again, the §318 definition of “family” should not be confused with the §267 definition.
  2. Partnerships and partners: unlike §267, the constructive ownership rules of §318 are both “upstream” and “downstream”. In other words, the attribution of stock ownership works both ways: from partners to partnership and from partnership to partners. Additionally, one must remember that an S-corporation and its shareholders are treated respectively as a partnership and partners for the purposes of §318.
  3. Estates and beneficiaries: the IRS §318 constructive ownership rules with respect to estates and beneficiaries are quite unique and invasive. They also work downstream and upstream – i.e. the stocks owned by estate are attributed to its beneficiaries and vice-versa.
  4. Trusts and beneficiaries: again, the stock ownership attribution rules of §318 between a trust and its beneficiaries can be downstream and upstream. Stock owned, directly or indirectly, by or for a trust is considered owned by its beneficiaries in proportion to their actuarial interests in the trust. The upstream relationship is more complex: while generally all stocks owned directly or indirectly by a beneficiary of a trust is considered owned by the trust, there are important exceptions.
  5. Corporations and shareholders: surprisingly, §318 attribution rules between a corporation and its shareholders also contain both downstream and upstream provisions. The application of these rules, however, is limited to persons who own directly and indirectly 50% or more of the value of stocks in the corporation. Again, the corporate attribution rules under §318 apply only to C-corporations; S-corporations are treated as partnerships for the purposes of this section.
  6. Holders of stock options: unlike §267, the constructive stock ownership rules of §318 are expanded to options. §318(a)(4) classifies a holder of an option to acquire stock as the owner of that stock. There are detailed rules for defining what an “option” is for the §318 purposes. Interestingly, the stock option attribution rule supersedes the family member attribution rules (which often results in a more extensive constructive ownership).

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US business tax law is incredibly complex. In fact, an ordinary taxpayer who attempts to decipher it on his own is likely to get himself into deep trouble; this is especially the case, if one deals with the international aspects of US business tax law.

This is why you need to contact Sherayzen Law Office for professional help. We have helped business owners around the world with their US tax planning and US tax compliance, and we can help you!

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Happy New Year 2020 from Sherayzen Law Office!

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Sherayzen Law Office wishes everyone a very happy and prosperous New Year 2020! We also wish you stay in full US tax compliance with US international tax laws while your tax burden decreases!

And, we are here to help our clients to turn these wishes into reality! In the year 2020, Sherayzen Law Office will continue to help its clients with all US international tax law issues, including compliance with FATCA, FBAR and all US international information returns such as Forms 3520, 5471, 8621, 8865 and others.

Moreover, Sherayzen Law Office will continue its leadership in the area of offshore voluntary disclosures, helping its clients to bring themselves into full compliance with US tax laws while lowering and, in some cases, even eliminating numerous IRS penalties. We will continue to do all types of offshore voluntary disclosures, including: Streamlined Domestic Offshore Procedures (“SDOP”), Streamlined Foreign Offshore Procedures (“SFOP”), Delinquent FBAR Submission Procedures, Delinquent International Information Return Submission Procedures, Modified Traditional Voluntary Disclosure, Reasonable Cause Disclosures and others.

If you are audited by the IRS with respect to your compliance with FBAR, FATCA or any other international information return filing requirements during any point of the new year 2020, then you can advantage of Sherayzen Law Office’s services with respect to IRS audits. We have helped clients throughout the worldwide with IRS audits, including audits related to foreign corporations and offshore voluntary disclosures (e.g. SDOP IRS audit or SFOP IRS audit).

Furthermore, during the new year 2020, Sherayzen Law Office will continue to create new creative and ethical tax plans and implement the old ones in order to allow our clients to take full advantage of the benefits offered by the Internal Revenue Code.

At Sherayzen Law Office, we look at the new year 2020 as an exciting opportunity to continue to deliver top-quality US international tax services to our clients around the globe. Helping people and their businesses with their US international tax issues is our goal!

Contact us directly by phone or email to schedule your confidential consultation!

Happy New Year 2020 to you and your family!