One of the most popular tax reduction strategies is based on shifting an ownership interest in an entity or property to related persons or related entities. In order to prevent the abuse of this strategy, the US Congress has enacted a large number of attribution rules. In this brief essay, I will introduce the concept of attribution rules and list the most important attribution rules in the Internal Revenue Code (“IRC”).
Attribution Rules: Definition and Purpose
The IRC attribution rules are designed to prevent taxpayers from shifting an ownership interest to related persons or entities. They achieve this result through a set of indirect and constructive ownership rules that shift the ownership interest assigned to third parties back to the taxpayer. In other words, the rules disregard the formal assignment of an ownership interest to a related third party and re-assign the ownership interest back to the assignor for specific determination purposes.
For example, in the context of determining whether a foreign corporation is a Controlled Foreign Corporation, all shares owned by the spouse of a taxpayer are deemed to be owned by the taxpayer if both spouses are US persons.
Attribution Rules: Design Similarities and Differences
The IRC contains a great variety of attribution rules. All of them are very detailed and have achieved a remarkable degree of specificity. Behind this specificity, all of the rules are always concerned with the substance of a transaction rather than its form. Hence, there always lurks a general question of whether there was a tax avoidance motive when a taxpayer entered into a transaction.
In spite of the fact that they share similar goals, the rules differ from each other in design. Most of these differences can be traced back to legislative history.
List of Most Important Attribution Rules
Here is a list of the most important attribution rules in the IRC (all section references are to the IRC):
1. The constructive ownership rules of §267, which apply to disallow certain deductions and losses incurred in transactions between related parties;
2. The constructive ownership rules of §318, which apply in corporate-shareholder transactions and other transactions, including certain foreign transactions expressly referenced in §6038(e).
3. The constructive ownership rules of §544; these are the personal holding company rules which apply to determine when a corporation will be subject to income tax on undistributed income.
3a. While they are now repealed, the foreign personal holding company rules of §554 are still important. In the past, they applied to determine whether US shareholders of a foreign corporation would be taxed on deemed distributions which were not actually made;
4. Highly important Subpart F constructive ownership rules of §958, which apply to determine when US shareholders of a Controlled Foreign Corporation should be taxed on deemed distributions which are not actually made;
5. The PFIC constructive ownership rules of §1298, which apply to determine whether a US shareholder is subject to the unfavorable rules concerning certain distributions by a PFIC and sales of PFIC stock; and
6. The controlled group constructive ownership rules of §1563 which determine whether related corporations are subject to the limitations and benefits prescribed for commonly controlled groups.
This is not a comprehensive list of all attribution rules, there are other rules which apply in more specific situations.
Contact Sherayzen Law Office for Professional Help With the Attribution Rules
The rules of ownership attribution are highly complex. A failure to comply with them may result in the imposition of high IRS penalties.
This is why you need to contact the highly experienced international tax law firm of Sherayzen Law Office. We have helped US taxpayers around the globe to deal with the US tax rules concerning ownership attribution, and We Can Help You!