What are the rules for attribution for determining Parent/Subsidy & Brother/Sister Controlled Groups?
Attribution is the concept of treating a person as owning an interest in a business that is not actually owned by that person. Attribution may result from family or business relationships. Internal Revenue Code (“Code’) Section 1563 attribution is used in determining a controlled group of businesses under Code Section 414(b) and (c).
Note: Although the following attribution rules are written in terms of stock ownership, the same principles are applied for organizations that are not incorporated.
In the case of a: Ownership relates to the:
Trust or estate Actual interest
Partnership Capital or profits
Sole proprietorship Sole proprietorship
When calculating ownership interests, use the greater of:
− Corporate ownership – voting stock or value of stock
− Partnership ownership – capital or profits
Code Section 1563 Attribution
Code Section 1563 contains the rules of attribution used to determine “control” for the following:
− Controlled groups of corporations (Code Section 414(b)); and
− Trades or businesses, whether or not incorporation, which are under common control (Code Section 414 (c)).
Also see Treas. Reg. § 1.414(c)-4.
General Rules for Family Attribution
The following is a general description of how the family attribution rules are applied to controlled groups.
Note: The following family attribution rules only apply to a brother-sister controlled group and do not apply to a parent-subsidiary controlled group.
– The ownership interests of a Spouse are attributed to the other Spouse.
EXCEPTION: No attribution between spouses if there is no:
· direct ownership,
· participation in company, and
· no more than 50% of business gross income is passive investments.
-The ownership interests of Minor Child (under age 21) are attributed to the Parent.
-The ownership interests of a Parent are attributed to the the Minor Child (under age 21) .
-The ownership interests of a Parent are attributed to an Adult Child (age 21 or Older) only if the Adult Child owns greater than 50% of that business.
-The ownership interests of a Adult Child (age 21 or Older) are attributed to a Parent only if the Parent owns greater than 50% of that business.
-The ownership interests of a Grandparent are attributed to an Adult or Minor Child (under age 21) only if the Minor or Adult Child owns greater than 50% of that business.
-The ownership interests of a Minor or Adult Child are attributed to an Grandparent only if the Grandparent owns greater than 50% of that business.
The ownership interests of a Sibling will not be attributed to no other Sibling.
Ada and Barton are married. Barton is a doctor owning 100% of his medical practice. Ada is also a doctor and owns 50% of a separate medical practice (the other 50% is owned by an unrelated doctor).
Barton is not an employee or owner of a direct interest in Ada’s practice and less than 50% of the gross income in Ada’s practice is from passive investments. Barton, however, is in charge of significant management activities for his wife’s practice.
Ada does not directly own an interest or participate in Barton’s practice and less than 50% of the gross income from Barton’s practice is from passive investments.
−Barton is attributed the 50% interest that Ada owns in her practice (due to his participation in Ada’s practice).
−Ada is not attributed any ownership interest in Barton’s practice.
Clare, age 25 is the daughter of Dana. Dana owns 75% of XYZ Corporation and Clare own the remaining 25%. Since Dana owns more than 50% of XYZ, her ownership is attributed to Clare. Since Clare does not own more than 50% of XYZ, her ownership is not attributed to Dana.
General Rules for Organizational Attribution
The following is a general description of how the attribution rules for organizations are applied to controlled groups:
-The ownership interest from a corporation to its shareholder are attributed to corporate ownership interests attributed, proportionately, to shareholders (owning at least 5% of corporate stock).
–This is applicable to brother-sister controlled group only
-The ownership interest from a partnership to its partners are attributed to partnership ownership interests attributed, proportionately, to partners having at least 5% or more capital or profits interest.
–This is applicable to brother-sister controlled group only.
The ownership interest from a trust to its beneficiaries attributed to trust ownership interests attributed, proportionately to beneficiaries having 5% or more actuarial interest.
Example 1: Elliott owns 70% of the stock in the Fairfield Corporation. Grant owns 20% of the stock and four other individuals who each own less than 5% own the remaining 10%. The Fairfield Corporation has a 30% stock ownership in the Hale Corporation.
The Hale stock is attributed to Elliott and Grant in proportion to their ownership interests in the Fairfield Corporation as follows:
Elliott is treated as a 21% owner of Hale Corporation.
– 70% (interest in Fairfield) x 30% (Fairfield’s interest in Hale).
Grant is treated as a .06 % owner of Hale Corporation.
– 20% (interest in Fairfield) x 30% (Fairfield’s interest in Hale).
Since each of the four remaining shareholders of Fairfield Corporation own less than 5%, they are not treated as owning any interest in Hale Corporation.
Example 2: The Isanti Group is a partnership. Jay owns a 70% interest in Isanti, and Kendall owns a 30% interest. The Isanti Group owns 50% of the stock of Lake Investments Corporation.
The Lake stock is attributed to Jay and Kendall in proportion to their partnership interests in Isanti as follows:
Jay is treated as a 35% owner of Lake Corporation (70% x 50%).
Kendall is treated as a 15% owner of Lake Corporation (30% x 50%).
Other Rules under Code Section 1563
After an individual is attributed the ownership of a family member, the interest does not get attributed from the individual to another family member.
1. The ownership interests of an individual may be attributed to more
than one family member.
2. After an individual is attributed the ownership of a corporation,
partnership or trust, the interest may then be taken into account under
other attribution rules.
Options to acquire stock are, generally, treated as stock ownership under Code Section 1563. Refer to Rev. Rul. 68-601 and North American Industries, Inc. v. Commissioner, 33 TCM 1275 (1974) for further information.
Dad owns 40% interest in the XYZ Partnership. Son A (age 20 owns 30%. Son B (age 30 owns 20% An unrelated person owns the remaining interest in XYZ Partnership.
Dad is considered to own a total of 90% of the profits interest in XYZ
Partnership as follows:
-He directly owns 40% of XYZ Partnership,
-He is considered as owning the 30% interest owned by minor Son A, and
-He is also considered as owning the 20% interest of XYZ that is owned by his adult son.
Note that generally, the stock ownership of family members who are 21 or older are not attributed to an individual. However, such attribution is required if the individual has effective control. Dad has more than a 50% ownership of XYZ. See 1.414(b)-4(b)(6).
Son A is considered to own a total of 70% of the profits interest in XYZ:
-He directly owns 30%, and
-He is considered to own the 40% profits interest owned directly by Dad.
Son A is not, however, considered to own the 20% owned directly by Son B (and attributed to Dad).
-Son B is considered to own a total of 20% of the profits interest in XYZ:
-He directly owns 20%, and
-He is not considered to own the 40% interest of XYZ that is owned by his father. This is because Son B owns only 20% and he would have to own more than 50% in order for his father’s interest to be attributed to him.