HH—Attribution

When it is intended that continued ownership would be held within a family, it is extremely important to consider the effect of the attribution rules when planning for the sale of stock to a corporation. Unfortunately, all too often the operation of these rules is poorly understood, and the adverse tax consequences can be disastrous (they have been aptly described as “infamous and insidious”).

The basic problem arises under Section 302(b)(3) of the Code, that requires that to qualify as a “capital transaction” the sale of stock to a corporation must result in acompletedisposition of the stockholder’s interest (both actually owned and constructively owned). If there is a redemption oflessthan the stockholder’s entire interest, then the transaction is likely to be treated and taxed as a stock dividend. However, merely selling all directly owned stock to the corporation, may not satisfy this requirement if stock owned by others is attributed to the selling stockholder or his estate. There are two types of attribution, family attribution and entity attribution. Whereas family attribution can be waived, entity attribution cannot be waived. To summarize the rules of family attribution:

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1. An individual is deemed (i.e., considered) to own any stock owned directly orindirectlyby his:a. parentsb. spousec. childrend. grandchildren
2. There isnofamily attribution with respect to one’s grandparent, brother, sister, uncle, aunt, nephew, cousin, or in-law.
3. There is no “secondary” attribution under the family attribution rules (e.g., stock attributed from daughter-in-law to son cannot then be again attributed from the son to his parents).

Depending upon the particular family relationship, an individual may, or may not, be considered to own the stock of other members of his family. For example, assume we have an extended family composed of a husband, his wife, his grandfather, grandmother, father, mother, and brother; as well as his son, daughter-in-law and grandson. In this family thehusbandis considered as owning the stock ofhisfather, mother, wife, son and grandson. On the other hand, hiswifewill be considered as owning the stock of onlyherfather, mother, husband, son and grandson.