To prevent shareholders from avoiding dividend treatment by shifting shares to related parties, § 318 attributes ownership of stock from one person to another. The attribution rules apply to redemptions under § 302(c)(1).
There are three main types of attribution:
- Family attribution (§ 318(a)(1)): Stock owned by an individual is attributed to his spouse, children, grandchildren, and parents. Note: siblings are not included, and attribution does not go both ways (a child’s stock is attributed to a parent, but a parent’s stock is not attributed to a child – at least not directly; it can be reattributed).
- Entity attribution (§ 318(a)(2)): Stock owned by a partnership, trust, or corporation is attributed proportionately to its partners, beneficiaries, or shareholders. And stock owned by a partner, beneficiary, or shareholder is attributed back to the entity.
- Attribution from entities (§ 318(a)(3)): Stock owned by a partner, beneficiary, or shareholder is attributed to the partnership, trust, or corporation.
But there are limits: a “1” attribution (family) cannot follow another “1” attribution. So you can’t attribute from a child to a parent, and then from the parent to another child. And a “2” attribution (entity to individual) cannot follow a “3” attribution (individual to entity). These limits prevent unlimited chains of attribution.
The attribution rules can make it much harder to qualify for sale treatment. For example, if a father owns 60% of a corporation and his son owns 40%, the father is deemed to own 100% by attribution. If the corporation redeems all the father’s shares, he still owns 40% by attribution from his son – so no complete termination under § 302(b)(3). He would need to waive family attribution under § 302(c)(2) (discussed in a later article).
This article is for general informational purposes only and is subject to change. Tax laws are complex and vary by situation. You should consult a qualified professional for advice specific to your circumstances. For questions, contact Alan Goldstein.
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