What Are Attribution Rules?
Attribution rules refer to a set of Internal Revenue Services (IRS) guidelines that have been established to thwart the creation of business ownership structures designed to skirt certain tax laws. The guidelines call for attribution of ownership from one person or entity to other people or entities in certain scenarios, which is particularly important for family-held businesses.
- Attribution rules mark out the legal principal owners of a firm, and are in place to prevent tax evasion or fraud.
- These rules establish that stock owned, directly or indirectly, by or for a partnership shall be considered as owned by any partner having an interest of 5% or more in either the capital or profits.
- This is important especially for family businesses where equity ownership may be obscure, and transactions involving business and personal funds can become intermingled.
Understanding Attribution Rules
Attribution rules came to be via three main sections of the Internal Revenue Code. Internal Revenue Code Section 267(c) determines individuals who are prohibited from certain transactions involving plan assets.
Internal Revenue Code Section 1563 address related companies that are part of a controlled group. A controlled group is any two or more corporations connected through stock ownership involving a parent-subsidiary group, a brother-sister group or a combined group.
Internal Revenue Code Section 318 focuses on highly compensated employees, key employees, and disqualified individuals in employee stock ownership plans. This section also identifies related companies that are part of an affiliated service group.
The section stipulates that an individual owns what their spouse, children, grandchildren, or parents own. For example, if a wife owns 100% of a business, her husband is deemed to own 100% of that business as well. Adopted children are treated the same as children related by blood. There is no attribution between spouses if they are legally separated. Certain family members are not subject to the family attribution rules. There is no ownership attribution between siblings, cousins, or a mother-in-law and son-in-law, for instance.
Other Notable Attribution Rules Provisions
Attribution differs for controlled groups under Section 1563. Attribution applies for parents and children if the children are under 21. For adult children and grandchildren, attribution applies only to individuals who own more than 50% of the business. For example, if a father owns 51% of the business and his son owns 4%, the rules deem that the father also owns the son’s 4%, but not vice versa.
Double attribution is not possible, meaning attribution does not pass between in-laws.
There is a spouse non-involvement exception for controlled groups. For example, in theory, spouses who have 100% ownership of two separate and unrelated companies would seem to form a controlled group, and thus would have to consider the other’s employees into account when forming retirement plans. However, there is no attribution if neither spouse is an owner, director, fiduciary, employee, or manager of the other’s business.
Minors can reintroduce a controlled group, though. A minor child of the spouses who own those businesses would have 100% ownership of both. Once that child turns 21 years, the controlled group would be broken. Notably, the parents of a minor child do not need to be married for attribution.