Ownership by Family Attribution Question
A. For determining highly compensated and key employees the rules are rather straight forward and are presented below. (Please note that for control group purposes, the family attribution rules with respect to ownership have many additional nuances making it impractical to address in a FAQ format. We suggest that you consult with counsel in determining any control group issue.)
Family attribution rules are found in Internal Revenue Code §318. This section defines the family relationships for purposes of ownership of a company. The question of which family members are considered to own the stock of another family member is spelled out in Code Section 318(a)(1):
A. An individual shall be considered as owning the stock owned, directly or indirectly, by or for
(i) his or her spouse (other than a spouse who is legally separated from the individual under a decree of divorce or a separate maintenance) and (ii) his or her children, grandchildren, and parents. B. Effect of Adoption - For purposes of subparagraph (A)(ii), a legally adopted child of an individual shall be treated as a child of such individual by blood. Some examples of these rules:
John would be considered to own the stock of his wife Mary.
Mary would be considered to own the stock of her husband John.
John and Mary would each be considered to own the stock of their three children Hank, Jim and Sarah.
The three children would each be considered to own the stock of their Mom & Dad.
John and Mary would also be considered to own the stock of their grandchildren.
John and Mary’s grandchildren would NOT be considered to own the stock of John and Mary.
- Neither Hank, nor Jim, nor Sarah are considered to own each others stock as sisters and brothers are not part of the family attribution rules.
- John but not Mary would be considered to own the stock of his parents George and Martha.
- Hank, Jim and Sarah would NOT own the stock of their grandparents George and Martha.
- When Hank, Jim and/or Sarah marry, John and Mary would NOT own the stock of their children’s spouses because in-laws are not covered by the family attribution rules.
- The spouses of Hank, Jim and Sarah would NOT own the stock of Hank, Jim and Sarah’s parents as in-laws are not part of the family attribution rules.
- Hank’s kid, Jim’s kid and Sarah’s kid would not own each others stock as they are cousins.
Keep in mind that there are also attribution rules for partnerships, estates, trusts and corporations.