StepChild

[30Rock]

I just wanted to verify - a step child would NOT be counted as a Child for attribution/ownership purposes unless legally adopted, is this the understanding?

[movedon]

I believe that is right.

[Mike Preston]

Doesn't it depend on whether it is a community property state?

[30Rock]

This is 318 attribution for purposes of ownership of a corporation - parent is owner, step child works for him. Is step child an HCE and key employee? Only if there is attribution from step parent to step child.

[GMK]

Maybe this helps:

http://www.ehtc.com/ehtc/brochures/SALTArt...Attribution.pdf

It suggests not counted without a legal adoption.

[Guest Sieve]

Correct. For attribution under IRC Sections 318 & 1563 (controlled group) (including 414(b) & 414©), blood child/parent relationship or legal adoption is required.

[30Rock]

thanks that is great!

[Mike Preston]

I think it depends on whether the ownership is community.

http://benefitslink.com/cgi-bin/qa.cgi?dat...8&mode=read

Quick example: Father directly owns 22%; Mother directly owns 0%; Mother's son, step-son of Father, not adopted, owns 78%. Mother is deemed to own 100%. Community property rules (see link) state that Father directly owns 50% of the community which is 11% of the stock; Mother directly owns 50% of the community, which is 11% of the stock. Attribution rules state that Father is deemed to own 22% of the stock (his and Mother's direct interest); Mother is deemed to own 100% of the stock (her and Father's direct interest; along with Mother's son's direct interest); Mother's son is deemed to own 89% of the stock (his and Mother's direct interest).

Note that the "non-involvement" exception does not apply in a community property situation.

[Guest Sieve]

Mike --

I don't quite understand how your example contradicts the rule that parent-child attribution only follows blood relationship or legal adoption. The only attribution in your example which includes the son is between him & his mother, and not between him & his step-father.

[K2retire]

And although the step father's ownership is attributed to the mother, it is not attributed as second time from her to her son.

[Mike Preston]

Mike --

I don't quite understand how your example contradicts the rule that parent-child attribution only follows blood relationship or legal adoption. The only attribution in your example which includes the son is between him & his mother, and not between him & his step-father.

Larry, I don't know how to state it any differently. Maybe by drawing a comparison between attribution (which I agree precludes, by definition, DOUBLE attribution) and some other word, which deals with the direct ownership in community property states. It is this community property direct ownership issue which many think is obviated when dealing with step-children. It is not.

[Mike Preston]

I think first, in my scenario, the biological parent of the step child is not an employee. Therefore, I think that resolves the issue and community property does not matter.

However, lets say biological parent is an employee but has no direct ownership. State is community property. You need to know the ownership percentages. Spouse owns 20% direct, per community property biological parent owns 10% direct, and 20% by attribution. The most she can attribute to her child, the step child, is 10%. This would make the step child an HCE and an owner.

If state is NOT community property, parent has no direct ownership, she is an owner by attribution from spouse only. So she cannot attribute to the step child as this would be double attribution. So step child would not be an HCE or owner.

I don't see why your second paragraph requires the biological parent to be an employee. How is the analysis changed if the biological parent is not an employee? What matters is whether the step-child is an employee and the step-child's deemed ownership interest. And that isn't dependent upon the employee status of the biological parent, is it?

[GMK]

Mike --

I don't quite understand how your example contradicts the rule that parent-child attribution only follows blood relationship or legal adoption. The only attribution in your example which includes the son is between him & his mother, and not between him & his step-father.

Took a while, but I think the point is that in the community property case, the son is deemed to own 89%, which is his directly owned 78% plus the half of step-Father's 22% that was deemed to Mother, who directly owns 0%. Without half of Father's 22% being deemed to Mother, the son would only have 78%.

[Mike Preston]

I have never heard of such a requirement.

EDIT: It looks like the message to which this was responding has been deleted. A good argument for quoting prior messages, huh? For the record, the message indicated that employment by the Mother was required before attribution to the step-son would take place. I think it is fair to say that the deletion of the message indicates that they have re-thought their position.

[Guest Sieve]

OK. Step-father's ownership can be attributed to step-son in a community property state because half of step-father's ownership is treated as direct (not attributed) ownership by mother, and mother then passes that ownership (by attribution) to son (requiring adult son independently to own more than 50% of stock, if we're dealing with Section 1563 attribution). I agree with that analayis.

I understand your point, too, Mike, regarding community property rules which potentially pass ownership through a parent to a step-child of the other parent. Still, that does not mean that attribution flows to step-son from step-father--only that mother has direct ownership due to community property state rules, and then her ownership is attributed to her son.

I also agree that employee status is immaterial in Section 318 attribution (except that such status can be used in Section 1563 to require attribution to a non-shareholder spouse--see Section 1563(e)(5)).

Whew . . .!! All of a sudden, I'm exhausted!

[Mike Preston]

Whew . . .!! All of a sudden, I'm exhausted!

But this discussion is appreciative of your exhaustion! Completely agree.