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What's the Difference Between Sections 267 and 318?
(Posted March 25, 2002)
Question 147: I want to follow up on Q&A 146. I understand that IRC 318 attribution is used for affiliated service groups, rather than section 267, but so what? Both provide for attribution between husband and wife, parent and child, partnership and partner, etc. What difference does it make?
Answer: The difference can be huge depending on the situation. Yes, there are similarities, but there are major points addressed differently by the two systems:
- Most importantly for affiliated service groups, IRC 318 is the only attribution system that has attribution from shareholders, partners, and beneficiaries to the corporations, partnerships, and trusts they own.
- There is attribution between siblings under IRC 267, but not under 318.
- IRC 318 says if I have an option to buy stock, I am deemed to own the stock. IRC 267 is the only attribution system without an option rule.
- There is absolute attribution from corporation to shareholder under 267. By contrast, under 318 only a 50% or more shareholder is deemed to own his pro rata share of stock held by the corporation.
- IRC 267 has a bizarre and unique rule that says I am deemed to own any stock held by my partner in an unrelated partnership.
These are just some of the difference between these two attribution systems. There are further differences if one compares them to the controlled group rules in IRC 1563. That's why it's crucial to know what attribution system to use when. Unfortunately, it's one of the major causes of confusion in the employee plans arena.
I discuss all three of these attribution systems in my book, Who's the Employer? (Appendix D in the book compares and contrasts the three systems.)
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