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Attribution Adds Owners, Not Shares
(Posted November 13, 2002)
Question 236: Wife owns 100% of Corporation A. She, her husband, and two unrelated individuals each own 25% of Corporation B. Is there any type of controlled group situation here, such as brother-sister? Do we assume the husband and wife together own an identical interest in both corporations of over 50%, because they each are considered to own the other spouse's interest in each corporation?
Answer: No, you are misunderstanding the attribution rules.
All of the attribution systems, under IRC sections 318, 1563 or 267 (with 1563 being the attrribution system that applies here) allow us to treat someone who doesn't own a particular share of stock as though he or she owned it. But none of them take that share of stock and treat it as though it were two shares.
Consider what this means for Corporation B. Suppose there are 100 shares of stock outstanding. Wife owns 25 shares outright. Husband owns 25 shares outright. Because of the attribution rules, we can treat Wife as owning 50 shares (and Husband 0), Husband as owning 50 shares (and Wife 0), Wife as owning 40 shares and Husband 10, or any other combination that adds up to 50. But the attribution rules don't take those 50 shares and turn them into 100 shares.
So the best we can do in trying to create a controlled group is to treat Wife as owning 100% of A and 50% of B. That's not nearly enough to create a controlled group. She'd need 30% more of B, or she'd need to have the unrelated individuals own part of A.
Let's look at this situation another way. Suppose you were right. Suppose that we treat Wife as owning 50 shares and Husband as owning 50 shares. There are still two other shareholders who each own 25 shares. Husband and Wife together still would have only 2/3 of Company B, which is not enough for a controlled group. So either way a controlled group does not exist. But I believe that such an analysis, where one adds stock rather than just adding stockholders, is flawed and inconsistent with the statute, regulations and case law.
I discuss the controlled group attribution rules with many examples in chapter 7 of my book, Who's the Employer.
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