Who's the Employer?

Answer: IRC 318 says "An individual shall be considered as owning the stock owned, directly or indirectly, by or for ... his children, grandchildren, and parents." It adds that "a legally adopted child of an individual shall be treated as a child of such individual by blood."

There is no attribution between a stepparent and a stepchild (or, for that matter, a foster parent and a foster child) under this provision unless the stepparent adopts the child. There is always attribution between an adoptive parent and adopted child. Without the adoption, there is no relationship between the two recognized under IRC 318.

Of course, there would be attribution from child to natural parent, but there would not be a second level of attribution from the natural parent to the stepparent, because that would violate section 318's prohibition on double family attribution.

The same analysis would apply to controlled group attribution under IRC 1563, with the modification that attribution is limited between a child over age 20 and a parent. However, there is no attribution under that section between stepchild and stepparent. Moreover, adopted children are treated the same as natural children.

The same answer is found in IRC 267, which applies to determine related parties for purposes of management function groups, leased employees, and the prohibited transaction rules. IRC 267 is the only Code section that allows attribution between siblings, and it expressly includes attribution between half-siblings.

Let's put this all in a family context with an example. John and Mary are happily married. They have a daughter, Debbie. John has a son from a prior marriage named Steve. Mary has a son from a prior marriage named Adam. John has adopted Adam, but Mary has not adopted Steve (Steve's mother would not consent). All three children are under age 21 and each owns 2% of the SAD company.

For purposes of all three sets of attribution rules, John will be considered to own 4% of SAD. He is deemed to own Debbie's and Steve's 2% because they are his natural children. He is deemed to own Adam's 2% because Adam is his adopted child. Hence John is a "5%-owner" of SAD as that term is used in the Code's definition of highly compensated employee.

Mary is deemed to own only 4% of SAD. She is not deemed to own Steve's stock because she has not adopted Steve and he is not her natural child. Thus, John is a 5%-owner for purposes of the HCE rules and Mary is not.

Under IRC 267, each of the three children is deemed to own 6% of SAD, because there is attribution between siblings and half-siblings under that section.

The attribution rules under IRC sections 1563, 318, and 267 are discussed in more detail in Chapters 7, 13, and 17 (respectively) of my book, Who's the Employer? The latest edition of the book includes a table comparing the three sets of attribution rules.

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