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Attribution From Entities Under Different Rules
(Posted August 8, 2002)
Question 223: My understanding is if Corporation A owns 5% or more of Corporation B then a 5% or more shareholder of Corp A is deemed to own a proportional ownership of Corp B and, likewise, if Partnership A owns 5% or more of Partnership B then a 5% or more partner of Partnership A is deemed to own a proportional ownership of Partnership B. Would the same hold true for a shareholder of an S corporation that owns 5% or more of Partnership B?
Answer: Your understanding is close, but not accurate. There are three different sets of attribution rules, each with its own nuances. You did not specify which set of rules you are using, so I'll address all three.
Under each set of rules, if an owner is deemed to own his pro rata share of what the entity owns, then there is no threshold on the entity itself. An example might make that clearer. Under the controlled group rules of IRC 1563, a 5% partner is deemed to own his pro rata share of whatever the partnership owns (whether or not the partnership owns 5% of the second entity). Suppose John is a 50% partner in the JK partnership, and JK owns 4% of the XYZ corporation. John will be deemed to own 2% of XYZ.
The table below summarizes the attribution rules for all three sets of rules. It shows which owners are deemed to own their pro rata interest of what the entity owns. The 1563 rules are for controlled groups. The 318 rules are for affiliated service groups, highly compensated employees, key employees, and several other purposes. The 267 rules are used in determining related parties for management function groups and leased employees.
|C Corp||5% shareholder||50% shareholder (5% for HCE/key employee)||All shareholders|
|S Corp||5% shareholder||All shareholders||All shareholders|
|Partnership||5% partner||All partners||All partners|
All of the attribution rules are laid out on a table appearing as Appendix D in my book, Who's the Employer.
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