Associate Attorney - Tax (Honolulu HI)
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|Question 296: Does Code section 1563(e)(6)(a) prevent parents who own separate businesses and have a minor child from availing themselves of the exceptions to the constructive ownership rules?|
Answer: Yes and no. Let me break up your question into the different questions it suggests.
1. Does a minor child prevent a husband and wife from using either of the exceptions to spousal attribution under the controlled group rules? No. The law treats me as owning my wife’s stock unless (a) we are divorced (final or interlocutory) or legally separated (heaven forbid!) or (b) the noninvolvement exception applies. Under the noninvolvement exception, I am not deemed to own my wife’s stock if I do not own any stock directly, I am not a director or employee and do not participate in management, not more than 50% of the corporation’s income comes from rents, royalties, annuities, dividends, etc., and the stock is not subject to transfer restrictions which run in my favor or in favor of my children under age 21. Having a minor child does not change either of these exceptions.
2. Does that mean that no other attribution rule applies? No. There are six different attribution rules, and the two spousal exceptions address only one of them: attribution between spouses. For example, if I have an option to buy my wife’s stock, then the law deems that I own the stock through option attribution, even if the noninvolvement exception otherwise would apply.
3. So, if I own my business and my wife owns her business, and the noninvolvement exception applies, does a controlled group exist if we have a child under age 21? Yes, because the controlled group rules treat our child under age 21 as owning my stock and my wife’s stock. The noninvolvement exception does not prevent parent-child attribution. It prevents husband-wife attribution.
4. But doesn’t this involve double family attribution, which the law prohibits? No. Our child is deemed to own my stock. Our child is deemed to own my wife’s stock. Each share of stock has been attributed once and only once. This is not attribution from me to our child to the child’s mother (my wife). This is attribution from me to our child and my wife to our child.
Could the law have been written differently? Of course it could have? Should it have been written differently? Perhaps. But the statute is the statute and the language of the statute is blindingly clear.
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.