Who's the Employer?

The attribution rules treat a party as owning stock that is, in fact, owned by someone else. As a result, two people are treated as owning the stock. The deemed owner can be an existing shareholder or someone who doesn’t own any stock in the company directly. In determining whether a controlled group exists, it does not matter whether an individual actually owns stock or whether he or she is deemed to own it owned by attribution.

Simple option. Fred owns 100 shares of XYZ Corp. Fred gives me an option to buy 50 shares of his stock. Under the option attribution rules (see Q 7:4) Fred owns 100 shares of XYZ Corp and I am deemed to own 50 shares. Either of us can be treated as owning the shares if doing so would create a controlled group.

The number of shares of stock under consideration does not change because of attribution. The same shares can be counted only once in determining whether a particular controlled group exists. However, two different persons can be treated as owning those shares, to try to create a controlled group. If ownership by either would create a controlled group, then the group exists.

The way this works is illustrated by the following examples. Each involves two corporations, Acme and Zenith, and three unrelated owners, Aaron, Betty, and Cathy. Legal title to the corporations is held as follows:

	Acme	Zenith
Able	29%	50%
Betty	20%	50%
Cathy	51%	0%

Without options. As it stands in the chart above, without any options being issued, Acme and Zenith are not a controlled group. There is no group of shareholders with effective control.

Cathy’s stock optioned. Suppose that Cathy gives Able an option to buy her shares. Able is therefore deemed to own 80% of Acme (29% he actually owns plus 51% by attribution from Cathy). Able and Betty then own 70% for effective control and 100% of both corporations for a controlling interest. The two corporations are in a controlled group.

Able and Betty’s stock cross-option. Instead of Cathy giving Able an option, suppose that Able gives Betty an option to buy his Acme stock and Betty gives Able an option to buy her Acme stock. A controlled group does not exist. Between the two of them, they have 49% of Acme, and the grant of the options doesn’t change that. You can treat Able as owning 49%, Betty as owning 49%, each as owning 24.5%, or any combination in between, but they do not own more than 49%, even after attribution.

The author has had professionals call him, thinking that if one shareholder owns 40% of a company, and someone has an option to buy that stock, then the two of them together own 80%. That just is not true, as the previous example illustrates. The attribution rules create alternate owners for stock, but do not double the number of shares they hold.