In the prior lesson, you learn there are five types of
qualified stock redemptions that receive sale or exchange tax treatment.
Each type applies a different test to determine eligibility.
The tests however are applied after considering intricate stock attribution rules,
which determine if a shareholder constructively own
stock that is actually owned by a related party.
This is an important issue because
most qualified stock redemptions are concerned with whether there
was a substantial reduction in the shareholders proportionate ownership interest.
In this lesson, you will learn about the Stock Attribution Rules in Section 318,
which cover four categories of Constructive Stock Ownership.
After reviewing the concepts,
you'll apply them to Sunchaser Shakery.
Subsequent lessons consider each of the five types of qualified stock redemptions,
which rely on the Stock Attribution Rules in Section 318.
When creating the qualifying stock redemption rules in Section 302,
which are concerned with substantial reductions in ownership interest,
Congress believe that an individual or business entity
should be deemed as owning shares of stock that are actually
owned by family members and related entities under
the Complex Stock Attribution Rules in Section 318.
Why? Consider a simple example.
Assume that Michael and his wife Emily each own 50 of
the 100 outstanding shares of Sunchaser Shakery Corporation.
Further assume Michael sells 25 of his shares back to Sunchaser.
While Michael's proportionate ownership interest declines from 50 to 33 percent,
the remaining shares outstanding are owned by his spouse.
Thus, for all intents and purposes,
Michael and Emily each constructively own all of the shares of stock.
Without stock attribution rules,
a shareholder could easily reduce legal ownership without sacrificing real ownership.
Said another way in this example,
Michael can easily reduce his legal ownership down to
33 percent while his household continues to own 100 percent of the outstanding stock.
Section 318 is one of several sets of Constructive Ownership Rules in the code.
It applies when it is expressly made applicable by another section.
It considers four categories of attribution: family,
partnership, corporation and estate or trust.
For family attribution, an individual is
considered as owning stock owned by his or her spouse,
children, grandchildren and parents.
Notice this, siblings, aunts,
uncles and in-laws are not viewed as part of the family for
this rule and there is no attribution from grandparent to grandchild.
The family attribution rules can be waived or
non-applicable in some situations. More on this later.
For partnership attribution, a partner is considered to own stock owned by
a partnership to the extent of the partner's proportionate interest in the partnership.
However, any stock owned by a partner is deemed to be owned in full by the partnership.
For corporate attribution, the stock owned by a corporation is viewed as owned
proportionately by any shareholder owning 50 percent or more of the corporation's stock.
Any stock owned by a shareholder,
who owns 50 percent or more of a corporation,
is deemed to be owned in full by the Corporation.
For a state or trust attribution,
a beneficiary or heir is determined to own the stock owned by an estate or trust
to the extent of the beneficiary or heirs proportionate interest in the estate or trust.
Similar to the other cases,
the stock owned by a beneficiary or heir is
deemed to be owned in full by an estate or trust.
Michael P Donohoe, PhD, CPAAssociate Professor of Accountancy and PwC Faculty Fellow
