If You and Your Family Members Own Stock in the Same Corporation, This is What You Need to Know About the Tax Consequences of I.R.C. Section 318(a)(1)
Does the family that invests together stay together? Under Internal Revenue Code section 318(a), you might be taxed together. Or at least one of you might bear the burden for the entire family’s corporate stock investments. If you and your spouse and children all own stock in the same corporation, section 318 could lead to some surprises at tax time.
What is Section 318 of the Internal Revenue Code?
Section 318(a) of the tax code sets forth the family attribution rules for stock ownership in a corporation. For family members who all own stock in a corporation, this can have significant tax consequences. The statute states:
“(A) In general,
- An individual shall be considered as owning the stock owned, directly or indirectly, by or for— his spouse, and his children, grandchildren, and parents.
- For purposes of subparagraph (A)(ii), a legally adopted child of an individual shall be treated as a child of such individual by blood.”
28 U.S.C. § 318(a)(1) (2005).
So, if you own stock in a corporation and you have family members that own the same stock, Section 318 can attribute the stock holdings of your spouse, children, legally adopted children, grandchildren, and parents to you. The IRS can also hold you liable for all of the taxes due as a result of the stock attributed to you.
Exceptions to 318
There are some exceptions to family attribution outlined in Section 318.
- While the IRS can attribute a legally adopted child’s stock ownership to you, this doesn’t apply to stepchildren or stepparents.
- The IRS can attribute your spouse’s stock ownership to you, even if you are separated, but this doesn’t apply to finalized divorces. However, if your divorce isn’t completely final, the IRS can still attribute stock ownership to you. For example, if you have an interlocutory decree of divorce, the IRS will still attribute your spouse’s stock ownership to you or vice versa.
- While the IRS can attribute the stock ownership of grandchildren to their grandparents, the reverse is not true. The IRA won’t attribute a grandparent’s stock ownership to a grandchild.
- This rule doesn’t allow attribution between siblings, aunts, uncles, nieces, nephews, or cousins.
- Family attribution only applies to U.S. residents. Constructive attribution of stock ownership can only happen between two U.S. residents.
Fortunately, there is no double attribution of stock among family members under Section 318. The IRS can’t attribute stock to one family member and then also attribute it to other family members. However, without a skilled tax advisor, the IRS rules for family attribution could leave you with an unexpected tax bill.
As you can see, owning stock in a corporation and the tax consequences can be legally complex. If you have significant stock holdings, or even if you and your family simply own some of the same stock, be sure to always have an experienced corporate lawyer and a knowledgeable CPA by your side.
