Skip to content
SuperMoney logo
SuperMoney logo

Attribution Rules: Principles, Application, and Case Studies

Last updated 03/15/2024 by

Rasana Panibe

Edited by

Fact checked by

Summary:
Understanding attribution rules is crucial for businesses, especially family-held ones, as these rules set out IRS guidelines to prevent tax evasion and fraud. This article delves into the significance of attribution rules, their key takeaways, and the sections of the Internal Revenue Code governing them.

What are the attribution rules?

Attribution rules, established by the Internal Revenue Service (IRS), act as guidelines to prevent the creation of business ownership structures aimed at circumventing tax laws. These rules play a vital role in identifying the legal principal owners of a firm, particularly in family-held businesses where equity ownership may be unclear.

Understanding attribution rules

Attribution rules have their basis in three key sections of the Internal Revenue Code:

Internal revenue code, section 267

This section identifies individuals prohibited from certain transactions involving plan assets.

Internal revenue code, section 1563

Focuses on related companies in a controlled group, specifying connections through stock ownership.

Internal revenue code, section 318

Addresses highly compensated employees, key employees, and disqualified individuals in employee stock ownership plans, including family attribution rules.
The rules stipulate that an individual owns what their spouse, children, grandchildren, or parents own. However, certain family members are exempt from these rules.

Other notable attribution rules and provisions

Attribution rules differ for controlled groups under Section 1563. For example:

Double attribution

Attribution does not pass between in-laws, preventing double attribution.

Spouse non-involvement exception

Attribution doesn’t apply if spouses have 100% ownership of separate, unrelated companies and are not involved in each other’s businesses.

Minors and controlled groups

Minors can reintroduce a controlled group, but once the child turns 21, the controlled group is broken.
Understanding these provisions is essential for businesses to navigate the complexities of attribution rules effectively.
WEIGH THE RISKS AND BENEFITS
Here is a list of the benefits and drawbacks to consider.
Pros
  • Pay back less than what you owe.
  • Become debt-free in less time.
  • Avoid bankruptcy
Cons
  • Negative impact on credit score
  • Additional fee accrual
  • Remains on your credit history for 7 years

Frequently asked questions

What is the purpose of attribution rules?

Attribution rules aim to prevent the creation of business ownership structures designed to evade taxes and commit fraud.

Who is exempt from family attribution rules?

Certain family members, such as siblings, cousins, and in-laws, are not subject to family attribution rules.

When does double-attribution apply?

Double attribution does not apply between in-laws, ensuring that ownership attribution is not passed in both directions.

Key takeaways

  • Attribution rules determine the legal principal owners of a firm to prevent tax evasion or fraud.
  • Ownership attribution includes spouses, children, grandchildren, and parents.
  • Sections 267(c), 1563, and 318 of the Internal Revenue Code outline attribution rules for different scenarios.
  • Attribution rules are crucial for family businesses where equity ownership may be obscure.

Share this post:

You might also like