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Family affairs.


The provisions of the Internal Revenue Code dealing with family attribution and aggregation are a complex maze. Because many of them contain different definitions of who is considered part of a "family," taxpayers who own or work for businesses that involve other family members are particularly affected. Taxpayers easily can run afoul of these provisions, with unexpected (and sometimes disastrous) tax results.


These are corporations commonly owned as brother-sister entities, which means five or fewer individuals own at least 80% of the outstanding stock's value and there is more than 50% common ownership. If companies are considered part of such a group, they will be aggregated for purposes of determining how the lower tax brackets on income below $100,000 may be used, if the uniform capitalization rules must be met and whether qualified plans meet benefits tests' coverage and provision requirements.

In determining common ownership, certain family members (for example, husbands and wives working inthe same business) are treated as a single individual. Children and grandchildren also may be aggregated with parents and grandparents, but different rules apply, depending on whether the descendant is under or over age 21.


To avoid discrimination in favor of highly compensated individuals, husbands, wives and lineal descendants under the age of 19 working in the same business are aggregated for purposes of determining certain limits on qualified plans' contributions and benefits. Section 401(k) plans have similar rules that, however, limit the amount that may be deferred from a family business owner's compensation as a percentage of the deferral for the nonhighly compensated employees.

A husband and wife sometimes can control their relative compensation so as to maximize plan contributions. However, doing so may increase overall payroll taxes and subject these amounts to Internal Revenue Service scrutiny for reasonableness.


Special rules affect the use of the installment method when the buyer and seller are members of the same family or commonly controlled entities or include individuals and their controlled entities. If there are subsequent sales to (or other taxable transactions with) unrelated parties within certain (generally, two-year) time periods, the gain on the sale to the original seller may have to be accelerated. If a marketable security traded on an established market is involved, the installment method's use may not be allowed. In addition, special rules may apply when a transaction is between individuals and the sale involves depreciable property.


Losses on a sale between related parties cannot be currently used. Because a family is treated as a single unit, the property is not considered as having left the family unit and no loss is recognized. When the property is sold to an outsider, only the family member who sold it can use the loss, and only then to offset a gain on the sale.


When a shareholder removes money or other property from a regular corporation, the attribution rules may apply. When a shareholder wants to redeem all or a portion of his or her stock, he or she must meet certain requirements to treat the redemption as a sale or exchange (rather than a dividend). There must be a significant difference in the individual's actual and constructive ownership before and after the redemption.

Family attribution rules play a critical role in such a situation. Taxpayers and their spouses, parents, children and grandchildren (but not brothers and sisters) are treated as one individual for many purposes. In some instances, evidence of family hostility also may negate these rules.

Note: While the similarity of tax rates diminishes the distinction between dividend and capital gain treatment, the distinction is still important when shares are redeemed on or after the death of a shareholder.

For a discussion of the rules involving family members, see "Family Business Consulting," by Gary Zwick, in the January 1993 issue of The Tax Adviser.

--Nicholas J. Fiore, editor

The Tax Adviser
COPYRIGHT 1993 American Institute of CPA's
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Title Annotation:from The Tax Adviser
Author:Fiore, Nicholas J.
Publication:Journal of Accountancy
Date:Jan 1, 1993
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