Inconsistent Application of the Attribution Rule
By Professor Karen B. Brown, Donald Phillip Rothschild Research
Professor of Law
George Washington University School of Law, Washington, DC
There is almost universal appreciation of the importance of the
various Internal Revenue Code constructive ownership rules (which
treat one party as owning shares held by another related person) as a
counterbalance to attempts by talented tax planners to avoid a set of
tax consequences and to subvert the considered intention of Congress.
Because these rules have evolved over the years often in response to
perceived abuses, they lack uniformity in detailing the circumstances
in which it is appropriate to treat parties as having a relationship
sufficient to justify treating separate parties as one. Much has been
written about the inconsistent application of the attribution rules.
For example, while most provide for constructive ownership by family
members, there is no uniform definition of the family unit. Section
267(c)(4) defines family members from whom share ownership may be
attributed to include siblings as well as spouses, ancestors, and
lineal descendants. By contrast, for purposes of the constructive
ownership rules of §318(a)(1), the family unit includes the
spouse, children, grandchildren, and parents, but not siblings.
While equity (and efficiency) concerns motivate proponents of
uniformity in application of the various constructive ownership rules,
there are countervailing considerations dictated by the particular
circumstances of a Code provision that support continued discrepancy.
This was apparent in Garber Industries, Inc. v.
Comr.,1 in which the Fifth
Circuit Court of Appeals declined to incorporate siblings into the
modified definition of the family unit contained in the net operating
loss provisions of §382. Rules limiting carryover of net
operating losses apply only if a 5% shareholder increased ownership by
more than 50 percentage points.
Family members, as defined in §382(l)(3)(A) (by incorporating
§318(a)(1)) to include the spouse, children, grandchildren, and
parents, but not siblings, are treated as one shareholder.
Consequently, a sale of stock by one §318(a)(1) family member to
another does not trigger the net operating loss limitation rules even
if the sale results in an increase in ownership of more than 50
percentage points.
Because the sale in Garber Industries, Inc. v. Comr. was by
one brother to another who increased his ownership by more than 50
percentage points, the loss limitations applied unless the court
incorporated siblings into the definition of family members. The
taxpayer argued that §382(l)(3)(A) intended to include siblings
in the family unit because it eliminated the restriction on sideways
attribution under §318(a)(5)(B), thereby allowing attribution
from the selling brother to a parent and from the parent to the
purchasing brother. The court rejected this argument relying on the
plain meaning of the statute to incorporate only §318(a)(1)
(family but not sibling attribution) and deferring to Congressional
intent to foreclose net operating loss limitations only in cases of
ownership changes among a circumscribed group of family members. To
adopt the taxpayer's mode of statutory interpretation would allow
virtually unlimited aggregation of family members in defeat of
Congress' intention to cover a limited group.
The Garber decision demonstrates that each set of
constructive ownership rules must be considered separately in light of
the particular circumstances of the Code provision to which they
relate. Because each set of rules is designed to accomplish specified
ends, it is perilous to argue for an interpretation beyond the
parameters of a given statute.
For more information, in the Tax Management Portfolios, see
Brown, 554 T.M., The Attribution Rules, and Koutouras, Tizabgar
and Carreon, 564 T.M., Related Party Transactions, and in Tax
Practice Series, see ¶2930, Transactions Between Related
Parties.
1
435 F.3d 555 (5th Cir. 2006), aff'g 124 T.C. 1 (2005).
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