Legal Definitions - attribution

Attribution refers to a legal principle, primarily found in tax law, where the ownership of shares in a company (stock) by one person or entity is treated as if it is also owned by a closely related person or entity. This concept is used by tax authorities, such as the Internal Revenue Service (IRS), to prevent individuals or groups from avoiding certain tax rules or limitations by distributing ownership among family members or affiliated businesses. Essentially, for specific tax calculations, the law "attributes" or assigns ownership from one party to another due to their close relationship, even if direct legal ownership doesn't exist.

Here are a few examples to illustrate how attribution works:

• Example 1: Family Business Stock Redemption

  Imagine a father who owns 60% of a family-run corporation, and his daughter owns 10% of the same company. If the corporation decides to buy back (redeem) all of the father's shares, the tax treatment of this transaction depends on whether the father has completely terminated his interest in the company. For tax purposes, the IRS's attribution rules would treat the daughter's 10% ownership as if it were also owned by the father due to their family relationship. Therefore, even after selling his 60%, the father might still be considered to own 10% of the company through his daughter, which could prevent the redemption from being treated as a favorable capital gain transaction and instead classify it as a less favorable dividend distribution.

• Example 2: Small Business Tax Deductions

  Consider a husband and wife who each own separate, distinct small businesses. Each business might qualify for certain tax deductions or credits, often subject to income limitations. If the tax law includes attribution rules for spouses, the IRS might combine their ownership and income for the purpose of calculating these limits. For instance, if a deduction is capped at a certain income level per "owner," the attribution rules would treat the husband and wife as a single owner, potentially causing their combined income to exceed the cap and reduce or eliminate the deduction for one or both businesses. This prevents splitting businesses between spouses solely to maximize tax benefits intended for truly independent enterprises.

• Example 3: Controlled Group Rules for Employee Benefits

  Suppose a parent company owns 85% of Company A and 75% of Company B. For the purpose of certain employee benefit plans, such as retirement plans, the IRS has strict rules to ensure that plans do not unfairly favor highly compensated employees. These rules often apply to "controlled groups" of companies. Through attribution rules, the ownership of Company A and Company B by the common parent company means that Company A and Company B are considered a single "controlled group" for tax purposes. Consequently, their employee benefit plans must meet non-discrimination requirements on a combined basis, treating all employees of both companies as if they work for one large employer. This prevents companies from creating separate entities to circumvent benefit plan regulations.