Raby & Raby on Stock Ownership Attribution and Siblings

Burgess J.W. Raby & William L. Raby have published Stock Ownership Tax Attribution and Siblings, also available on the Tax Analysts web site as Doc 2005-2087, 2005 TNT 22-60. Here is the Conclusion:

The issue of dividend equivalency versus capital gain is less significant than in the past. Most dividends are now taxed at the same 15% rate as security capital gains. Thus, the difference between dividend and redemption treatment consists of the use of tax basis to offset the amount received in the stock redemption situation and full taxation of the amount received, to the extent of earnings and profits, in the dividend alternative.

But the issue of stock attribution is not as easily ignored elsewhere. Tax practitioners need to be aware of it in a wide range of situations. Garber Industries, for example, might have been able to avoid the § 382 problem if it had been conscious of the effect of the 1998 sale of stock from Kenneth to Charles. In a closely held business, the three-year window can often be managed so that there is never a 50-percentage-point change in any three-year period.

If there had been no Garber Industries case, however, we would not have deepened our understanding of the interaction between §§ 318 and 382. We knew that § 382 focused on a family group being treated as one individual for change of ownership purposes. However, we did not fully appreciate the difference in results if that individual was an ancestor, thus rendering siblings part of the family group despite § 318(a)(1); or if that focal member of the family group was alive or not throughout the testing period; or if that person was or was not directly a stockholder. Now we know. We believe the Solomonic approach taken by Judge Halpern should stand up on appeal. Tax practitioners should henceforth be able to advise on intrafamily stock transfers with a better grasp of their effect on NOL carryovers of the family corporation.