If you're selling your share of the family-owned business, you have plenty of reasons to offer relatives, who are current owners, first shot at buying your portion.
If your brother or sister already runs the operation, you can keep full ownership in the immediate family. What's more, you can leave your sibling with a tidy tax present.
Strategy: Stay within tax-law boundaries following an ownership shift. If your company is a C corporation that has been operating at a tax loss, your smart moves now can preserve future net operating loss (NOL) write-offs under the "family-attribution" rules. Otherwise, the write-off may shrink substantially.
Family-attribution rules can become a thorn in your side (see box below, left). Triggering the rules treats you as owning shares of stock that are actually owned by another family member, such as your child or your spouse. That's usually not good. (The tax law, in such cases, views you and the other family members as a single shareholder.)
A new Tax Court case provides a good lesson. The taxpayers actually wanted the family-attribution rules to apply. Applying the family-attribution rules would have negated a tax provision that limits the NOL write-offs that family owned corporations can claim.
Facts of the case: In 1996, Charles Garber held 19 percent of the stock in Garber Industries Holding Co. His brother Ken owned 65 percent. Other relatives were stockholders, but the brothers' parents and grandparents were all deceased. In 1998, Ken sold all his shares to Charles, giving him 84 percent ownership.
The company claimed an NOL of more than $800,000 on its tax return ($728,000 for AMT purposes), but the IRS reduced that figure to $120,000. Reason: It cited the rule under tax code Section 382, which limits NOL carry-forwards in the years following a change in ownership (see box below). The brothers disagreed with the ruling and took the case to
The brothers' argument: Although siblings aren't traditionally included under "immediate family," the rules apply if you refer to their parents' family. For instance, if you're looking at the father or the mother, both Charles and Ken are children and, therefore, should be treated as part of the immediate family.
The IRS's argument: The family-attribution rules apply only to living family members. Since no parent or grandparent was alive at the start of the three-year period before Charles bought Ken's shares, no individual had a family that included both brothers. So, the family-attribution rules shouldn't apply.
Here's what the Tax Court decided: It ruled in the IRS's favor, but not for the stated reason. The court said the family- attribution rules should be applied from the individual shareholders' perspective. The sibling shareholders' stock can't be aggregated for NOL purposes, since neither the parents nor the grandparents were shareholders. Therefore, the NOL limitation kicks in.
Advice: In a comparable situation, siblings can benefit from the family-attribution rules by keeping some stock in the hands of a parent or a grandparent.
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