Author: Leon Clinton

Many taxpayers assume that tax law looks only at the stock they actually own. Section 318 proves that assumption wrong

The Section 318 attribution rules can treat you as owning business interests you never purchased, simply because of family relationships, entity ownership, or even stock options. When that happens, your tax results can change dramatically.

Section 318 matters because many tax rules depend on ownership thresholds. Ten percent, 50 percent, or 80 percent ownership often determines control, related-party status, and reporting obligations. Through constructive ownership, a taxpayer who believes they own only a small interest may suddenly cross one of these thresholds.

Section 318 also changes how transactions are taxed. Stock redemptions, related-party sales, and similar transactions often turn on whether the parties count as related. Attribution can convert what looks like a capital gain into a taxable dividend or disallow a loss entirely. Sales involving family members or family-owned entities create the highest risk.

The rules also trigger reporting obligations. Several high-penalty regimes, including foreign-corporation reporting, rely on Section 318 ownership. A small direct interest can balloon into deemed control once family and entity ownership applies. Missed filings in these areas can produce severe penalties even when no tax is due.

Section 318 works through several channels. Family attribution pulls in stock owned by your spouse, parents, children, and grandchildren—regardless of age. Entity attribution moves stock owned by partnerships, corporations, trusts, or estates up to owners and beneficiaries. Attribution also flows downward from individuals to entities they control. Option attribution treats unexercised options as actual ownership.

These rules operate more broadly than the controlled-group rules under Section 1563. Whereas Section 1563 focuses on retirement plans and controlled groups, Section 318 appears throughout the tax code, affecting S corporation benefits, redemptions, foreign corporations, and related-party rules.

Practical examples highlight the risk. Family attribution can force S corporation health insurance into wages. Attribution can turn a family stock redemption into a dividend. Family ownership can convert a small foreign stake into controlled foreign-corporation status with extensive reporting.

If you own interests alongside family members, operate through multiple entities, or hold options, you should map both direct and constructive ownership. A clear attribution map often prevents unexpected tax bills, denied deductions, or penalty notices.

If you want to discuss the Section 318 attribution rules, please call me on my direct line at 408-778-9651  

• By Leon Clinton
• January 27, 2026

Serious real estate investors rely on the Section 1031 exchange because it allows them to grow wealth faster while legally deferring federal income taxes. 

When you sell rental property without using a 1031 exchange, capital gains tax and depreciation recapture immediately reduce the cash you can reinvest. A properly structured exchange keeps all sale proceeds working for you.

With a 1031 exchange, you can sell appreciated rental property, reinvest every dollar, and move into larger or higher-performing assets. Many landlords use exchanges to trade single-family rentals for multifamily properties, consolidate management, and increase cash flow. You can repeat this process over decades without triggering federal tax.

Consider a simple illustration. An investor buys a rental for $100,000, sells it years later for $175,000, and reinvests the proceeds through a 1031 exchange. He repeats that process multiple times and builds a portfolio worth $10 million. During his lifetime, he pays no federal income tax on any of those sales. 

At death, his heirs inherit the properties with a step-up in basis to fair market value, which eliminates the deferred tax entirely.

To start a successful exchange, you must engage a qualified intermediary before you close on any sale. The intermediary holds the proceeds and guides you through the required steps. You should select this firm carefully and involve your tax advisor early.

Most investors use a forward 1031 exchange. In this structure, you sell your existing rental first and then purchase a replacement property. You must identify replacement properties within 45 days and complete the purchase within 180 days. The process is straightforward and relatively inexpensive, but missed deadlines will destroy the exchange.

Some investors choose a reverse 1031 exchange when they need to buy first. In that case, the intermediary parks the new property in a temporary entity while you sell your existing rental. This approach costs more and requires additional planning, but it solves timing and inventory problems.

The 1031 exchange remains one of the strongest tools for long-term real estate growth. With careful planning, strict attention to deadlines, and the right intermediary, you can defer taxes indefinitely and pass substantial wealth to the next generation.

If you want to discuss 1031 exchanges, please call me on my direct line at 408-778-9651  

• By Leon Clinton
• January 23, 2026

We continue to see aggressive advice circulating about routing personal commissions through an S corporation to reduce self-employment tax. This strategy sounds attractive, but it fails under long-standing tax law and creates significant audit risk.

Consider a common setup: An individual earns commissions under contracts issued in his personal name. He holds the required state license individually, and payors issue Forms 1099-NEC to his Social Security number. Despite these facts, he attempts to shift the income into an S corporation by charging a “management fee” equal to most or all of the commissions, or by directing payors to deposit the commissions directly into the S corporation’s bank account.

Neither approach works.

Tax law focuses on one central question: Who earned the income? When income arises from personal services, the individual who performs the services and controls the earning of that income must report it. Labels, internal invoices, and bank routing do not change that result.

A 100 percent management-fee approach collapses quickly under scrutiny. The IRS compares the 1099s issued to the individual with the tax return and sees commissions wiped out by a related-party fee. Examiners routinely reclassify the commissions as the individual’s Schedule C income, deny the fee, and unwind the S corporation reporting. The result places the income back where it started—subject to self-employment tax—along with interest and penalties.

Routing commissions by ACH directly into the S corporation’s account fares no better. The contracts remain in the individual’s name. Licensing records still identify the individual. The 1099s still list the individual as payee. The IRS simply treats the deposits as income constructively received by the individual and then transferred to the corporation. This tactic often worsens the audit narrative by suggesting intentional income shifting.

A management fee can work only when the S corporation performs real, measurable services and charges a reasonable, supportable fee for those services. The fee must compensate administration, staffing, marketing, and/or infrastructure—not attempt to transfer ownership of the commissions themselves.

Effective S corporation planning requires the corporation to sit legitimately in the income stream, with contracts, regulatory approval, and reporting aligned to that structure. Anything else invites predictable adjustments.

If you want to discuss your commission arrangement, please call me on my direct line at 408-778-9651  

• By Leon Clinton
• January 20, 2026