1.409(p)-1T has some definitions and examples that are confusing (to me anyway.) In the definition of disqualified person relative to the 10% test it refers to a person's deemed-owned shares. Relative to the 20% test it refers to the person and members of his family. It then goes on to repeat that expanded definition of family that we love. Under attribution rules it says the rules of 318(a) apply to determine ownership of shares including deemed-owned and synthetic, but in applying section 318(a)(1) the larger 409(p) definition of family applies. Finally, it shows an example where a husband and wife each own less than 10% but are determined to be DQPs because their combined ownership exceeds 10%. Their combined ownership does not exceed 20%.

In every seminar I've seen the 10% test is applied individually and the 20% is applied to family groups, with most of the attention focused on the groups. However, the reg example does not do this. Because their individual percents do not exceed 10 and their combined does not exceed 20, I think in days gone it's likely they would not be classified as DQPs (by me anyway.) I'm sure the percentages used in the example are no accident. Does the example mean that some sort of family aggregation applies to the 10% test? If so, is it 318(a) or 409(p)? If 409(p), it doesn't seem like the 20% test has much meaning.

I hope I'm missing something. Any help would be appreciated.

I see your point. When the regulations were originally issued in 12/2004 they contained an additional seciton 1.409(p)-1T(d)(2)(iv) which definitely would have applied 409(p) attribution to the 10% DQP test. The reg was corrected in March 2005 to drop this reference. See:

http://benefitslink.com/taxregs/05-4506.htm


I wonder if they forgot to correct the example in 1.409(p)-!T(d)(4) or whether this is still intentional. I have a call into the IRS to find out. I agree that if you apply 409(p) attribution to the 10% DQP test it appears that the 20% DQP test would have no purpose.

Thanks for the response. A little while after I posted the question I found the same thing. RIA in their analysis says the example wasn't changed even though (iv) was removed so it's not clear how the example would be applied. Looks like our friends at the IRS were in too much of hurry to get rid of (iv). I'm going to ignore the example and move on. If the IRS responds, please post what they say. Thanks again.

I spoke with the primary drafter of the regulations. The example is an error which he said would be taken care of when the temporary regulations are made final.