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HCE - family attribution rules


richard
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Dad owns 60% of a company. Adult son "Fred" owns 40% of the company. Adjust son "Jim" owns 0% of the company. All three are employees of the company.

Ignoring the $80,000 pay rule, is Jim an HCE because he is either (a) the son of a 60% owner, or (B) the brother of a 40% owner?

I believe the answer is "yes" because, Section 318(a)(1)(A)(ii) indicates that an individual is considered as owning the stock of his ... parents. Also, Section 318(a)(5)(B) doesn't help (I think it would have helped is the employer were Jim's wife, not Jim).

Am I correct or all wet?

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from RIA:

Under the constructive ownership rules, an interest in an organization owned, directly or indirectly, by or for parents and children, grandparents and grandchildren is attributed from:

...minor children (under 21) to parents;

...parents to minor children (under 21); [40]

...adult children and grandchildren (regardless of age) to a parent or grandparent who is in effective control of the organization;

...parents and grandparents to adult children or grandchildren (regardless of age) if the adult child or grandchild is in effective control, either directly or indirectly of the organization. [41]

[40]. Reg § 1.414©-4(B)(6)(i).

[41]. Reg § 1.414©-4(B)(6)(ii).

A legally adopted child of a person is treated as a child of that person. [42]

[42]. Reg § 1.414©-4(B)(6)(iii).

In determining whether a parent, grandparent, adult child, or grandchild is in

effective control of the organization, the constructive ownership rules apply. [43]

RIA illustration:

B owns directly 40% of the profits interest of DEF Partnership.

His son, M (20 years old) owns directly 30% of the profits interest of DEF, and his son A (30 years old), owns directly 20% of the profits interest of DEF. The 10% remaining of the profits interest and 100% of the capital interest of DEF is owned by an unrelated person. [44]

[43]. Reg § 1.414©-4(B)(6)(ii).

[44]. Reg § .414©-4(B)(6)(iv)(A).

B owns 40% of the profits interest in DEF directly and is considered to own the 30% of the profits interest owned directly by minor son M. Since, for purposes of the effective control test, B is treated to own 70% of the profits interest of DEF, B is also considered under the attribution rules between adult children and parents to own the 20% profits interest of DEF owned by his adult son A. Accordingly, B is considered to own a total of 90% of the profits interest in DEF. [45]

[45]. Reg § 1.414©-4(B)(6)(iv)(B).

M owns 30% of the profits interest in DEF directly, and is considered to own the 40% profits interest owned directly by his father, B. However, M is not considered to own the 20% profits interest of DEF owned directly by his brother, A, and constructively by his father, because an interest constructively owned by B by reason of family attribution is not considered to be

owned by him for purposes of making another member of his family the constructive owner of that interest. Accordingly, M is considered to own a total of 70% of the profits interest of DEF. [46]

[46]. Reg § 1.414©-4(B)(6)(iv)©.

A owns 20% of the profits interest in DEF directly. Since, for purposes of determining whether A effectively controls DEF, he is treated to own only the percentage of profits interest he owns directly, he does not effectively control DEF, and thus does not satisfy the requirement for the attribution of the DEF profits interest from his father, B. Accordingly, A is considered to own only the 20% profits interest in DEF that he owns directly. [47]

[47]. Reg § 1.414©-4(B)(6)(iv)(D).

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Guest lminsky

The above cited Regulations relate to family attribution for Related Employer purposes (IRC 414(B) and IRC 414©) and do not apply for the HCE definition. I believe that, for the HCE definition, attribution is determined under the broader standard of IRC 318(a)(1)- ie. FROM spouse, children, grandchildren & parents (&, as a result, TO spouse, children, parents & grandparents).

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See example 1.318-2 (B)

Husband 25%

Wife 25%

Son 25%

Grandson 25%

Husband, wife, and son are 100%

grandson is 50% (his own and his father's.

318(a) (1) (A) reads

an individual shall be deemed to own stock directly or indirectly by

(i) his spouse

(ii)his children, grandchildren, and parents

note:this does not include grandparents.

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