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Attribution of Ownership to Minor Children


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Hi - I am seeking practical feedback on the question of attribution of ownership to minor children.  I don't question that IRC section 1563 attributes ownership from parents to children under 21. This creates controlled groups of entirely separate companies simply because they are owned by spouses with minor children.  The thing I struggle with are the many cases where the issue goes unnoticed (or is even ignored). I have lost a couple of prospects because they refuse to believe that aggregation is mandatory.  For those with existing plans, they often say their TPA never notified them (even in cases where they are confident the TPA is aware of the facts.)

I am curious about others' experience.  Do you find this rule is often overlooked?  I've never heard of IRS making an issue of it.  Have you?   

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I'm not sure how to answer this.  The rules appear to be very clear.  I haven't seen many, if any at all, cases where the client intentionally rejected the rule simply because it wasn't what they wanted to hear.  That's not to say it doesn't happen, but I wouldn't go as far as believing it's commonplace.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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I agree with ETA, the rules are very clear.  Do some less honest practitioners disregard rules because their clients don't like the end result?  Sure.  Have I lost clients/prospects because I refuse to break the law? Sure.  

If you are finding yourself in a position where you are contemplating breaking the law or intentionally overlooking regulations in order to obtain a more favorable (and incorrect) result for your clients, it is time to take a serious look at your practice and why you are struggling.

 

 

 

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The most recent 401(k) audit I was involved in (a few months ago now) had specific questions regarding family members, related companies, children, etc. The issue may never come up outside of an audit, but I would have a very tough time telling a client to disregard the rule when responding to the audit request just because they don't like it.

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many many many many moons ago Derrin Watson had this response in his  Q and A column

 

 

Controlled Groups in Marriages Continued

(Posted February 26, 1999)
Question 9: Your article in Q&A 1 about attribution from both husband and wife to their minor child comes as something of a shock. Could you please elaborate? Can parent-child attribution really cause businesses owned as separate property by the mother and father to be a controlled group?

Answer: Surprisingly, the answer is yes. Although it is counter-intuitive, using the strict language of the Code parent-child attribution can cause businesses owned separately by the parents to become a controlled group. Consider the following examples:

1. Childless Separate Property. John and Mary are a married couple living in New York. Each owns 100% of the stock of a medical corporation as his or her separate property. Neither has anything to do with the other's business, and each corporation makes all its income from the practice of medicine. They have no children. The marital exception to attribution (IRC 1563(e)(5)) applies. There is no aggregation between the businesses and they are not part of a controlled group.

2. The Blessed Event. Same facts as the previous example, except John and Mary have been blessed with a baby. The child is deemed to own 100% of John's corporation and 100% of Mary's corporation. Hence the two corporations are a brother-sister controlled group. This is not double family attribution. The stock of each corporation is attributed only once, from the parent to the child.

3. Divorce Follows. The facts in the prior example cause John and Mary so much difficulty that they get divorced. It does not solve their problem. Their businesses will still be aggregated until their youngest child is 21.

4. Nonmarital Union. Same facts as the prior example, except John and Mary were never married. Their child was the result of a night of passion after studying for exams while they were medical students. They went their separate ways after medical school, and their only contact now is child support checks. Since marital status does not affect attribution between parents and children, the two corporations will be part of a controlled group until the child reaches age 21.

Practitioners have noted that the foregoing, while logically valid, seems senseless and contrary to the intent to create a separate property spousal exemption. Unfortunately, the courts have held that where the statutory language is clear, legislative intent is irrelevant. The language is astonishingly clear in this case. The conclusions stated above are inescapable. The only reason this has not created more controlled groups is that the IRS has not aggressively pursued this issue.

It is important to remember that the controlled group rules are intended to be clear, bright line tests. There are few "facts and circumstances" elements to them. That means that there is a clear road for practitioners to follow. The price of clarity is that sometimes the road goes places you do not expect, and there are no convenient ways off the path. If there is to be a solution for this problem, it will probably have to come from Congress.

Some practitioners have taken heart in the fact that the IRS has not yet pursued this issue. The operative word in the foregoing sentence is "yet." Nobody wants their client to be the test case, especially if they have not informed the client of the potential risk involved.

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A "senseless" statute?  I'm shocked.  Shocked.

 

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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