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Luke Bailey

Reducing the required quantum of common ownership for a service recipient controlled group in the case of brother-sister companies

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Treas. reg. 1.409A-1(g) says that a controlled group is to be treated as a single service provider. 1.409A-1(h)(3) says that for the purposes of the definition of "separation from service," the required quantum of ownership to determine a controlled group is reduced from 80% to 50%, whether you are dealing with a parent-sub (1563(a)(1)) or brother-sister (1563(a)(2)) relationship, but I can take the 50% up in my plan document, apparently for any reason, but not above 80%. I can also, but this time only if I have a business reason, instead reduce the 50%, but not below 20%. I think I've got all that right.

However, either for some policy reason that escapes me or because it simply slipped the minds of the reg writers, the ability to ratchet the 50% down to 20% or any point in between is tied to the statute's reference to "80%." Works fine if the relationship you are dealing with is a parent-sub, but if you have a brother-sister, ratcheting down the 80% requirement (i.e., 5 or fewer individuals, estates, or trusts must own at least 80% of each company) will not help if you cannot also reduce the separate 50% requirement (i.e., looking to the lowest percentage that each of your five individuals, estates, or trusts own in each company, the 5 or fewer group must own at least 50% of each company).

It's possible that part of the problem (either mine or the reg writers') stems from the fact that 1563(a)(2) is really 1563(f)(5) for purposes of 414(b) and (c). I'm pretty sure, however, that the references in 1.409A-1(g) and1.409A-1(h)(3) to 1563(a)(2) are really (i.e., really "really," not just intended "really") to 1563(f)(5), but I'm not sure if even that is absolutely certain.

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