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controlled group question


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Here is the fact pattern.

Parent’s voting stock is owned 50/50 by John and James (unrelated).

Parent owns 100% of Sub.

Sub is thinking of creating Sub 1 which will be owned

  • 50% by Sub
  • 50% by Sub’s general manager 

The ultimate question is whether Parent is in a controlled group with Sub 1. I think the answer is no.

I am struggling with whether Sub’s general manager’s stock in Sub 1 will be excluded under 1563(c)(2)(iii) (assuming the stock will be subject to a condition that runs in favor of Parent or Sub).

This rule hinges on Parent owning 50% of Sub 1 and I don’t think it does because the parent sub rules for determining stock ownership in 1563(d)(1) only apply the constructive ownership rules from of 1563(e)(1)(options), (2)(partnerships) and (3) (estates and trusts).

   
   
   
   
   
   
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Controlled groups and attribution are always super tricky, but I'm not sure I understand the argument. Sub owns 50% of Sub 1, so under the assumption you make, Sub 1 and Sub are in a parent subsidiary controlled group, right? And Parent and sub are also in a controlled group? So does not the chain form a single controlled group under 1563(a)(1)(B)?

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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15 hours ago, Luke Bailey said:

Controlled groups and attribution are always super tricky, but I'm not sure I understand the argument. Sub owns 50% of Sub 1, so under the assumption you make, Sub 1 and Sub are in a parent subsidiary controlled group, right? And Parent and sub are also in a controlled group? So does not the chain form a single controlled group under 1563(a)(1)(B)?

50% ownership doesn't constitute a parent subsidiary controlled group.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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1 hour ago, Bill Presson said:

50% ownership doesn't constitute a parent subsidiary controlled group.

Roger that, Bill. But my point was that in the OP, Parent owns 100% of Sub (cg there), and then, if the manager's stock is excluded, Sub owns 100% of Sub 1. So even if the attribution rules only give Parent 50% of Sub 1, you have a chain of 100% from Parent to Sub, and Sub to Sub 1.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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