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Controlled Group & ASG


mromney

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Here is the fact pattern: Husband is 100% owner of S-Corp A, Husband & Wife are 50/50 owners of S-Corp B, Wife is 50% owner of LLC C, the remaining 50% is owned by an unrelated 3rd party. They do have minor children together. 

It is believed that S-Corp B & LLC C are considered an Affiliated Service Group, S-Corp A is not an ASG with any business. Based on that, S-Corp A & S-Corp B are a controlled group and S-Corp B and LLC C are a controlled group, correct?

We are trying to determine if husband can establish an Individual 401(k) for S-Corp A without the need to perform coverage testing from LLC C.

Any help would be appreciated.

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mromney, my recollection is that this fairly obvious issue is actually not addressed by Code or regs, and the only discussion of it that you will find in a formal writing is by Derrin Watson in his "Who's the Employer" tome. I think he may discuss only overlapping CGs, but the same principle would seem to me to apply for an overlap of a CG with an ASG. My recollection is that he concludes there is no clear answer under the law (i.e., you may have a CG of A and B, and an ASG of B and C, but no single group of anything among A, B, and C, or, arguably, a single group). I think he may refer in his discussion to oral comments made at a conference by someone at IRS when question was posed to the effect that taxpayer should use a rule of reason in this situation, which may mean that taxpayers who want to call it a single group for simplicity, where doing so produces no discrimination, should be able to do that, but that taxpayers who attempt to exploit the ambiguity to promote discrimination could be in trouble. However, assuming my memory is correct that there is no reg or other guidance on point, probably the better answer if you are a strict constructionist is that you have two separate groups, so each must pass 410(b) and 401(a)(4) separately (iow, B has to pass twice).

Usually our clients have wanted a single group, for simplicity. We have gotten DLs after full disclosure of "overlapping separate groups" issue that we had a single group, but the fravorable letters did not specifically address the overlapping group issue. Never tried asking for a letter the other way.

If you have a chance to review the issue in the latest edition of Derrin's book, or come up with any other "guidance," please let everyone know.

Good luck.

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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