Controlled group without ownership?

[Guest Christie Banks]

Company A provides all of the funding for company B. However, they have no ownership in B. Company A does this same thing for several other companies. They basically have "control" as they provide the funding and if the funding stops, Company B would go out of business. (Company B is a new startup company). Company A sponsors a retirement plan that each of it's funded companies can elect to participate in. Can Company B start it's own retirement plan without having to worry about the controlled group issue?

The client (Company b) assures me that A has no ownership in B, however they still refer to A as their "parent company".

[Guest mr.pension]

It seems as if something is missing here. Company A is either totally generous in giving to charity,or (and this is more likely)investing in a note or obligation from B based upon future return of capital or stock if the investment in B proves to have been sensible. In any event I think there are a couple of blank pages in your fact-finding that must be filled in before anyone goes on the hook with an answer.

[pjkoehler]

Christie Banks: If Company A and B have entered into an agreement in which Company A has a right to share in the net income of Company B's operations or a return of its capital, then the two would have a joint venture relationship. As joint venturers Companies A and B would be "partners" for purposes of the rules governing a controlled group of trades or businesses under Code Sec. 414©. The 414© regs define "ownership" as an interest in another organization including a partnership. Reg. Sec. 1.414©-(2). For this purpose, "partnership" is defined in Code Sec. 7701(a)(2) very broadly to include a joint venture through or by means of which any business, financial operation, or venture is carried on. Without the relevant facts, it's probably best not to speculate, but (what the heck) ... unless, Company A is making a gift of its "funding" or has entered into a bona fide debtor-creditor relationship with Company B, I think the Service would have a difficult time not believing at the very least there is an implied joint venture relationship, with respect to which Company A would have an indirect, if not a direct, ownership interest in proportion to its capital or profits interest.

[david rigby]

As an alternative, is it possible that, although Company A does not own B, one or more individuals who own A have ownership of B?

[pjkoehler]

pax: Absolutely. All possible configurations, including a brother-sister controlled group, should be evaluated. This one is easy to dismiss if their are no common shareholders. On the other hand if there are, then its a function of determining if there are 5 or fewer who (1) each have identical ownership interests aggregating to more than 50% ("effective control") and (2) total cumulative interests aggregating to at least 80% ("controlling interest"), determined on the basis of value or voting rights. Of course, all the attribution rules and other rules of indirect ownership come into play as well. So this can get to be quite a fact-bound analysis.

Another possibility is that either Company A or B is part of parent-subsidiary group in which it is the parent of the partnership. This could happen under the attribution rules, for example, if A or B has an option to buyout the capital or profits interest of the other to the extent that it could upon exercise hold an interest of at least 80% of capital or profits in the partnership.

Now this doesn't mean that Company A and B are in a controlled group, as would be the case in the brother-sister configuration. However, if all the employees of say Company B perform substantially full time services for the joint venture and it is Company A that has a 80% direct or indirect capital or profits interest in the joint venture, then all the employees of Company A and the employees of the joint venture would be treated as employed by a single employer under Code Sec. 414©.