Controll group

[Guest JFBEARB]

Company A (C-Corp) is owned by Mother-100%. Son and daugher-in-law work with her.

Company B (S-Corp) is owned by Mother - 79% and Daughter-In-Law 21%.

In applying the brother-sister test, I understand that family attribution rules are used.

The son is not a direct owner, but under attribution rules AND community property state law, he does have some ownership. I understand that double attribution cannot exist.

Would the Son assume ownership in Company A from his Mother? Then would Daugher-In-Law assume ownership from Husband?

Would Son assume ownership in Company B from his Mother? Would Daughter-In-Law assume ownership from Husband in addition to her existing ownership? What about Husband's share of Wife's ownership (community)? Wouldn't this be double attribution?

I would very much appreciate assistance in clarifying ownership/attribution in this case?

[Dawn Hafner]

What is age of son? §1563 (which is the code section that defines ownership attribution for brother sister cont group rules) has special attribution rules that depend on age of child.

[The son is not a direct owner, but under attribution rules AND community property state law, he does have some ownership. I understand that double attribution cannot exist.]

If over age 21 under the brother sister cont group rules Mom's percentage is not attributed to son because son does not own directly more than 50%.

[Would the Son assume ownership in Company A from his Mother? Then would Daugher-In-Law assume ownership from Husband? ]

No to both if Son is over 21.

[Would Son assume ownership in Company B from his Mother? Would Daughter-In-Law assume ownership from Husband in addition to her existing ownership? What about Husband's share of Wife's ownership (community)? Wouldn't this be double attribution? ]

Son will not get ownership attribution of B from Mom for same reason above. He will get the 21% attribution from his wife.

Based on these facts, this is not a controlled group.

[jaemmons]

In company A, the son is NOT attributed the stock of his mother, assuming he is over the age of 21 and doesn't own 50% of stock in company A directly. Therefore, the mother is the only shareholder for IRC 1563 purposes.

In company B, only stock attribution is to the son from his spouse (21 % owner). NO attribution of stock from the mother to the son because of the same reason given above (over age 21 and does not own 50% of company B stock on directly or indirectly (he owns only 21% indirectly)).

The community property rules are relevant in this case for the mother and father. Assuming the father is alive and still married to the mother, he would be attributed the stock of the mother, irrespective of the spousal exception rules. Therefore, you would have a controlled group of corps. because of the following:

CompanyA:

Mother -100%

Father (1563 attribution) - 100%

Total ownership = 200% (IRS math)

Company B

Mother 79%

Father 79%

(dont count son or daughter-in-law ownership because they don't own anything in Company A directly or indirectly)

Total ownership = 158%(IRS math)

80% common ownership is satsfied since they own over 80% of each company.

more than 50% identical ownership is met, since they own collectively a similar 79% interest or 158% together.

[Guest JFBEARB]

In reference to my original post, there is no Father to consider in this case.

Also, son is over age 21.

[jaemmons]

Then you wouldn't have a controlled group.

[Blinky the 3-eyed Fish]

Jaemmons, I have never heard of anything like your example with the mother and father. For controlled group purposes it would mean completely different treatment of owners based on whether they were married or not. Do you have any cites or experience on which you base your logic?

[jaemmons]

Stock is attributed to the spouse unless an exception exists under IRC 1563(e)(5). One of the 4 conditions becomes a little clouded when you are in a community property state. Under community property law, the spouse becomes a direct owner of the stock by operation of state law, as supported by various court cases. Therefore, they cannot meet the first condition of the spousal exception where they do not own any stock in the corporation directly (IRC 1563(e)(5)(A)).

[Blinky the 3-eyed Fish]

Jaemmons, so you are saying that in a community property state you could have a married individual that owns 41% of two companies and that would constitute a controlled group?

[jaemmons]

Under community property law, each spouse has an equal share of the stock. Therefore, they would be deemed to be 41% owners, respectively, in both companies and, thus, forming a controlled group of companies. However, I do want to caveat this statement as a general determination based upon general information.

The only way I know of circumventing these ridiculous rules, is if the spouses had entered into an agreement to treat their property separately. Therefore, generally, property acquired during or before the marriage would be treated as separate property and the stock wouldn't be attributed to the other spouse.

[Blinky the 3-eyed Fish]

Jaemmons, I was reading page 1.99 of the latest ERISA Outline Book and wanted to note that Sal does not agree with your methodology.

[jaemmons]

Blinky,

Thanks. However, you may want to read "Who's the Employer" by Derrin Watson. This exact issue is discussed.

[R. Butler]

Blinky,

See Page 1.45 of the ERISA Outline book. In jaemmons scenario there isn't double attribution (as described on page 1.99 of the ERISA Outline book), but rather there is actual ownership of the community property interest.

[Blinky the 3-eyed Fish]

R. Butler, I agree that there is actual ownership based on the community property rules, but note in the example you referenced that the portion that is treated as community property is 1/2 of the total amount. Also, my reference to page 1.99 of the ERISA Outline Book does not deal with double attribution.

Jaemmons, do you know where in Watson's book this issue is discussed? I would be curious to read it.

[jaemmons]

Blinky,

It's is the "Controlled Group Attribution Rules". My copy has this as Chapter 7, page 210 (copyright is 1998). Enjoy!