Constructive Ownership Problem?

[Guest Michael519]

A client of mine is a dentist. He has a profit sharing plan. He recently purchased the building his practice is in. There are two other non related tenants.

He wants to create a realty managment company with his wife as either a sole owner, or possibly, with he and she as partners.

Their only income would be from rental income from the building.

Can the realty company have a pension plan without any conflict with the plan in the dental practice? I'm wondering if there would be a contructive ownership problem since a portion of the realty company's income is being derived from the spouse of the owner of the realty company.

Thanks!

Michael

[mbozek]

What kind of comp will be paid to the Dr? Passive income such as dividends and rental income are not wages for pension plan purposes. The Dr would have to be paid some form of salary for managing the company in order to get a pension contribution.

[Guest Michael519]

Yes, if only the spouse was to own the realty managment company, I would expect that the company would deposit the rental income and then all expenses and salaries would be paid accordingly.

From what you raise, there are two issues. First, I suppose the doctor could be a shareholder in the company without being an employee, thus earning no income and continuing to draw his pension from his dental practice. His wife would then be the only eligible employee in the realty company.

If this is allowed, then I suppose he can also draw a salary from the management company and also participate in the plan, as well as participate in his dental practice retirement plan (up to the allowable limits).

I think it is only a matter of how much, if any, a percentage of the management company the doctor owns that could create a problem. Maybe there is no problem at all! That would be nice.

[E as in ERISA]

Under the controlled group/common control rules of 414(B) and ©, the dentist practice and realty company would generally be treated as one employer -- and the plans would have to be tested together.

Under the constructive ownership rules of 1563, the dentist would generally be considered to own any stock owned by the wife. There is an exception if all of the following are met:

(1) The dentist does not directly own any stock of the realty company;

(2) The dentist is not a director or employee -- and does not participate in any of the management of -- the realty company;

(3) Not more than 50% of the realty company's gross income is from rents, dividends, interest, royalties, and annuities; and

(4) The wife's right to dispose of her interest is not limited a way that benefits the dentist and children under 21.

Under 414©, these rules generally apply to non-corporate entities (such as sole proprietorships and partnerships).

Also note that if the couple has children under age 21, then the children's constructive ownership interests may be attributed to their parents.

[Kirk Maldonado]

I think you have a prohibited transaction problem also.