Controlled Group or Affiliated Service Group, or Neither?

[Guest RBeck]

I have a situation where an individual owns 100% of a restaurant, and 79% of a second restaurant. He sold the assets of the first restaurant, and retains ownership of the corporation. IMHO, this does not constitute a controlled group because it fails the 80% common ownership test, although the 50% identical ownership test is met.

However, one company pays fees to the other. (100% to 79%) - does this constitute an affiliated service group?

[Archimage]

I agree with you that it is not a controlled group. You must have at least 80% owndership. The 50% test only applies to a brother-sister relationship but you still have to have 80% common ownership.

It is not an affiliated service group. In order for it be an A-org or B-org type ASG, the FSO must be a service organization. A restaurant would not be considered a service organization.

[Guest RBeck]

That helps a lot, Archimage. Is there any relationship between the companies due to the fees paid? My thought is no, but I want to be sure...

[Archimage]

If the FSO was a service organization then it would be a B-org ASG. Since that is not the case, it is not an ASG.

There is another point I should mention. Since one corporation owns more than 50% of the other, the two will be treated as one for 415 purposes only.

[rcline46]

Archimage, the lead question said the individual owner 100% and 79%, not that the first corp owned 79% of the second. THis makes it a brother sister not a parent sub.

I believe the 415 rule only applies to parent sub so it would not be applicable here.

[Archimage]

Yes, that is correct. I was assuming that they were both corporations. Sorry for the confusion.

[Guest RBeck]

The second company is a shell, not an operating restaurant - he sold the assets, but retained the corporation. The fees are being paid by the restaurant which he owns 79% of, to the corporation that he owns 100% of. Depending on the nature of the fees, could this be a managment organization?

[jaemmons]

It depends on whether or not the 1st restaurant (own 100%) provides management functions to the second restaurant. You will need to look at the "facts and circumstances" surrounding their business relationship.

Also, before you dismiss the bro/sis relationship, you should look at any possible attribution of ownership under IRC 1563. Does the spouse or any children under age 21 work at either restaurant? Does the owner have any children under age 21? Is the restaurant doing business in a state subjet to the community property laws?

[Guest RBeck]

Good points, jaemmons. I need to do some more digging here.

thanks!