Husband/Wife Controlled Group

[Guest SCUDDESLER]

I need some help with what should be a basic controlled group question. My question is based on the following facts:

Husband and wife each own 50% of Corporation A. Husband owns 50% of Corporation B. The remaining portion of Corporation B is owned by an unrelated third-party. Wife is an employee of both Corporation A and Corporation B. Husband and wife are happily married. Both corporations sponsor 401(k) plans and the employees of each corporation are only permitted to participate in the 401(k) plan sponsored by their respective employer.

My question is whether Corporations A and B constitute a controlled group of corporations for compliance testing purposes?

Thanks for your responses.

[jaemmons]

Yes. Through stock attribution under IRC 1563, husband and wife each are deemed to be 100% owners and 50% owners in Corporation B.

Controlling interest in Corp A is 200% and Corp. B is 100%, so they meet the first requirement under 1563(a)(2)(A). Effective control, taking into account smallest ownership interest is 100%, so they meet the effective control requirement under 1563(a)(2)(B).

Above determination assumes that all stock considered has voting rights.

[Guest Boilerburm]

I'm not sure I agree, jaemmons. Why do you say that controlling interest in B is 100%? 50% of B is owned by an unrelated third party. There is only 50% common control, so I don't think you have a controlled group here.

[jaemmons]

The spouse is attributed the 50% ownership from the husband. No spousal exception applies to the attribution of stock, since she is an employee of Corp. B. Therefore, collectively they own 100% - 50% of direct ownership from husband + 50% attributed stock to wife from husband.

[Guest greggi39]

jaemmons,

if she didn't work for the 2nd corp she would not be attributed the ownership, right?

what if they have a child, would she then be attributed through the child?

[Guest Boilerburm]

The number of shares, or ownership percentage, does not change because of attribution. The ownership interest can be counted only once in the controlled group determination. We could treat either of them as owning the shares, but since there isn't a controlled group in either scenario, it doesn't matter.

[jaemmons]

If they had a child who is under the age of 21, then the stock would be attributed to the child and a controlled group would exist.

Assuming all other requirements are met under 1563(e)(1) through (4), the spousal attribution exception would apply if she had absolutely no involvement with Corp. B. However, if they live in a community property state, then the spousal exception requirement listed in 1563(e)(1) (Spouse does not own any stock in that corporation directly) has not been met, as the stock deemed to be part of the community property assets of the marriage is deemed to be directly owned by each spouse.

[KJohnson]

It seems that to come to 100% you are actually doubling the shares rather than attributing ownership. I don't think this is a controlled group. For a similar example see Derrin Watson's explanation at this link:

:http://benefitslink.com/cgi/qa.cgi?databas...d=236&mode=read

[Guest Boilerburm]

Thanks for the link KJohnson - that is exactly what I was trying to say, but I don't have the eloquence of S. Derrin Watson Esq.!!

[jaemmons]

I see that I did inerrantly count the shares twice. Sorry for the confusion. Thank you to those who pointed out my oversight.

[Guest SCUDDESLER]

Thanks to everyone for the spirited debate and very helpful assistance. The issue that I needed help clarifying relates to whether the shares are counted twice or not (a different issue than whether the shares may be attributed twice, e.g., from one child to her parent to another child).