Controlled Group

[Guest tintree73]

This may be simple, but let me know if I am not handling this correctly:

An LLC1 owns 100% of Corp A - and Corp A owns 100% of LLC B.

Also, LLC1 owns 100% of Corp C - and Corp C owns 100% of LLC D.

Also, LLC1 is owned 50% by Corp. X and 50% by Corp. Y.

LLC B and LLC D each sponsor 401(k) plans - no other entity sponsors a 401(k) plan. This is a controlled group of corporations-right? So-if the 401(k) plans sponsored by LLC B and LLC D are both standardized - we have a problem (because standardized plans must cover all employees of the controlled group) unless the 410(b)(6)© grace period (due to a transaction-per Rev Proc 2000-20) applies? Honestly, the LLC v. Corp distinction is confusing me as well as whether this is a Parent-Subsidiary or a brother/sister issue. Please help!

Would the answer be different if LLC1 was owned 42% by Corp W-and Corp W was owned 50% by Corp. X and 50% by Corp. Y?

[Just Me]

One thing to remember when doing a controlled group analysis is that Brother/Sister groups are very limited - look at §1563(a)(2) and note that it involved ownership by Individuals, Trusts and Estates only. Since what you have are all corporations, the brother/sister rules are in applicable.

That being said, it appears to me that you have a Parent/Sub controlled group of all entities EXCEPT X and Y since their ownership is not 80% or greater.

You also need to take a look at §415(h) which streches the Parent/Sub controlled group by dropping the percentage to "more than 50%" in lieu of "at least 80%." However, since you indicate EXACTLY 50%, you do not need to test §415 limits by considering X and Y either (you didn't indicate that they had any plans, anyway).

Just my humble opinion....

[Guest mrilao]

Does the analysis change under the parent/subsidiary analysis? It is my understanding that a parent/subsidiary CG exists when a parent owns at least 80% of a subsidiary and at least 80% of each subsidiary is owned by the parent or one of its other subsidiaries. So, in that case, if Corp X and Corp Y own at least 80% of the capital and/or profits of LLC1 (here 50+50=100%), does that make LLC1 a subsidiary member of a parent/subsidiary group.

With the brother/sister group - would they have to attribute the stock to the shareholders?

I could be way off base on this.

[Just Me]

Nope. You only "add up" the ownership of multiple entities in a Brother/Sister group, which this fact pattern does not have. (You wouldn't do the 50% + 50% math in a Parent/Sub analaysis.)

With respect to the shareholder attribution, greater than 5% shareholders are deemed to own any stock owned by the company of which they are a shareholder. So in the facts we are discussing, it would be important to know if the have any large common shareholders of X and Y, because if we do, then we may have a Brother/Sister group there, combined with the Parent/Sub group below. (The dreaded "combined group.")

[Guest tintree73]

So if I understand this correctly, the idea is that in the parent-sub analysis, you would not combine the ownership of the parent entity with another entity - but with regard to the subsidiaries (e.g., as you go down the line from LLC1 to Corp A to Corp B) you would combine ownership in that instance? I know confusing, so here is an example - if Corp M owns 80% of Corps N and P and Corp N then owns 40% of Corp Q as well as Corp P also owning 40% of Corp Q - that would make a total of 80% ownership of Corp Q by Corps N and P and the common ownership would then include a group of Corps M, N, P and Q?

In contrast, if Corp L owned 30% of Corps N and P and Corp M owned 50% of Corps N and P - that would not be a parent because you would not add the 50% and 30% together to make the requisite 80%?