Constructive Ownership/Controlled Group

[MarZDoates]

Employer sponsors a profit sharing plan. He is the sole owner of a medical PSC. His wife is an employee of the medical PSC and also owns 100% of a separate S Corporation. My question relates to controlled groups and constructive ownership.

Section 1563(e)(5) says that an individual shall be considered as owning stock in a corporation owned, directly or indirectly, by or for his spouse...except in the case where the individual does not own directly any stock, is not a director, etc. etc.

Who is considered the "individual". Would it be the owner of the medical PSC sponsoring the profit sharing plan?

Thanks.

[Belgarath]

It would be the spouse for whom you are determining if the "non-involvement" exception of 1563(e)(5) applies. In this case, yes, it would be the husband. If you were determining if there is attribution from the husband to the wife, then the "individual" would be the wife.

A note of caution on this: there's some debate as to how the ownership question is handled in a community property state. I've heard arguments on both sides - some say that there IS direct ownership, and some maintain that this doesn't apply.

Personally, the most well reasoned argument that I've seen is that of Mr. S. Derrin Watson, in his book, "Who's the Employer?" This is the best single source that I've seen for explaining the mysteries of controlled groups, affiliated service groups, etc., and the applicable attribution rules.

[Kirk Maldonado]

Belgarath:

Don't leave us hanging. Which way does Derrin come out on this issue?

[E as in ERISA]

A lot of those Q&As are posted on this site. Maybe this one?

http://benefitslink.com/modperl/qa.cgi?db=...employer&id=113

[Belgarath]

Mr. Watson opines that in a community property state, there is direct ownership, and that therefore the "no direct ownership" condition of 1563(e)(5) cannot be satisfied. (He also cites the Aero Industrial case) He does go on to say that there is a way around this - having their stock treated as separate property. HOWEVER, he goes on to caution that there are potentially serious side effects to this approach as well, and it would require competent counsel to advise any client attempting to use this method.

[Kirk Maldonado]

Katherine:

Thank you for posting that. It was very informative.

Are you saying that (1) Derrin's book is in a question and answer format and (2) the materials on BenefitsLink are basically the same material that is in his book? (I don't have his book, so I don't know.)

Belgarath:

Thanks for summarizing Derrin's views.

My opinion is that the attribution rules for controlled groups of corporations are the second most complicated rules of ERISA, right after determining who is a disqualified person (or party in interest) under the prohibited transaction rules. Accordingly, I am always eager to hear the viewpoint of someone who has spent as much time dealing with them as Derrin.

[E as in ERISA]

I don't have Derrin's book either. He seems very generous with the number of Q&As he has posted: http://benefitslink.com/modperl/qa.cgi?db=qa_who_is_employer

I usually go to the corp tax people for the first pass on these types of rules.

[Belgarath]

His book is in a question and answer format.

[Lame Duck]

1563(e)(5)(B) and regulation 1.414©-4(b)(5)(B) limit the exception to situations where the individual is not a member of the board of dirctors, a fiduciary or an employee of such organization and does not participate in the management of the organization at any time during the taxable year. Since the spouse is an employee of the medical corporation, the exception to the controlled group rules under 1563(e)(5) would not be available.

In addition, you might have attribution from one parent to another through a minor child under 1.414©-4)(b)(6)(i).

[Blinky the 3-eyed Fish]

Lame Duck, are you referring to the fact that if they have a minor child then 100% of the ownership from each parent's company is attributed to the child and you have yourselves a controlled group?

If so, this is a highly debatable subject.

(I forgot the verb in the last sentence.)

[Lame Duck]

Blinky,

I agree that it is debatable, but that's what the language of 1.414©-4(b)(6) seems to say. I only threw it in as something additional that needs to be considered.

[Guest merlin]

The Service has agreed, at least informally, with the idea that the parents' ownership is attributed to the minor child, thereby creating a controlled group. See Q&A 36 from the 96 ASPA conference, and Q&A 82 from the 99 conference.

[R. Butler]

Lame Duck, are you referring to the fact that if they have a minor child then 100% of the ownership from each parent's company is attributed to the child and you have yourselves a controlled group?

If so, this is a highly debatable subject.

(I forgot the verb in the last sentence.)

Why is this highly debatable? It seems fairly clear to me that if their is a minor child, spousal exception is irrelevant, you have a controlled group. I've never heard an opposite view. How would the opposing view get around attribution to the child? Just curious.

[Blinky the 3-eyed Fish]

One example is Sal's comment at the end of page 1.34 of the 2003 edition of the ERISA Outline Book.

[R. Butler]

I read Sal's comment (albeit in the 2002 Edition), but it does appear that ultimately he would still say control group. Irregardless, the argument that its not fair & that Congress may not have intended that result is shaky. I could (& have) reasoned unfair & unintended on many statutes, that doesn't make my me correct. (Example: safe harbor, top heavy & letting employees defer immediately. Does it seem fair or intended, that employers who let participants defer immediately, but make them wait for safe harbor contrib. be subject to top heavy? Not really, employer could have excluded tham altogether & got the result they wanted. Being more flexible screws them. Does that change the answer? No, its still subject to top heavy.) The best evidence of collective Congressional intent is the text of the statute.

Just my 2 cents.

[Blinky the 3-eyed Fish]

I guess the lesson is to tread carefully if trying to use the 1563(e)(5) exception.