Controlled Group

[Guest karlin]

Husband and wife are doctors with minor aged children. Each spouse owns 100% of their own separate medical practice with no shared responsibilites, etc. He is an S corp, she is a sole proprietor. They both have employees. I believe they are a controlled group. We don't want to cover the wife or her employees. I am thinking this may work if the plan passes coverage requirements.

Are there any other tests we have to satisfy? Is there any other way to exclude them?

[Guest R. Daestrom]

I believe you are correct and a controlled group exists. When combining both plans for testing, 410(b) and 401(a)(4) should be met on a combined basis, as well as BRF.

This particulary situation always annoyed me, where you have a wife and husband who own 2 separate businesses, no overlap, no shared ee's, etc, and yet both groups must be combined for controlled group reasons. Can anyone help explain the logic behind this?

[Blinky the 3-eyed Fish]

First, you don't say what state to which this applies. If it's a community property state and special division of assets has not been done, then yes, it is a controlled group. Now it also sounds to me that you Karlin have looked at the spousal exception rules of 1563(e)(5), but because they have minor children you are saying that the attribution rules make them a controlled group.

On that last issue, I think you will get some different opinions. While the strict reading of the law would lead to the conclusion that it is a controlled group, others will argue that the intent is being misapplied and the minor children alone do not make it a controlled group.

[Lame Duck]

We've had this discussion before, but the clear langauage of 1563(e)(6) says "An individual shall be considered as owning stock, owned directly or indirectly, by or for his children who have not attained the age of 21 years, and, if the individual has not attained the age of 21 years, the stock owned directly or indirectly by or for his parents." I don't see how it can be considered to be misapplied when the child is considered to own 100% of his parents' businesses, thereby forming a controlled group.

[Blinky the 3-eyed Fish]

The smell test works both ways Mr. Duck. Playing devil's advocate that it is not a controlled group, do you honestly think the intent was to make couples with under age 21 children controlled groups in this case and couples without under age 21 children not controlled groups? We are talking about children under 21. It could be an infant. What impact could an infant have on the business? What possible logic is there is saying an infant should affect controlled group status?

I can hear the discussion now, "Dr. Husband, let's have a baby."

"Dr. Wife, are you kidding? Do you know that little bundle of joy will bring our corporations into controlled group status?"

BTW, these comments are the opinions of devil's advocate and not necessarily the opinions of the poster or his management.

[Lame Duck]

My personal sentiments are in 100% agreement with you. I think the wording of the Code Section is poor and that Congressional intent was to prevent abuses caused by parents deliberately transfering stock to a minor child to avoid application of the controlled group rules. However, I would hate to be the one to have to defend my clients in tax court if I told them not to pay attention to the Code and Regs., that they weren't meant for them. By the way, you can call me Lame.

[Blinky the 3-eyed Fish]

I still think that attribution from minor children to the parents is appropriate to avoid, as you mentioned, the transfer of ownership to them. However, the specific spousal exception I mentioned is what I am saying should not be affected by a minor child.

However, as you state, I would not tell a client that the exception applied if they had a minor child, but would rather inform them of the details in writing and have them decide how to proceed.

[Guest karlin]

Thank you for that spirited debate. This particular application of the minor children rule is quite aggravating because there is no transfer of ownership to the minor children and, in three years, he-doctor will be taking on a 50% partner (unrelated) and the controlled group rules will no longer apply.

I suppose the IRS could argue that if the parents died simultaneously (g-d forbid) that the child would inherit both their businesses and that would definitely be controlled (at least until the child sold the practices to two unrelated doctors)!!

Not that it matters but this is in NJ.

Also, in Daestrom's posting, what is BRF?

[WDIK]

Benefits, Rights and Features

[Earl]

just to further the devil...

Don't you have to be a doctor to own a medical corporation? so the kid couldn't inherit it?