Is this a Controlled Group/Affiliated service Group?

[himt4]

Lets say Joe is over age 21 and is 100% owner of a building. Joe and his father decide to use the building to make widgets. Joe and his father form an s-corp with Joe a 51% owner and Father a 41% owner for their widget business. The widget business pays rent to Joe for use of his building. Joe incorporates as a 100% owner of a business that recieves rental income. Joe makes his father an employee of his rental income business, they both receive w-2 income from the rental income business. Joe wants to start a pension plan for his rental income business which cover him and his father (the only employees).

Is there any rule or reason the pension plan would have to also cover employees of the widget business?

[Belgarath]

First, as always, I'd recommend consulting an attorney versed in these matters.

If you don't want an attorney, you can apply for a determination letter using a form 5300.

This doesn't jump out at me as being an ASG, but it does smell a bit. There could, of course, be separate issues as to whether the income from the rental company is actually earned income for purposes of a plan, but that's the accountant's problem.

[himt4]

Yes, it smells to me too under the logic that the IRS' goal in making these ASG laws is to prevent this kind of thing from happening. If it was ok, I'd think that a lot of businesses would create this kind of set-up. If we end up consulting an attoney, I'll let you know what he says.

[Guest jdw]

You don't need to get to the ASG analysis since it is a controlled group. Control group analysis uses the 1563 attribution rules, which provide that an adult child is attributed the stock of their parent if the child owns more than 50% of the stock. See 1563(e)(6)(B). That means Joe owns 100% of the Widget S-corp (51% directly, and 49% by attribution from Father since Joe owns more than 50%. I assume Father owns 49%, not 41%, but it does not matter). Joe is also the 100% owner of the building entity. That means you have a controlled group and a combined census.

The Building plan will cover two employees, Joe an Father, and both are HCEs. Joe is an HCE by ownership (100% owner); Father is HCE due to attribution of Joe's stock. For HCE determination, you use 318 attribution rules, and 318(a)(1)(A)(ii) says you have unlimited attribution between parents and children (or vice versa). So your HCE coverage is 100%, unless there are Widget Corp. HCEs excluded. If not, you have to cover 70% of the Widget non-HCEs or see if coverage passes using an average benefits test.

If you have the Widget business owned 50-50, you may be ok, since 1563(e)(6) says MORE than 50% ownership triggers attribution. Absent that attribution, you have two entities with Joe the only common owner, and he owns 50% of one -- not enough to create a controlled group. I have not thought about what happens if Joe has childern, either minors or adults, but that may also crause enough common ownership to create a controlled group.

Even if you can avoid the controlled group, as Belgareth mentioned the compensation paid to Joe and Father by the Building Corp must be reasonable, based on the services they provide. It cannot include the dividends, so the only services I see they could provide are building maintenence and perhaps some administrative functions, and that is not much. Also, any compensation paid by the Building to Joe is subject to FICA and FUTA. You may be ahead of the game to distribute it as dividends or non-payroll distributions.

I remember seeing some old Revenue Rulings that frowned on an arrangement like this, but cannot recall names or numbers without digging.

[Belgarath]

Thank you for pointing this out. Must be too much holiday eggnog - for some reason I started thinking about ASG, and never even considerd a CG. Time to recharge my batteries...

[himt4]

Sorry, I made two typos in my original post. As JDW pointed out I meant a 51%/49% split. But more importantly it should have been written as Joe with 49% and Father with 51%. And, therefore, as Joe doesn't have a controlling interest, he does not get attributed his fathers interest and remains a 49% owner for consideration of control groups.

The problems witht the compensation recieved in the Building corp. are a concern, but as Belgarath pointed out, hopefully they have a good problem solving accountant.