Unsure of Controlled Group Status

[mming]

A husband and wife each own 50% of Company A and there are no other employees. Company A (not the indivudual owners) owns 56% of Company B which has several employees. To me this looks like a parent-subsidiary group and a controlled group situation does not exist.

However, there's been recent evidence that instead of A owning the 56% ownership in B, it's actually one of the 50% owners of A that owns 56% of B. If this is true the two companies would be classified as a brother-sister group and a controlled group situation would exist due to the attribution of spousal ownership (each spouse would be deemed to own 100% of A). Am I interpreting IRC sec. 1563(a) correctly?

[Lame Duck]

For a brother sister controlled group to exist, you have to pass two tests:

1. 5 or fewer people must own at least 80% of both businees, when looking only at people who have some ownership interest in both businesses.

2. They must own more than 50% of both business when looking at identical ownership (the lowest percentage of ownership in each business.

In your case, you have:

A B Identical Ownership

Husband or Wife 100% 56% 56%

This meets the second part of the rule but not the 80% part. Based on the facts you've given, I don't see a controlled group. However, you should look into who owns the other 46% of B. There may be some required attribution between them and the husband/wife team.

Additionally, any ownership that A has in B would have to be attributed to the owners of A. See 1.414©-4

(b)(4).

[Nate X]

Even though the two companies are not in a control group, the 415 limit is applied as if they were since A owns > 50% of B.

[Belgarath]

I agree with Nate if Corporation A actually owns 56 % of corporation B. However, your post appears to indicate that A may not own any of B, but instead, one of the owners of A also owns the 56% of B. If that's the case, then the 415 issue mentioned does not apply. This applies only to 1563(a)(1), which is parent-subsidiary only, and does not apply to a brother-sister situation.