Brother-Sister Businesses Under Common Control

[Guest Donaldson]

For purposes of determining if two or more entities will be treated as a single employer (for purposes of the separation from service rules), Treasury Regulation § 1.409A-1(g) states that the controlled group/common control group rules of sections 414(b) and 414© apply.

For purposes of the brother-sister common control group test under Treasury Section § 1.414©-2©, there are two requirements: (1) the “at least 80% requirement” (which is the controlling interest requirement) and (2) the “more than 50% requirement” (which is the effective control requirement). Treasury Regulation § 1.409A-1(h)(3) states that the at least 80% requirement is replaced with an “at least 50%” ownership level (this is the default rule), and can be reduced to as low as 20% if the selection is based on legitimate business criteria.

However, Treasury Regulation § 1.409A-1(h)(3) does not address if the more than 50% requirement (which is the second requirement needed in order to have a brother-sister group) can be reduced to 20% as well. It seems that the 20% ownership threshold should apply to both requirements of the brother-sister common control group test (the at least 80% requirement and the more than 50% requirement), although neither the final regulations nor the preamble even mention this point. I look forward to receiving any thoughts or comments you may have on this issue.

Thank you very much.