Prof. Services Corp and Control Group Issues

[Guest Ellie]

We have a husband and wife that each own their own businesses. The wife owns 100% of a medical practice and the husband owns 100% of an executive search firm. The husband is barred from owning a mediacl practice due to the lack of an MD; would these two businesses still be considered a controlled group?

[J Simmons]

Yes.

[Bill Presson]

There's a possibility a controlled group can be avoided in the right circumstances:

Question:

Controlled group determination and attribution between spouses - A husband owns 100% of one company (sole proprietorship), and his wife owns 100% of another company (another sole proprietorship). Are these 2 companies in a controlled group?

Answer:

Maybe. Generally, the spouse's ownership attributes to the other spouse, resulting in the two companies being "trades or businesses under common control", which means they are treated as a single company for plan purposes. However, ownership does not attribute from one spouse to the other if:

1. The spouse does not own directly any interest in the company;

2. The spouse is not a director or employee, and does not participate in the company's management;

3. Not more than 50 percent of the company's gross income is from royalties, rents, dividends, interest, or annuities; and

4. The interest in the company is not subject to conditions which substantially restrict or limit the spouse's right to dispose of such stock and which run in favor of the individual or his children who have not attained the age of 21 years.

Regardless of the above, if the couple has a minor (under age 21) child together, the ownership of each spouse attributes to the child (but not to each other) making the child the 100% owner of each company. And, if they are in a community property state, the state law may result in actual, rather than attributed ownership. Either would result in being under common control, for plan purposes.

The same rules apply to corporations, under IRC 1563(e)(5).

§1.414©-2

© Brother-sister group of trades or businesses under common control

(1) In general. —The term “brother-sister group of trades or businesses under common control” means two or more organizations conducting trades or businesses if (i) the same five or fewer persons who are individuals, estates, or trusts own (directly and with the application of §1.414©-4) a controlling interest in each organization, and (ii) taking into account the ownership of each such person only to the extent such ownership is identical with respect to each such organization, such persons are in effective control of each organization. The five or fewer persons whose ownership is considered for purposes of the controlling interest requirement for each organization must be the same persons whose ownership is considered for purposes of the effective control requirement.

§1.414©-4. Rules for determining ownership

(a) In general. - In determining the ownership of an interest in an organization for purposes of §1.414©-2 and §1.414©-3, the constructive ownership rules of paragraph (b) of this section shall apply, subject to the operating rules contained in paragraph ©. For purposes of this section the term “interest” means: in the case of a corporation, stock; in the case of a trust or estate, an actuarial interest; in the case of a partnership, an interest in the profits or capital; and in the case of a sole proprietorship, the proprietorship.

(b) Constructive ownership

(5) Spouse

(i) General rule. - Except as provided in paragraph (b)(5)(ii) of this section, an individual shall be considered to own an interest owned, directly or indirectly, by or for his or her spouse, other than a spouse who is legally separated from the individual under a decree of divorce, whether interlocutory or final, or a decree of separate maintenance.

(ii) Exception. - An individual shall not be considered to own an interest in an organization owned, directly or indirectly, by or for his or her spouse on any day of a taxable year of such organization, provided that each of the following conditions are satisfied with respect to such taxable year:

(A) Such individual does not, at any time during such taxable year, own directly any interest in such organization;

(B) Such individual is not a member of the board of directors, a fiduciary, or an employee of such organization and does not participate in the management of such organization at any time during such taxable year;

© Not more than 50 percent of such organization's gross income for such taxable year was derived from royalties, rents, dividends, interest, and annuities; and

(D) Such interest in such organization is not, at any time during such taxable year, subject to conditions which substantially restrict or limit the spouse's right to dispose of such interest and which run in favor of the individual or the individual's children who have not attained the age of 21 years. The principles of §1.414©-3(d)(6)(i) shall apply in determining whether a condition is a condition described in the preceding sentence.

(iii) Definitions. - For purposes of paragraph (b)(5)(ii)© of this section, the gross income of an organization shall be determined under section 61 and the regulations thereunder. The terms “interest”, “royalties”, “rents”, “dividends”, and “annuities” shall have the same meaning such terms are given for purposes of section 1244© and §1.1244©-1(e)(1).

(6) Children, grandchildren, parents, and grandparents...

1563(e) Constructive Ownership. -

1563(e)(5) Spouse. - An individual shall be considered as owning stock in a corporation owned, directly or indirectly, by or for his spouse (other than a spouse who is legally separated from the individual under a decree of divorce whether interlocutory or final, or a decree of separate maintenance), except in the case of a corporation with respect to which each of the following conditions is satisfied for its taxable year -

1563(e)(5)(A) The individual does not, at any time during such taxable year, own directly any stock in such corporation;

1563(e)(5)(B) The individual is not a director or employee and does not participate in the management of such corporation at any time during such taxable year;

1563(e)(5)© Not more than 50 percent of such corporation's gross income for such taxable year was derived from royalties, rents, dividends, interest, and annuities; and

1563(e)(5)(D) Such stock in such corporation is not, at any time during such taxable year, subject to conditions which substantially restrict or limit the spouse's right to dispose of such stock and which run in favor of the individual or his children who have not attained the age of 21 years.

1563(e)(6) Children, grandchildren, parents, and grandparents. -

1563(e)(6)(A) Minor children. - 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.

1563(e)(6)(B) Adult children and grandchildren. - An individual who owns (within the meaning of subsection (d)(2), but without regard to this subparagraph) more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock in a corporation shall be considered as owning the stock in such corporation owned, directly or indirectly, by or for his parents, grandparents, grandchildren, and children who have attained the age of 21 years.

1563(e)(6)© Adopted child. - For purposes of this section, a legally adopted child of an individual shall be treated as a child of such individual by blood.

[Guest Ellie]

Thank you both.