Controlled Group Question

[PFranckowiak]

Have several related??? companies

A Owned by Mr. G

B Owned by Mr. G(90%) Mr. T (10%)

C Owned by Mr. G 78% Mr. T 22%

D Owned by Mr. G 26% Mr X 74% but contains all the employees for C (Leased Employees who were originally employees of C but a separate company was set up due to some tax reason)

Controlled Groups for testing?

A and B

B and C

How is D handled? Does this fit under affiliated service group rules?

Because not are all in the same controlled group - then this would not fit under a prototype doc, am I correct?

Thanks for any input

PF

[Guest Sieve]

Controlled groups: A & B - yes; B & C - yes. If T's stock is subject to a condition running in favor of G, then C could be a controlled group member with A & B (see IRC Section 1563 regs)--likewise D, if X's stock is subject to a condition running in favor of G.

If there are multiple controlled groups (such as A & B and B & C), then the employers not related to the others (such as C, or A) cannot partcipate in the same prototype document with the related members, but can be in a volume submitter (including in a VS prototype-style) with them.

If the result is that there's one controlled group (as still might be possible), then they can all be participating employers in a prototype plan.

Not enough info re: C & D as ASG. Need to know if G or X are on D's payroll, if D performs performs services for others, how much of D's revenue comes from C, etc.

[PMC]

Question -

If A is the same employer as B and B is the same employer as C why aren't A and C the same employer?

[Guest Sieve]

First, you are not correct when you suggest that "A is the same employer as B and B is the same employer as C". Rather, they simply are treated, for certain testing purpsoes, as if they are the same employer as a result of the controlled group relationship.

Now, why is there not one controlled group containing A, B & C as a result of the overlapping controlled groups of A & B and B & C? Well, IRC Section 414(b) refers to IRC Section 1563, which contains, in IRC Section 1563(b)(4), a provision providing that a memebr of an overlapping group shall be considered a member of only one controlled group. However, the regs under IRC Section 414(b) say that you ignore the overlapping group rule of IRC Section 1563, and, instead, follow the rule that " . . if a corporation is a member of more than one controlled group of corporations, such corporation shall be treated as a member of each controlled group". (Treas. Reg. Section 1.414(b)-1(a).)

In your scenario, A & C are not related to each other--rather, they are in separate controlled groups with B (which is a member of each group). So, under IRC Section 414(b), A & B and B & C are separate and distinct controlled groups, and are tested accordingly--but that does not cause A & C to be in any way related to each other.

[Laura Harrington]

Another argument in favor of the conclusion that A,B and C are not part of one controlled group is the interpretation of IRC 1563 by the Supreme Court in the U.S. v. Vogel Fertilizer Co. which stated that when determining if the 80% common ownership test is met, the common owner must have at least some ownership in each business being tested.

Only Mr. G has ownership in A,B and C. Since he only owns 78% of company C, the 80% common ownership test is not satsified.

[PMC]

Thanks for the clarification and references.