Controlled group

[Guest Sieve]

A & B each is a 50% partner in P'ship X & P'ship Y. A also has a sole proprietorship, Z. From what I can tell, X, Y & Z are under common control. (Treas. Reg. 1.414©-2©(2)(iv).) Agreed?

Does it make a difference if X & Y are corporations?--i.e., if A & B each owns 50% of the stock of Corp. X & Corp. Y, and A also has sole proprietorship Z, are X, Y & Z under common control?

[Kevin C]

Sieve,

I see X & Y as under common control. But I'm not seeing Z as part of it with the information you've given. Can you elaborate on how you get there?

[Guest Sieve]

Kevin --

I was interpreting the reg. (Treas. Reg. 1.414©-2©(2)(iv), describing "effective control")) to mean that if 2 people each own 50% of a partnership, and one of those 2 also owns 100% of a sole proprietorship, then the sole proprietorship is part of the controlled group because there is "effective control" of the sole proprietorship.

That's not how I thought it was--I did not think that Z was part of the group I describe since A & B do now both own the sole proprietorship--but why else does -2©(2)(iv) say "one of such persons [my emphasis] owns such sole proprietorship" since only one person can ever own a sole proprietorship, while (i), (ii) and (iii) of -2©(2) speak in terms of "such persons"?

If only X & Y are, in fact, the only members of the group under common control, then what does -2©(2)(iv) mean?

[rcline46]

Are you confusing 'common control' with 'controlled group'? They are different animals.

[Kevin C]

Sieve,

The reg you cited defines "effective control" for purposes of determining if while taking into account only identical ownership of the various entities, the same 5 or fewer persons are in effective control of each organization. It says the owner of the sole proprietorship is in effective control of the sole proprietorship. It also says more than 50% for a partnership in (iii), so 50% is not sufficient to have effective control.

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.

The only person with an interest in each of X, Y and Z is A. A owns 50% of X & Y and 100% of Z. X,Y & Z don't have at least 80% common ownership for (i), nor do they have more than 50% common ownership considering only identical ownership for (ii).

Look at

Example (4). Unrelated individuals A, B, C, D, E, and F own an interest in sole proprietorship A, a capital interest in the GHI Partnership, and stock of corporations M, W, X, Y, and Z (each of which has only one class of stock outstanding) in the following proportions:

ORGANIZATIONS

________________________________________________________________________________

____________________

Individuals A GHI M W X Y Z

________________________________________________________________________________

____________________

A ............ 100% 50% 100% 60% 40% 20% 60%

B ............ -- 40% -- 15% 40% 50% 30%

C ............ -- -- -- -- 10% 10% 10%

D ............ -- -- -- 25% -- 20% --

E ............ -- 10% -- -- 10% -- --

________________________________________________________________________________

____

100% 100% 100% 100% 100% 100% 100%

________________________________________________________________________________

____________________

Under these facts the following four brother-sister groups of trades or businesses under common control exist: GHI, X and Z; X, Y and Z; W and Y; A and M. In the case of GHI, X, and Z, for example, A and B together have effective control of each organization because their combined identical ownership of GHI, X and Z is greater than 50%. (A's identical ownership of GHI, X and Z is 40% because A owns at least a 40% interest in each organization. B's identical ownership of GHI, X and Z is 30% because B owns at least a 30% interest in each organization.) A and B (the persons whose ownership is considered for purposes of the effective control requirement) together own a controlling interest in each organization because they own at least 80% of the capital interest of partnership GHI and at least 80% of the total combined voting power of corporations X and Z. Therefore, GHI, X and Z comprise a brother-sister group of trades or businesses under common control. Y is not a member of this group because neither the effective control requirement nor the 80% controlling interest requirement are met. (The effective control requirement is not met because A's and B's combined identical ownership in GHI, X, Y and Z (20% for A and 30% for B) does not exceed 50%. The 80% controlling interest test is not met because A and B together only own 70% of the total combined voting power of the stock of Y.) A and M are not members of this group because B owns no interest in either organization and A's ownership of GHI, X and Z, considered alone, is less than 80%.

The situation between A and GHI in example 4 is basically the same as the situation between X & Z in your example. Notice they do not say A and GHI are part of a brother-sisted group together.

**Edit: Sorry, the table didn't line up. Check the example in the regs.**

[Guest Sieve]

Kevin --

Let's change my facts, slightly. A is a 60% partner of X & a 60% partner of Y. B is a 40% partner of X & a 40% partner of Y. A also has a sole proprietorship, Z. A is now in effective control of X, Y & Z, but is not an 80% owner of X & Y without considering B. Nevertheless, does that reg (Treas. Reg. 1.414©-2©(2)(iv)) cause X & Y & Z to be under common control--X & Y because A & B (combined) have a controlling interest in A & B and are in effective control of A & B, and Z because one of A & B (A) is in effective control of Z?

I would think not, becasue B ought not be considered when looking at X-Y-Z because B does not own any interest in Z, but I then don't understand the -2©(2)(iv) reg. and its use of "one of such persons [my emphasis] owns such sole proprietorship".

[Belgarath]

Sieve - FWIW - I agree with Kevin, and with your thought as to what is logical - i.e. there's no group where Z is part of it. The fact that one of "such persons" (that is, one of the people who owns an interest in one or more of X and Y) has a sole proprietorship doesn't matter unless that person also owns at least 80% of one or more of the partnerships.

Of course, my opinion and a dollar are worth about 9 cents.

[Kevin C]

Sieve,

Treas. Reg. 1.414©-2©(2)(iv) is one piece of the determination of whether or not a brother-sister group exists. All it says is that for a sole proprietorship, the owner of the sole proprietorship has a controlling interest in that sole proprietorship. One of such persons refers to the five or fewer persons ... from 1.414©-2©(1).

Under common control is defined in

1.414©-2(a) In general. --For purposes of this section, the term "two or more trades or businesses under common control" means any group of trades or businesses which is either a "parent-subsidiary group of trades or businesses under common control" as defined in paragraph (b) of this section, a "brother-sister group of trades or businesses under common control" as defined in paragraph © of this section, or a "combined group of trades or businesses under common control" as defined in paragraph (d) of this section. For purposes of this section and §§1.414©-3 and 1.414©-4, the term "organization" means a sole proprietorship, a partnership (as defined in section 7701(a)(2)), a trust, an estate, or a corporation.

In your example, unless A's percentage of X & Y is at least 80%, there is no group of businesses under common control that includes X, Y & Z.

Look at example 4 in the regulations again. Your new example is basically the same as the relationship between A & W or A & Z in example 4.

[Guest Sieve]

rcline -- Common control is the term used when the group of entities includes non-corps., while controlled group is for corps. (See difference between IRC Section 414(b) & ©.) Otherwise, they are, in fact, the same animal. Why is it that you consider them different?

[rcline46]

Common control is also used for tax purposes, and now for tax purposes there is only a 50% test, but for qualified plan purposes there is an 80% test. The 80% test was moved to a new section in the code a few years back.