Step-Child of Owner: HCE or NHCE?

[John Feldt ERPA CPC QPA]

The owner of a business just hired his step-daughter. She has not been adopted by the owner (original parents both still have rights). So far, this looks like a NHCE.

However, the business owner (100% ownership) lives in a community property state (Wisconsin). So, due to community property law, I think the spouse of the business owner is considered to directly own 50% of the business (even though there is no actual direct ownership of any company stock certificates by the spouse). If that is correct, then this would make the step-daughter a HCE?

Agree? Disagree?

[Belgarath]

I agree. There are people out there, however, who do not agree that for these purposes a community property state confers direct ownership. They seem to be in a minority as far as I can tell.

[K2retire]

I don't know which is accurate, but I can see an argument that the portion attributed to the spouse under the community property laws, cannot be attributed a second time to the spouse's child.

[Belgarath]

Agreed - one interpretation is that it is not attributed in a community property state - it is DIRECT ownership. But we just point this out to the client, and tell them to check with their attorney and let us know what they decide! Honestly, I've never heard of a situation where the IRS disagreed or caused problems one way or the other in such a situation, so I suspect it is a fairly low risk no matter which interpretation you take.