Controlled group -- spousal exception would apply except for minor children

[katieinny]

I have been looking at some articles lately, including examples provided by McKay Hochman, Derrin Watson and others that talk about the spousal exception (relating to attribution under the controlled group rules) not being applicable when the couple has a minor child because ownership is attributed to the child and that messes everything up. There are comments about that being the letter of the law, but not necessarily the intention. I have to believe that there must be a pretty large number of couples where each spouse owns his/her own (separate) business and they have at least one child. However, I haven't seen any write-ups about the controlled group status being enforced, and I'm pretty sure it's not because they are following the rules (yes, I'm a cynic). Has anyone heard the IRS make any informal comments about this, or has anyone seen it enforced? Or is this one of those things that's quietly swept under the rug and nobody talks about it?

[ETA Consulting LLC]

9 x 9 x 9 x 856 x 125 x 164895 x 0 = 0

I figured this out in less than 1 second. The key is to recognized the obvious rule, anything multiplied by zero is zero, and use that knowledge to solve your problem. When performing any analysis, this approach helps. Regardless of intent, the obvious rule is that there is automatic attribution to children under the age of 21. So, if a husband and wife each owns their respective business, their minor child is considered 100% owner of both businesses.

I, typically, perform that controlled group analysis in 3 seconds; the time it takes for me to ask the age of their children. Trying to enter subjective opinions regarding the 'intent' which runs contrary to 'plain language' is not efficient in my experience. I tend to design the plan by treating the employers as related and move on. When you begin to introduce subjective measures, you open yourself up to endless debate.

Good Luck!

[Belgarath]

I agree with ETK re properly operating a plan in accordance with the law. However, to answer your other question, no, I have neither seen no heard of any specific IRS enforcement on this particular issue. Whether that means most plans are in proper compliance, or whether it means that it isn't on the IRS "radar" I can't say.

Since the potential consequences of incorrectly ignoring this, IF the IRS decides to pursue the issue, are severe, it seems like a poor area to take risks. Others might disagree...

I can tell you about at least one TPA who makes sure their clients properly take this into account.

[katieinny]

Of course, you are both right.

[12AX7]

You may also have a controlled group in a community property state without regard to the spousal non-involvement exception.

I do however think that the IRS does review and enforce controlled group matters during an audit. I've had to answer that question properly on the pre-audit questionnaire in the past.