Minor kids result in the 80% test being met, but what about 50% test?

[katieinny]

Husband and wife each have 50% ownership in their own companies. The other 50% of her company is owned by a friend and the other 50% of his company is owned by his brother. Due to the couple's minor children, they can't rely on the spousal exception. So, the 80% test is satisfied because it looks like husband and wife own a total of 100% of each company. But the identical ownership (50%) test also adds up to 100%. I feel like there's double attribution going on here -- or maybe the fact that neither has effective control (voting power) in the other's company that makes me think that the 50% test is not met. Is my intuition steering me in the right direction, or am I grasping at straws and just need to face facts?

[ETA Consulting LLC]

There really is no "cannot rely on spousal exception". You must create a chart in order to effect the analysis.

Co 1: Hubby @ 50%, Bro-n-law @ 50%

Co 2: Wifey @ 50%; Friend @ 50%

Attribution Rules: Minor Son owns 50% of Co 1 and 50% of Co2.

There is no other owner who owns a percentage of both companies; so you only have 50% common ownership.

That's not a controlled group.

Attribution questions. Is there a 'right of first refusal' requiring Bro-n-law to sell his 50% to Hubby in the event he want to exit the business. If so, then Hubby (and therefore son) is 100% owner.

The same question would be posed to Wifey and Friend.

When you approach this type of analysis, it helps to break it down into simplified steps; not compile into a single equation.

Good Luck!

[katieinny]

ETK: I understood your analysis up to the 'right of first refusal' paragraph. It's probably a safe bet to say that there is a right of first refusal in place for both companies (I'll confirm). So, assuming the language is there, are you saying that both husband and wife (and son) are considered 100% owners of their respective companies now?

[katieinny]

ETK: I started researching the right of first refusal language. If I understand what I'm reading (big IF), I think that if there are reciprocal rights, meaning that both owners have the right of first refusal for each other, we don't have to count the other person's ownership percentage. So, if hubby and bro have rights of first refusal for each other, and wifey and friend have similar language in their agreement, we don't have to assume that hubby, wifey and son are 100% owners. I certainly wouldn't have given that a thought, so thank you for bringing it up. I'm going to get confirmation of the language in their agreements next.

[rcline46]

It is not the right of first refusal, but unrestricted options to buy the other one out. Again, be careful - cross purchase agreements do not usually rise to the level of options, they have to do with the death of the other party.

[katieinny]

"Just when I thought I was out, they pull me back in."