Controlled group - "spousal noninvolvement"

[Belgarath]

Kind of a strange one here, or maybe not so strange. Two spouses, each with sole proprietorships, in a non-community property state. The businesses are such that they clearly meet all of the spousal noninvolvement requirements of 1.414©-4(b)(5)(ii) below, with the possible exception of the piece I have emphasized below. My question is, how is this determination really made? Yes, I know we can get a tax attorney's opinion, but any idea what parameters they might use? Anyone ever seen any additional guidance, or had a real situation like this? I mean, does the fact that the spouses talk and work together when making a decision constitute "management" in the organization? Seems like you potentially get screwed either way...seems like facts and circumstances to the utmost degree.

I'd love to hear any opinions. Thanks.


(5) Spouse—(i) General rule. Except as provided in paragraph (b)(5)(ii) of this section, an individual shall be considered to own an interest owned, directly or indirectly, by or for his or her spouse, other than a spouse who is legally separated from the individual under a decree of divorce, whether interlocutory or final, or a decree of separate maintenance.
(ii) Exception. An individual shall not be considered to own an interest in an organization owned, directly or indirectly, by or for his or her spouse on any day of a taxable year of such organization, provided that each of the following conditions are satisfied with respect to such taxable year:
(A) Such individual does not, at any time during such taxable year, own directly any interest in such organization;
(B) Such individual is not a member of the board of directors, a fiduciary, or an employee of such organization and does not participate in the management of such organization at any time during such taxable year;
© Not more than 50 percent of such organization's gross income for such taxable year was derived from royalties, rents, dividends, interest, and annuities; and
(D) Such interest in such organization is not, at any time during such taxable year, subject to conditions which substantially restrict or limit the spouse's right to dispose of such interest and which run in favor of the individual or the individual's children who have not attained the age of 21 years. The principles of §1.414©-3(d)(6)(i) shall apply in determining whether a condition is a condition described in the preceding sentence.
(iii) Definitions. For purposes of paragraph (b)(5)(ii)© of this section, the gross income of an organization shall be determined under section 61 and the regulations thereunder. The terms “interest”, “royalties”, “rents”, “dividends”, and “annuities” shall have the same meaning such terms are given for purposes of section 1244© and §1.1244©-1(e)(1).