Controlled Group

[waid10]

Hi. I am struggling with the controlled group rules. My main concern/question is about entity C and the related testing for their 403(b) plan. Here is the scenario:

A and B are each 501©(3) entities. A owns 40% of Joint Operating Corp (JOC). B owns 60% of JOC. JOC is a shell...no employees, no payroll, nothing. JOC owns 100% of C, 100% of D, and 100% of E. C, D, and E are each 501©(3) entities. My question involves C. C has employees and sponsors a 403(b) Plan just for C's employees.

Are C, D, and E automatically in a controlled group because they all share a common 100% parent? When I look at the brother-sister rules, it always refers to the "same 5 or fewer 'persons'" when it talks about ownership. JOC is a corporation. Does that qualify as a person?

Also, with regard to C, what about A and B's shared ownership in JOC. Does that create a controlled group with C in some way?

By way of additional background (not sure if it is helpful), D and E treat each of their employees as employees of B, meaning that they are on B's payroll and B is the sponsor of their benefit plans.

I have read through the controlled group rules, but I haven't been able to read a lot of examples. Just the text of the rules is hard to follow.

Please help. Thanks.

[Carol V. Calhoun]

Umm, how does JOC "own" 501©(3)s? It's rather in the nature of a 501©(3) that it can't be owned.

[waid10]

All of the stock of C, D, and E is held by JOC, which was set up by A and B. C, D, and E are nonprofit corporations.

[Carol V. Calhoun]

But if C, D, and E are 501©(3)s, they shouldn't have stock. No part of their net earnings can inure to the benefit of shareholders, so stock ownership would be meaningless.

For that reason, the controlled group rules with respect to 501©(3)s are based on things like interlocking boards of directors, not stock ownership. See Treas. Reg. § 1.414©-5.

[waid10]

But if C, D, and E are 501©(3)s, they shouldn't have stock. No part of their net earnings can inure to the benefit of shareholders, so stock ownership would be meaningless.

For that reason, the controlled group rules with respect to 501©(3)s are based on things like interlocking boards of directors, not stock ownership. See Treas. Reg. § 1.414©-5.

Hi Carol. I am trying to get my hands on the document that outlines the relationship. But you are probably right that C, D, and E are non-stock corporations. That would likely mean that A and B own the JOC and the JOC (via A and B) appointed the Board of C, D, and E. So either way, the JOC has complete control of C, D, and E.

[Carol V. Calhoun]

Okay, back to your original question. Yes, a "person" includes a corporation. So if the JOC has control of all of C, D, and E, it will be in a controlled group with all of them.

[waid10]

Okay, back to your original question. Yes, a "person" includes a corporation. So if the JOC has control of all of C, D, and E, it will be in a controlled group with all of them.

Thanks. Sorry for the additional questions, but this is very helpful.

So then it seems that what you are saying is that subsidiaries that have the same 100% parent are considered brother-sister entities, correct? The JOC qualifies as the "5 or fewer persons" as you indicate above.

Taking the above to my next question: what about A and B? Is C in a controlled group with either or both of them?

[Carol V. Calhoun]

No. A controlled group requires at least 80% ownership in the case of a taxable organization. In the case of a tax-exempt, common control exists between an exempt organization and another organization if at least 80 percent of the directors or trustees of one organization are either representatives of, or directly or indirectly controlled by, the other organization. So regardless of whether we're talking about stock ownership or interlocking boards, neither A nor B would be part of a controlled group with the JOC.