Controlled Group Quirk

[Below Ground]

My problem is whether a "Not-for Profit Firm" (501©) can create or be part of a controlled group.

Basically, there are 3 firms. Firm A is 100% owned by husband and Firm B is 100% owned by wife. They satisfy the exemption for attribution under IRC 1563, so there is no controlled group between A & B.

Firm C is a Not for Profit, and the 2 directors are the husband and wife. Does this create a controlled group for either Firm A or Firm B, or all 3?

[Below Ground]

I have researched this to conclude that a controlled group only exits if IRC 1563 attribution applies. It appears that this is not the case and no attribution applies.

[My 2 cents]

I don't practice in that area, but the husband and wife being directors would not cause there to be a controlled group issue, would it? Isn't actual ownership required? Being a director is not the same as being an owner, is it?

[Peter Gulia]

Consider all implications of 26 C.F.R. §1.414©-5.

http://www.ecfr.gov/cgi-bin/text-idx?SID=ec7865a93d6d3fb028fbafd74aee2313&mc=true&node=se26.7.1_1414_2c_3_65&rgn=div8

[Below Ground]

Below is extracted from related regulations. As you can see there is in fact an issue with controlled groups for tax exempt entities without ownership. The question boils down to does aggregation of directorships apply? So far, my research indicates no, BUT there is a need for regulatory clarification on this narrow issue. No matter, thanks for your reply.

(b) General rule.

In the case of an organization that is exempt from tax under section 501(a) (an exempt organization) whose employees participate in a plan, the employer with respect to that plan includes the exempt organization whose employees participate in the plan and any other organization that is under common control with that exempt organization. For this purpose, 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. A trustee or director is treated as a representative of another exempt organization if he or she also is a trustee, director, agent, or employee of the other exempt organization. A trustee or director is controlled by another organization if the other organization has the general power to remove such trustee or director and designate a new trustee or director. Whether a person has the power to remove or designate a trustee or director is based on facts and circumstances. To illustrate the rules of this paragraph (b), if exempt organization A has the power to appoint at least 80 percent of the trustees of exempt organization B (which is the owner of the outstanding shares of corporation C, which is not an exempt organization) and to control at least 80 percent of the directors of exempt organization D, then, under this paragraph (b) and §1.414(b)-1, entities A, B, C, and D are treated as the same employer with respect to any plan maintained by A, B, C, or D for purposes of the sections referenced in section 414(b), ©, (m), (o), and (t).

[Below Ground]

Peter, I believe you were making your post as I was writing mine. You gave the entire Section from which I made my extraction. Anyway, do you have an opinion on family aggregation of directorships? In my OP, aggregation would create a controlled group for Firm C. My belief at this time is "no".

[Peter Gulia]

I suspect there are more questions than is wise to discuss on a bulletin board. If you'd like to talk through the legal and practical issues for some free help between practitioners, just give me a call.

[Below Ground]

Just as followup on this thread, Peter and I did have a very pleasant discussion on this topic. Since the "devil is in the details" I can't really say much more for this thread, except that it does make sense to sometimes take a topic further. This situation if NOT as simplistic as it should be. I recommend that should you find yourself faced with a similar issue, give Peter Gulia a call. His contact info is under his signature.