Controlled Group

[Belgarath]

Suppose you have corporation A, where the stock is 100% owned by Mr. Big. It manufactures fishhooks for vegetarians.

Mr. Little, who is the Controller of Corporation A, owns 100% of the stock of Corporation B. It manufactures very large frozen drink glasses for TPA's.

These are not in any way service organizations, (even though manufacturing very large frozen drink glasses for TPA's is a valuable service in my book) or related in any manner whatsoever, so there is no ASG issue.

Mr. Little has an option to buy 100% of the stock of Corporation A, if the stock price reaches $100.00 per share. Currently it is at $10.00 per share.

Due to option attribution, Mr. Little is considered as owning 100% of both corporations, so there is a controlled group. (discussion of what really constitutes an "option" is scarce, but there are a couple of old Revenue Rulings - 89-64 and 68-801)

So, finally, here's my question - just looking for opinions. If Mr. Little applies for a Private Letter Ruling, arguing that the ability to ever exercise the "option" is vanishingly small for the foreseeable future, and that he otherwise has no control, so that this ownership situation should NOT be considered a controlled group, do you have any guess or opinion on the likelihood of the success of that argument?

My guess, and obviously it is a guess only, is that it would be unsuccessful. Just trying to think outside the box.

Thoughts?

[RatherBeGolfing]

I agree with your guess. Little has constructive ownership through the option, so you have your controlled group. You can restrict an option to price, and all you need for constructive ownership is the option, there does not have to be any type of intent to actually exercise it. Following that logic, the probability of Little ever having the ability to exercise the option is is irrelevant for constructive ownership.

J

[John Feldt ERPA CPC QPA]

He only has the option to buy once it reaches $100 per share, not before then? Does that mean he cannot exercise the right at this time? If so, I am not sure you have an attribution. I think that occurs once the option-holder has an unrestricted option to buy.

Or, are you saying he currently has an unrestricted option to buy it all at $100 per share?

[Belgarath]

Ah, great point! And I don't know the answer. But that makes sense. I hadn't really considered that angle. This is, at this point anyway, a truly hypothetical situation, but because we are looking at a client with a lot of family relationships and ownership transfers (the details of which are almost completely unknown at this point) I wanted to be prepared for possible option attribution.

Hopefully there will be no options and this will all be moot. Or as Tom would say (for those of you who have been following the humor column) MOOOOOOOOOOT.

Thanks for your input.

[John Feldt ERPA CPC QPA]

Also note that Derrin discusses this in questions 9:4 through 9:9 in Who's the Employer, 6th edition. You may want to look at 9:8 in particular where they tried to make a controlled group by using options but set such a high price that the government ignored the option.