Family and ownership attribution

[Pammie57]

My client has three owners, and one of them who owns more than 5% has a son-in-law working there.  I don't think he (SIL) is attributed the  FIL"s ownership, but wasn't 100% sure.  The daughter is not an employee.  

[Mike Preston]

"IL"'s (brother, sister, mother and father) are never attributed ownership except in some weird and kinky re-marriage scenarios with minor children. They are frequently NHCE's that the owner(s) wish to favor, providing a kick-start to the non-discrimination testing.

[Earl]

For Father-In-Law & Mother-In-Law in community property state I thought

1. Owner's ownership is considered actually owned by spouse (not attributed)
2. Spouse's ownership would be attributed to her Mother &/or Father (one step)
3. So Father-In-Law/Mother-In-Law of owner is an HCE & Key EE (regardless of whether owner's spouse is EE or not.)

Is that not true?

Thank you

[Larry Starr]

Yes, in community property states, you have to be careful to make sure you understand how the ownership is considered in a community property situation.  Look at this case:

Q 8:15 How is stock ownership determined for the controlled group rules? 

Ownership of stock is determined under relevant state law. Even though ERISA and the Internal Revenue Code are federal statutes, there are several instances in which they interact with state law. For example, state law determines when a husband and wife are married or divorced; the state may or may not recognize common law marriage. [Q 9:21]

Similarly, state law determines the actual ownership of stock. Code §1563 adds to that actual ownership a set of deemed ownership rules [Chapter 9], but it is up to state law to determine what is owned in the first place. The following example is from a case that demonstrates this point:

Example 8.15.1 The Aero Industrial case involved a mother who owned ⅔ of one business and 100% of another. The remaining ⅓ was owned by her son-in-law. There is no attribution between the son-in-law and the mother. Since the son-in-law owned no stock of one corporation, Vogel Fertilizer excludes him from consideration. The mother owned less than 80% of one of the corporations and so, at first glance, it appeared there was not a controlled group.

However, the son-in-law received his stock as compensation for services rendered to the company. Under state law, his stock was community property, even though it was in his name alone. Hence, under state law, the mother owned 67%, her daughter owned 16%, and the son-in-law owned 16%. The daughter’s shares were attributed to her mother. [Q 9:17] The mother was deemed to own 83% of the company, thus creating a controlled group. [Aero Industrial Co., Inc. v Commissioner T.C. Memo. 1980-116 (1980)]