Husband/Wife companies & controlled Group

[Cynchbeast]

We have a client (CA corporation) who's employees are only his wife and himself.  They are in real estate investment.

Wife owns 100% of a second company who's employees do work for the husband's company.

They were told by their accountant that in this way the employees wouldn't have to be covered by the plan.

Is this a controlled group or not?

I believe CA is community property state and therefore each would be attributed direct ownership of the other's company.  And would this also be considered an affiliated service group?

 

Second related question:  We have another set of clients where the husband is 100% owner of a construction company and the wife is 100% owner of a property management company.  The two companies are totally separate and unrelated to each other.  Do we have a controlled group>

[Larry Starr]

11 hours ago, Cynchbeast said:

We have a client (CA corporation) who's employees are only his wife and himself.  They are in real estate investment.  Do they receive W-2s?  Most distributions from real estate investments are not paid out as W-2 earnings to the owners but as non-earned income.  

Wife owns 100% of a second company who's employees do work for the husband's company.  You didn't say it, but is the first company owned 100% by the husband? We'll call that Company A. Is it a C or an S corp? We'll call the 100% wife owned entity Company B. And I have no idea what you mean when you say the employees of Company B work for Company A. HUH? That certainly needs more detailed explanation.  

They were told by their accountant that in this way the employees wouldn't have to be covered by the plan. What plan?  You haven't told us anything about a plan existing anywhere! Anyway... another accountant giving bad legal advice? I'm shocked; SHOCKED! ?

Is this a controlled group or not? IS.  Attribution between husband and wife is 100%; and these two do not qualify for what is called the non-involvement exemption since both of them are employed (you tell us) by the husband's company.

I believe CA is community property state and therefore each would be attributed direct ownership of the other's company.  Yes, CA is a community property state; so what? Community property doesn't even enter into it. Attribution between husband and wife is absolute in all states, so they are a controlled group.

And would this also be considered an affiliated service group?  Well, you certainly didn't give us any of the needed information to determine if it's an ASG, but we really don't need that since they are a controlled group right from the start.

Second related question:  We have another set of clients where the husband is 100% owner of a construction company and the wife is 100% owner of a property management company.  The two companies are totally separate and unrelated to each other.  Do we have a controlled group?  Are they in Calif?  Then because of community property, you do have a controlled group.  And even if you weren't in a community property state, if they have any minor children they are a controlled group also because they can't qualify for the non-involvement exception. And if they weren't in CA and didn't have any children, you haven't given us all the info needed to determine if the non-involvement exception would apply.

 

See my comments in the body of the posting above.  Is there anything I got wrong?

[Mike Preston]

35 minutes ago, Larry Starr said:

See my comments in the body of the posting above.  Is there anything I got wrong?

Wrong is a strong term.  Regarding the non-involvement exception there are some attorneys out here who believe it is possible as long as the separate companies are separate property.  Possible.  Unlikely, but possible.

[Luke Bailey]

19 hours ago, Mike Preston said:

Regarding the non-involvement exception there are some attorneys out here who believe it is possible as long as the separate companies are separate property.  Possible.  Unlikely, but possible.

Mike, why do you say "unlikely?" You would have to follow all of the rules of 1563(e)(5) carefully, and in a community property state you would need a separate property agreement.

[Mike Preston]

Because in the absence of a pre-nup (and said absence is by far the most common circumstance no matter how often you read in People magazine that the opposite is true) I've never seen a separate property agreement.

[Luke Bailey]

44 minutes ago, Mike Preston said:

Because in the absence of a pre-nup (and said absence is by far the most common circumstance no matter how often you read in People magazine that the opposite is true) I've never seen a separate property agreement.

Well, you could do it, Mike, but it could be a big problem if one business has greater value. Would put the marriage to the test, that's for sure. I've never seen it in practice, although I'm sure some have used, e.g. two equally successful physicians who want different retirement benefits.