Two Section 415 limits in unrelated companies.

[Guest]

A and B each own 50% of medical practice C Corp. B purchases 100% of medical practice S-Corp. A and B are not related, and there is no sharing of support staff or other services between C Corp and S Corp. Clearly, we do not have a brother-sister controlled group. Legally, I conclude that B gets two section 415 limits, or $70,000 if his comp in each corp can support it. Am I missing anything? It seems too good to be true.

[MGB]

Although now repealed, this is specifically why the government, during the 80s, added the 15% excess benefit excise tax (payments in retirement exceeding $150,000 per year). Because they couldn't stop you up front through existing 415 rules, they decided to catch you on the back side during payout.

Some doctors/dentists/etc., were playing musical chairs every Friday working for each others' practices without having any ownership interest. They would be able to get a full Section 415 benefit from each.

[Moe Howard]

The C-corp plan and the S-corp plan have to be aggregated under Code Sec 414(m) as a classic A-Org type Affiliated Service Organization. Under Code Section 414(m)(1), the employees of the two businesses are treated as employed by a single employer for mutiple purposes including compliance with the Code Sec 415 compensation limit. Therefore he WILL NOT be allowed two $35,000 (for a total $70,000) contributions. He will only be allowed one max $35,000.

[rcline46]

Moe, why do you get an ASG? If C corp does not do anything for S corp, and vice versa, then there is no service between the organizations. Now if B was actually Bcorp...

[R. Butler]

Although I agree with rcline46, that from the facts presented its not cocnlusive that there is an affiliated service group here, Moe Howard brings up an issue to be considered. There definitely is a possibility that an affiliated service group exists.

[Moe Howard]

rcline46: The C-corp does not have to do anything for the S-corp in order to force plan aggregation. The fact that B is 100% owner of the S-corp coupled by the fact that he performs substantial employee services for the C-corp (& owns at least 50% of the C-corp) ... is all it takes to force plan aggregation.

[Richard Anderson]

I agree with rcline46 and R. Butler. There is not sufficient information to determine if an ASG exists here.

An A-Org is a service organization that meets both of the following two requirements:

1. The A-Org is a shareholder or partner in the FSO.

2. The A-Org must either regularly perform services for the FSO (first service organization) or must be regularly associated with the FSO in performing services for third persons.

By attribution, the C-Corp owns 100% of the S-Corp and the S-Corp owns 50% of the C-Corp, so 1 above is met. But, 2 above must also be met.

[Guest]

The A-Org possibility occurred to me. But consider that when B is performing services for C-Corp, he is doing it as a shareholder/employee of C-Corp. When he is performing services for S-Corp, he is doing it a shareholder/employee of S-Corp. He is an employee of each. He is seeing C-Corp patients as an employee of C-Corp, not S-Corp, and vice versa. Technically, neither corp is performing services for the other. If S-Corp is the A-Org, it can be argued that it is not deriving any income from C-Corp. I don't follow the attribution issue here since neither corp has an ownership interest in the other. See 318(a)(2). I even considered a B-Org. See ex. 5, Reg.1.414(m)-2©(8). But again, none of the income of either corp is obtained by performing services for the other. Great discussion!

[R. Butler]

Thorton,

You seem to understnad the affiliated service group issue. I agree with you that the A-Org. must perform the services for the FSO. If you have determined that there is not an affiliated service group, then your initial conclusion is correct, the shareholder can hypothetically get 70,000.00. 415 limits, unlike the 402(g) limit, is imposed at the plan level.

[Guest]

Richard,

I see your attribution now - 318(a)(3). Yet, I still don't think that the second part of the test is met. This of course is a facts and circumstances test. Has anyone had any IRS challenges to similar arrangements? Would anyone request an IRS Determination Letter as whether an ASG exists? Thanks.

[Guest]

Another thought occurred to me. The controlled group rules use section 1563 rather section 318. Does 1563 have similar attribution between a corporation and a shareholder like 318(a)(3). If so, we still wouldn't have a controlled group here, but in other situations we might.

[Moe Howard]

The S-corp IS "regularly associated" with the FSO C-corp in providing services to third persons. The "third persons" are the patients of the C-corp. The event(s) of "regular association" between the two corporations is the simple fact that both corporations have a common employee that produces a substantial portion of each corporations' medical fees ... namely Doctor B. Assuming that Doctor B, in his individual capacity as an employee of the FSO C-corp employer, regurally performs substantial services for the FSO C-corp and assuming that he is not simply a passive investor in the FSO C-corp. That is more than sufficient association to satisfy the association requirement of Section 414(m).

Someone in an earlier message has already correctly stated that the S-corp is an owner in the FSO C-corp via Section 318(a)(3)© attribution.

So, aggregation of the two plans is required.

[Richard Anderson]

Thornton,

1563 does not require attribution from shareholder to corp.

[Guest]

Moe,

Your analysis is correct, but I don't believe that it is conclusive that an affiliated service group exists. "Regularly performs services" is a facts and circumstances test. Remember, S-Corp earns no income by B performing services for C-Corp. Both companies are separate entities with no shared employees. Since there is no attribution from shareholder to corp under 1563, a controlled group does not exist. Even if we assume that you are correct, has the "regularly performs services" test met? What is S-Corp's percentage of income earned by B performing services for the C-Corp? How many hours does B work for C-Corp vs S-Corp. Aren't these factors?

[R. Butler]

This my trouble with Moe's analysis, and it could be that I am missing something, Moe seems to be suggesting that because the doctor works for both practices that there is necessarily a "regular association". The S-corp is an entity on its own; it has always been my understanding that the A-org. (in this case the s-corp.) has to perform the services or associate itself with the FSO. If the medical practices do not treat the same patients, if the A-org. performs no services for the FSO, if there are no business referrals, then where is the "regular association"?

[Moe Howard]

R.Butler is correct. In fact everyone that posted a reply to this thread is correct ... except me. The requirement of "regularly performs services for the FSO or regularly associated with the FSO in providing services to third parties" requirement is NOT met simply because the doctor might be a major fee producing employee for both corporations. Sorry.

There is an old saying ..."opinions are personal but knowledge isn't". My previous replys to this thread were based on my opinion (not my knowledge). I now know the difference.

[Guest Thornton]

Moe,

Thanks for your "opinions". This has been one of the best and most useful exchanges I've had on these message boards! While you might not be "technically" correct, I think for practical purposes Doctor B is being very aggressive, informed him so. In addition, I don't believe he will earn enough in the separate practices to fund much over a single 415 limit anyway. But what an energizing discussion. Thanks to everyone who took part!