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Who's the Employer?

Question 23: John owns 70% of Corp A and 100% of Corp B. John's adult son, Sam, owns 8% of Corp A. John's former wife, Xena, owns 11% of Corp A. John's girlfriend, Lucy, with whom he currently lives without benefit of clergy, owns the remaining 11% of Corp A. Are the two corporations in a controlled group? Answer: I'm not certain. It depends on three points: 1. Under the law of the state where John and Lucy live, are they considered legally married under a common law marriage? 2. Do John and Lucy have any minor children? 3. Do John and Xena have any minor children? If the answer to any of these questions is yes, then the two corporations are in a controlled group. Let's understand why. John is deemed to own Sam's stock. John owns more than 50% of A, and hence is deemed to own all A shares held by his children. That gives him 78% of A, just 2% shy of the total needed to have a controlled group. There is no attribution between John and Xena. Divorce breaks all spousal attribution. In fact, an interlocutory decree of divorce (you're divorced but it won't be final for several months and so you can't remarry) is enough to break attribution between the spouses. If John and Lucy are married under the laws of their state, which can include common law marriage, then there would be stock attribution between them. John would be deemed to own Lucy's stock, giving him 89% of A, and a controlled group would exist. If John and Lucy have a minor child, Cathy, she would be deemed to own all of Johns stock in both A and B, and Lucy's stock in A. That would give her 81% in A, and all of B, a controlled group. (Incidentally, Cathy would not be deemed to own any stock from Sam [her half-brother] either directly from Sam or through attribution from John. There is no attribution between siblings, and no double family attribution.) If John and Xena have a minor child, the same analysis would apply. The marital or cohabitation status of the parents are irrelevant in evaluating parent-child attribution. The family attribution rules applicable to controlled groups are discussed at length at Q7:14-7:18 in my book Who's the Employer? Just as a reminder, these rules are different from the attribution rules for affiliated service groups and HCEs, where there is always attribution between parent and child and husband and wife, regardless of the age of the children. Thus, Sam would be deemed to own 89% of Corp A (his 8%, John's 70%, and Xena's 11%) for HCE purposes, even though he only owns his own 8% for controlled group purposes. For a comparison of the two sets of rules, see Q 14:16 of my book.

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