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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Multiple Family Attribution

(Posted December 11, 2002)

Question 242: S-Corp A is a consulting business owned 100% by wife. S-Corp B is a construction company owned as follows: Husband 55%, Husband's Dad 15%, Husband and Wife's 30 year old Son 10%, and two unrelated individuals 20%. Is this a controlled group? Suppose A is a legitimate consulting corporation but that typically 90% of its revenues result from services performed for B. Does that change your opinion?

Answer: I can't be certain whether it's a controlled group because I'm not certain about attribution between Husband and Wife. Let's run through some things. (All references are to the third edition of Who's the Employer and are available online to subscribers to the web edition.)

Husband is deemed to own 80% of B because he is deemed to own the stock held by his son and his dad. (Q 7:18.) So the question is whether Husband is deemed to own Wife's stock in A. Assuming they are happily married, this would turn on the non-involvement exception. (Q 7:17.)

Unless I divorce my wife or we become legally separated, I will be deemed to own any stock owned by my wife unless the stock is of a corporation that meets all four of the following conditions:

I do not own any stock in that corporation directly, including via operation of community property laws.
I am not a director or employee and I do not participate in management of the corporation at any time during the year.
Not more than 50% of the corporation’s gross income is derived from royalties, rents, dividends, interest, and annuities.
The stock is not subject to restrictions limiting my wife’s right to dispose of the stock which run in my favor or in favor of my children under age 21.

Assuming all four of those conditions are met, then there is no attribution from my wife to me, or from Wife to Husband in your situation.

Notice it does not really matter whether Husband's stock in B is attributed to Wife. Suppose it is; she would be deemed to own his 55% and her son's 10%, but there would be no attribution from Husband's Dad to Wife. That would be prohibited double family attribution. (Q 7:03.) Similarly, the presence of a child under age 21 would not affect things, because that child would not be deemed to own the stock held by his brother. (Q 7:19.)

Would the source of revenues affect my answer? No. Controlled group status is based solely on ownership. Facts and circumstances issues, such as the type of business or the provision of services, are irrelevant. (Q 6:13.)

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.