Subscribe Now!
Free Daily News, Jobs, Webcasts, Discussions
Post and Distribute
Your Jobs
ARPA Webcasts

Featured Jobs

Director of Finance

NYCDC of Carpenters Benefit Funds
(New York NY)

Defined Benefit Retirement Plan Administrator

Benefit Associates, Inc.
(Telecommute / Huntington Beach CA)

Benefit Associates, Inc. logo

Product Support Consultant part of Wolters Kluwer Legal & Regulatory
(Telecommute) part of Wolters Kluwer Legal & Regulatory logo

401(k) Consultant

TPS Group
(Telecommute / North Haven CT)

TPS Group logo

DC Administrator

(Telecommute / Phoenix AZ)

MGKS logo

DB Retirement Plan Administrator

The Nolan Company
(Telecommute / Overland Park KS)

The Nolan Company logo

Retirement Plan Administrator

Premier Plan Consultants
(Telecommute / San Diego CA)

Premier Plan Consultants logo

Manager, 5500 Team

401K Generation
(Altamonte Springs FL)

401K Generation logo

Director of 401(k) Implementation, Core

Human Interest
(Telecommute / Mill Valley CA)

Human Interest logo

Employee Benefits/Health and Welfare Attorney

Miller Johnson
(Telecommute / Grand Rapids MI / Kalamazoo MI / Detroit MI)

Miller Johnson logo

401(k) Implementation Manager

Human Interest
(Telecommute / San Francisco CA)

Human Interest logo

DB/DC Administrator

Primark Benefits
(Telecommute / Burlingame CA)

Primark Benefits logo

Retirement Plan Consultant / Relationship Manager

Associated Pension Consultants
(Chico CA / Sacramento CA)

Associated Pension Consultants logo

Defined Contribution Analyst

The Benefit Practice
(Stamford CT / Maitland FL)

The Benefit Practice logo

DC Retirement Plan Administrator

The Nolan Company
(Telecommute / Overland Park KS)

The Nolan Company logo

Free Newsletters

“BenefitsLink continues to be the most valuable resource we have at the firm.”

-- An attorney subscriber

Mobile App image LinkedIn icon
Twitter icon
Facebook icon

BenefitsLink > Q&A Columns >

Who's the Employer?

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

Controlled Groups in Marriages Continued

(Posted February 26, 1999)

Question 9: Your article in Q&A 1 about attribution from both husband and wife to their minor child comes as something of a shock. Could you please elaborate? Can parent-child attribution really cause businesses owned as separate property by the mother and father to be a controlled group?

Answer: Surprisingly, the answer is yes. Although it is counter-intuitive, using the strict language of the Code parent-child attribution can cause businesses owned separately by the parents to become a controlled group. Consider the following examples:

1. Childless Separate Property. John and Mary are a married couple living in New York. Each owns 100% of the stock of a medical corporation as his or her separate property. Neither has anything to do with the other's business, and each corporation makes all its income from the practice of medicine. They have no children. The marital exception to attribution (IRC 1563(e)(5)) applies. There is no aggregation between the businesses and they are not part of a controlled group.

2. The Blessed Event. Same facts as the previous example, except John and Mary have been blessed with a baby. The child is deemed to own 100% of John's corporation and 100% of Mary's corporation. Hence the two corporations are a brother-sister controlled group. This is not double family attribution. The stock of each corporation is attributed only once, from the parent to the child.

3. Divorce Follows. The facts in the prior example cause John and Mary so much difficulty that they get divorced. It does not solve their problem. Their businesses will still be aggregated until their youngest child is 21.

4. Nonmarital Union. Same facts as the prior example, except John and Mary were never married. Their child was the result of a night of passion after studying for exams while they were medical students. They went their separate ways after medical school, and their only contact now is child support checks. Since marital status does not affect attribution between parents and children, the two corporations will be part of a controlled group until the child reaches age 21.

Practitioners have noted that the foregoing, while logically valid, seems senseless and contrary to the intent to create a separate property spousal exemption. Unfortunately, the courts have held that where the statutory language is clear, legislative intent is irrelevant. The language is astonishingly clear in this case. The conclusions stated above are inescapable. The only reason this has not created more controlled groups is that the IRS has not aggressively pursued this issue.

It is important to remember that the controlled group rules are intended to be clear, bright line tests. There are few "facts and circumstances" elements to them. That means that there is a clear road for practitioners to follow. The price of clarity is that sometimes the road goes places you do not expect, and there are no convenient ways off the path. If there is to be a solution for this problem, it will probably have to come from Congress.

Some practitioners have taken heart in the fact that the IRS has not yet pursued this issue. The operative word in the foregoing sentence is "yet." Nobody wants their client to be the test case, especially if they have not informed the client of the potential risk involved.

The preceding is taken from Q 7:18 of my new book Who's the Employer?, along with my suggestion of statutory language to correct this issue.

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.

Copyright 1999-2017 S. Derrin Watson
Related links:

(restricted access)

(restricted access)

© 2021, Inc.