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Attribution Arising From a Lien?
(Posted June 27, 2001)
Question 114: A father owns 100% of 3 companies that constitute a controlled group. He has 2 adult sons who together own more than 80% of 2 other companies they recently purchased; that's a separate controlled group. The father does not own any interest in the 2 new companies but he co-signed with the sons for their purchase. Does the fact that the father co-signed attribute ownership to him, such that all 5 companies now are part of the same controlled group? Would it depend on what the purchase agreement says?
Answer: You sound like you have a good familiarity with the rules. You are correct that there is no attribution between the father and the adult sons in this situation, absent something unusual in the purchase agreement for the 2 new companies. And it would have to be pretty unusual.
Factors that give rise to attribution under the controlled group rules are (i) family status (which is not applicable here because of the age of the sons), (ii) pass-through from corporations, partnerships, trust, etc., and (iii) options. The only factor that might be applicable here is an option. I would be surprised to learn that the father had an outright option to buy the stock.
Of course, the purchase agreement might provide that if the father has to make payments, then he will acquire a lien or even could acquire the stock. However, even if he has the ability to acquire the stock if he has to make payments, that is not, in my view, an "option." Why? Because he can't acquire anything until the sons default. If the default took place, and if all the other conditions were met, then, depending on the terms of the agreement, an option might exist.
Another possibility is that he might be given the right to vote the stock until the debt is paid. If so, he is deemed under the regulations to own the voting power. (See Q 6:15 of my book, Who's the Employer?.)
The bottom line is that you need to check the underlying documents, but I suspect that the father will not be treated as owning the stock.
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