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Marital Attribution Strikes Again!
(Posted September 26, 2001)
Question 131: Corporation A is taxed as a "C" corporation. It's owned 50/50 by husband and wife. Now they want to start Corporation B as a management company, to be taxed as an "S" corporation. Are the two corporations a controlled group if Corporation B is also owned 50/50? What if Corporation B were owned 90/10?
Answer: For controlled group purposes, there is always attribution between husband and wife unless either (1) they are divorced (final or interlocutory) or separated; or (2) the noninvolvement exception applies. One of the conditions of the noninvolvement exception is that the one spouse doesn't own any of the stock directly, which isn't the case on the facts you cite.
Hence, regardless of the ratios, husband will be deemed to own wife's stock, and vice versa, in both corporations. Therefore, one person is deemed to own 100% of both corporations. That's a controlled group!
In fact, it will be a controlled group, assuming the parties are happily married, unless one spouse owns 100% of one business and the other owns 100% of the other business. (Even then, a controlled group may exist. See Q&A 111 for more details.)
But take attribution out of the picture just for a moment. Suppose this couple is living together without benefit of clergy, and they have no children. In that case, there would be no attribution. If each owns 50% of each business, then you have two owners owning identical interests in two corporations, a very clear controlled group. Shifting it to 90/10 doesn't help. Their effective control ownership would be 60%, which is more than the required "more than 50%" standard, and their controlling interest is still 100%.
If they want to break up the controlled group, they need to bring in an outside shareholder for one of the two businesses who would own more than 20% of the business. Even then, they need to beware of the attribution and exclusion rules.
These issues are discussed in more detail in Chapters 6 and 7 of my book, Who's the Employer?.
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