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Parent child attribution rules
(Posted March 11, 1999)
Question 15: If a father owns 100% of one corporation and the son owns 100% of another corporation, are they considered a controlled group? I think the answer is yes from IRC 318, but someone else thought that because the son is over 21 that the answer is no.
Answer: If you had money riding on this one, pay up!
One of the most confusing parts of the controlled group, ASG rules is that we have three different sets of attribution rules to work with. You must apply the proper set of attribution rules to a particular form of entity aggregation.
Traditional affiliated service groups are subject to the attribution rules of section 318. Under those rules, as you correctly note, there is absolute attribution between parent and child, regardless of the age of the child. The 318 rules also govern determination of whether someone is a 5% owner and a key employee.
Controlled groups, on the other hand (as well as groups of trades or businesses under common control) are governed by the attribution rules of IRC 1563. Under those rules:
A. There is absolute attribution between parent and child if the child is under age 21.
B. If the child is 21 or older, then:
1. The parent is deemed to own the child's shares only if the parent already owns (or is deemed to own) more than 50% of the company.
2. The child is deemed to own the parent's shares only if the child already owns (or is deemed to own) more than 50% of the company.
So, suppose I own 75% of company A and my adult son owns the remaining 25%. I am deemed to own my son's stock for controlled group purposes (because I already have more than 50%), but he is not deemed to own my stock (because he does not already have a majority of the company). For affiliated service group purposes, we are both deemed to own 100% of the other's business.
Going to the facts of your case, since neither owns any interest in the other's business, neither is deemed to own the other's stock. So there are no shareholders in common between the two businesses and a controlled group does not exist.
Just to make things a little more confusing, there is a third set of attribution rules that are used in dealing with leased employees under 414(n) and management function groups under 414(m)(5). These are the related party rules under IRC 267. Incidentally, those handle parent child attribution in the same manner as IRC 318.
Because these rules are so important, I discuss each set in a separate chapter of my book Who's the Employer?
Controlled group attribution: Chapter 7
Affiliated service group attribution: Chapter 14
Related party rules: Chapter 17
Q 14:16 of the book has a table contrasting controlled group attribution and ASG attribution.
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