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Who's the Employer?

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

Attribution Through Children's Trust

(Posted April 15, 2002)

Question 156: A company is 1% owned by a father and 99% owned by an irrevocable family trust. All of the trust's beneficiaries are children under the age of 21. Do attribution rules apply, making the father the owner of 100% of the company?

Answer: You didn't mention which set of attribution rules you were concerned about. Are you trying to determine if a controlled group or an affiliated service group exists? Did you want to find out if Dad's a highly compensated employee? Do you want to know if this company might be related to another for purposes of finding a management function group?

In this case, the omission doesn't matter. Yes, he is deemed to own 100% of the stock. Under each of the three sets of attribution rules, there is attribution from a trust to its beneficiaries. Thus, it is as though the children owned the stock outright.

Moreover, under each of the three sets of attribution rules, there is always attribution from a child under age 21 to a parent. Under each of the three sets of rules, while double family attribution is not allowed, attribution from trust to child to parent is permitted.

Thus, the father is deemed to own 100% of the stock for purposes of the controlled group rules, the affiliated service group/key employee/HCE rules, and the related party rules. These rules are discussed in Chapters 7, 14, and 17 of my book, Who's the Employer.

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.