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Who's the Employer?

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

Controlled Groups Without Employees

(Posted August 29, 2002)

Question 227: Corp A is 100% owned by a husband and wife. Corp B also is 100% owned by them. Company C is owned 95% by the husband and wife and 5% by their daughter. Only Corp A has employees. I would classify this as a controlled group, but does the fact that B and C have no employees (they're essentially shell companies) matter?

Answer: If a tree falls in a forest and nobody is around to hear it, does it make a sound? Of course it does.

If you have three corporations which, after attribution, are all owned 100% by the same person, do you have a controlled group? Of course you do. Controlled group status has nothing whatsoever to do with the number of employees that are in a company. It is only concerned with who owns the stock.

Ah, but what does it matter if the tree makes a sound when nobody is around to hear it? Or rather, what does it matter if a corporation is a member of a controlled group if its sister corporations don't have any employees? Actually, it matters in several ways.

A corporation that is a member of a controlled group cannot file Form 5500-EZ. It must file Form 5500, regardless of the amount of assets in the plan. The rule (from the instructions to the Form 5500) has no exception for controlled corporations that have no employees.

Naturally, if any of the owners ever decides to take a salary from B and C, that would be included in his or her total compensation for purposes of Corp A's plan.

For ordinary income tax purposes, the fact the three corporations are in a controlled group means a single set of tax rates is shared between them.

For more on controlled group determinations, see chapter 6 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.