Who's the Employer?

Answers are provided by S. Derrin Watson

Attribution Mechanics

(Posted April 27, 2005)

Question 275: In Q&A 236, you stated that the attribution rules do not require that a single share of stock be treated as 2 shares. Under IRC 1563, if I have a husband and wife who each own 5% of a corporation, can I assume that neither owns more than 5%, or must I assume that one owns more than 5%? Are the rules the same under IRC 318? (Must I assume that at least one is a key and an HCE, and can I choose which one?)
Answer: Let me clarify things.

Suppose Husband owns 4% of C and Wife owns 4% of C. Together they own 8% of C. For controlled group purposes, you can treat Husband as owning the entire 8%, Wife as owning the entire 8%, Husband as owning 4% and Wife 4%, or any other combination, assuming the parties aren't divorced or legally separated. As between any pair of corporations, the ownership that will create a controlled group is the ownership you use.

Some people suggest, for controlled group purposes, Husband would own 8%, Wife would own 8%, and together they would own 16%. They are wrong. That's the "heresy" I address in Q&A 236.

How about HCEs? Here, we don't care about total interests of groups of individuals. All we care about is if this specific person owns more than 5%. And you use whatever attribution will make that person a 5%+ shareholder. So, assuming Husband and Wife are both employees, Husband owns 8% and Wife owns 8% for HCE purposes. Both are HCEs.

But let's change the facts. Suppose C is a potential B-Org and we want to know if Husband and Wife, who are HCEs of a potential First Service Organization, own at least 10% of C. The answer? No. The reasoning is the same as with a controlled group. Either one of them can own 8%, but when you put the two together, you don't have more than 8%. The thing that distinguishes this from the HCE question isn't the attribution system (1563 vs. 318). The key factor is that HCE status is determined on a person-by-person basis, while B-Org and controlled group status is based on ownership interests held by groups of people, interests that must be added together.

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