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Who's the Employer?

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

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.

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.