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1 Corporation Plus 1 Individual Shareholder Plus 1 Subsidiary Can Equal 1 Controlled Group
(Posted September 8, 2007)
Question 292: Mr. X owns 100% of Corporation A. Corporation A owns 70% of Corporation B; Mr. X owns the remaining 30%. Is this a controlled group?
As I discuss this, I'll refer to the 4th edition of my book, Who's the Employer?. (Subscribers can click to view online the text of these references.)
There are two alternate ways of looking at the situation. Under either view, A and B are in a controlled group.
Parent-subsidiary. Let's look first at a parent-subsidiary group. A owns 70% of B. In and of itself, that is not enough to create a controlled group (except for purposes of 415); you need 80%. [Q 8:3.] For purposes of the controlled group rules, the corporation is not deemed to own the stock held by its sole shareholder (although a corporation is deemed to own stock held by its shareholder for purposes of the HCE or affiliated service group rules [Q 14:14]). However, if a corporation already holds more than 50% of a subsidiary, [Q 8:24], then the stock in that subsidiary held by the parent's principal shareholder is excluded. [Q 8:23.] Once you exclude the stock held by X, A owns 100% of the stock of B, and so A and B are in a parent-subsidiary controlled group.
Brother-sister. Now, let's examine things from the standpoint of a brother-sister group. X is deemed to own everything A owns. [Q 9:14.] Therefore, X is deemed to own 100% of B. So, X owns 100% of A and is deemed to own 100% of B. As such, A and B are in a brother-sister controlled group.
Any way you slice it, they're aggregated.
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