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Corp and LLCs as Controlled Group
(Posted October 29, 1999)
Question 30: Mary, Jan, Jack and Jill are equal stockholders of an S Corporation. Mary, Jan, Jack and Jill are also equal members in MJJJ LLC. MJJJ LLC owns a 52% interest in Sub LLC, with the remaining 48% owned by 8 unrelated individuals. Do all of these companies make up a controlled group?
Answer: Let's first get a technicality out of the way. The term "controlled group" only refers to groups of corporations. Most LLC's do not elect to be taxed as corporations and hence are treated as partnerships. Groups with entities other than corporations are groups of trades or businesses under common control under IRC 414(c), rather than controlled groups under 414(b).
Are the S Corp and the parent LLC under common control? Yes. There are 4 shareholders who have both effective control (> 50% ownership considering each person's ownership where it is least) and a controlling interest (at least 80% ownership).
Are the parent and sub LLCs under common control? For most purposes, no. To have a parent subsidiary group, the parent must own at least 80% of the subsidiary. That is not the case here. However, IRC 415(h) tells us that for 415 purposes ONLY the two are considered a parent subsidiary group.
Are the three entities under common control? For most purposes, no. However, for 415 purposes, we have already established that the two LLC's are under common control. The parent LLC is also under common control with the corporation. That means that for 415 purposes the three entities constitute a single combined group under common control, with a single 415 limit.
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