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Who's the Employer?

Question 54: I'm confused as to whether or not the mother-in-law of the owner of an S-corp is considered to be a key employee or a highly compensated employee by virtue of (double) family attribution. She is on the payroll and active in the business. She also earns considerably less than $80,000. Answer: Although it doesn't fit directly in our focus on employee and employer aggregation, this question does rely on the attribution rules of Code section 318, the rules that govern affiliated service groups. There is no attribution from someone to his or her mother-in-law. In fact, there is never double family attribution under any of the three sets of attribution rules applicable to qualified plans. For example, IRC 318(a)(5)(B) says "Stock constructively owned by an individual by reason of the application of paragraph (1) [the family attribution rules] shall not be considered as owned by him for purposes of again applying paragraph (1) in order to make another the constructive owner of such stock." This means that although there's attribution between husband and wife and between parent and child (regardless of the age of the child) for section 318 purposes, there cannot be attribution from the husband to the wife to the wife's mother. However, suppose for a moment that the stock is community property, even though it's in the husband's name. The wife's one-half interest in the stock is owned directly by her and is deemed to be owned by her mother. Thus, mother could be a 5% owner. Alternatively, suppose the stock is in the name of the Jones Revocable Family Trust, with the husband and wife as the grantors of the trust. Suppose that the trust provides that when husband dies, the wife or whomever she has designated gets his stock. The wife is deemed to own some of the stock, not because of the family attribution rules, but rather because she is a beneficiary of the trust. You would compute her interest via actuarial tables in the IRC regulations (20.2031-7). Under these regulations, if the husband is 43 and the current interest rate is 6%, the value of the remainder interest is 18.4%. So, the wife would be deemed to own 18.4% through trust attribution and 100% through spousal attribution. The 18.4% from trust attribution could be further attributed to the wife's mother, through parent-child attribution. The section 318 attribution rules are discussed at length in Chapter 14 of my book, Who's the Employer?.

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