New firm, same ee's as old firm - controlled group issue?

Owner of a professional services firm retires, or almost.  All other employees start up a new firm in the same location, same office and start up a new plan.

Turns out former owner/retiree is maintaining his old firm for part time work and still comes to the office.  Admin staff still provides services, though currently not clear how much work or if they are getting paid.

While reviewing Startup Costs Tax Credit, made me wonder if there is some kind of controlled group issue here, which may affect eligibility for the Tax Credit, as well as nondiscrimination testing, at least.

Internal Revenue Code of 1986 (26 U.S.C.) § 45E(e)(1) provides: “All persons treated as a single employer under subsection (a) or (b) of section 52, or subsection (m) or (o) of section 414, shall be treated as one person.  All eligible employer plans shall be treated as 1 eligible employer plan.”  http://uscode.house.gov/view.xhtml?req=(title:26%20section:45E%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section45E)&f=treesort&edition=prelim&num=0&jumpTo=true

§ 52 Special rules

(a)   Controlled group of corporations

For purposes of this subpart, all employees of all corporations which are members of the same controlled group of corporations shall be treated as employed by a single employer.  In any such case, the credit (if any) determined under section 51(a) with respect to each such member shall be its proportionate share of the wages giving rise to such credit.  For purposes of this subsection, the term “controlled group of corporations” has the meaning given to such term by section 1563(a), except that—

(1)   “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a)(1), and

(2)   the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563.

(b)   Employees of partnerships, proprietorships, etc., which are under common control

For purposes of this subpart, under regulations prescribed by the Secretary—

(1)   all employees of trades or business (whether or not incorporated) which are under common control shall be treated as employed by a single employer, and

(2)   the credit (if any) determined under section 51(a) with respect to each trade or business shall be its proportionate share of the wages giving rise to such credit.

The regulations prescribed under this subsection shall be based on principles similar to the principles which apply in the case of subsection (a).

http://uscode.house.gov/view.xhtml?req=(title:26%20section:52%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section52)&f=treesort&edition=prelim&num=0&jumpTo=true

You’ll need the details on the partnership interests (or member interests, or shares) in the “old” firm, and in the “new” firm

20 hours ago, TPApril said:

Admin staff still provides services, though currently not clear ... if they are getting paid.

Call me a cynic, but this might be the most important issue.

There is zero shared ownership between old and new firm. Rather than buying out the prior owner, they just started their own company, working at same location as old firm, with prior owner retaining his personal office.

David - you're a cynic.  Initial communication indicates they have not been paid by the other firm, having been formally terminated, and then hired by new firm a day apart.  But I'm going to ask for clarification of that.  Not sure what it would mean if they are providing unpaid services, but I'm thinking we wouldn't have to worry about that.

Nonetheless, not sure if nondiscrimination testing needs to include both sides.

Interesting - the new firm and one employee are treated as subcontractors to the prior firm.