Are these related entities?

Husband owns a business that is predominantly non-service (warehouse, sales, capital intensive inventory) but does provide some related service such as installation of products.  The business has over 200 employees.  Wife has been on payroll but will be terminated in 2022.  Wife owns a service business with no employees.  Husband’s business enters into a contract with wife’s business starting in 2023 which generates the majority of wife’s business income.  (This, of course, is subject to the accountant determining that there is a legitimate business reason to pay such amount to wife’s business.)  Wife intends to set up a pension plan for her business starting in 2023 with her as the only participant.

Effective 2023 wife will not be an employee or involved in management of husband’s business, and husband will not be an employee or involved in management of wife’s business; therefore I believe there is no controlled group.

I don't think there's an affiliated service group -- husband's business cannot be the FSO as it doesn't seem to be a service organization; and if wife's business is the FSO I don't see how husband's business could be an A org or B org.

Any contrary opinions?

Thanks.

Will wife's business have service recipients beyond husband's business?

33 minutes ago, Peter Gulia said:

Will wife's business have service recipients beyond husband's business?

Yes, but they will represent a small percentage of business income.

Isn't this the type of situation where we need to ask if there are any minor children? And can't remember if it mattered if they are in a community property state. 

If/when new pension legislation gets signed that could all be moot anyway, so she may be good to go in 2023 regardless.

7 hours ago, CuseFan said:

Isn't this the type of situation where we need to ask if there are any minor children? And can't remember if it mattered if they are in a community property state. 

If/when new pension legislation gets signed that could all be moot anyway, so she may be good to go in 2023 regardless.

I should have mentioned earlier that no minor children and not a community property state.

On 8/26/2022 at 11:48 AM, cathyw said:

I don't think there's an affiliated service group -- husband's business cannot be the FSO as it doesn't seem to be a service organization; and if wife's business is the FSO I don't see how husband's business could be an A org or B org.

Depending on the type of services provided by W's company, couldn't this be a management services group under 414(m)(5). The statutory provision is in effect, even though regs were withdrawn. Need to consider, I think.

On 8/26/2022 at 12:48 PM, cathyw said:

Husband’s business enters into a contract with wife’s business starting in 2023 which generates the majority of wife’s business income. 

I think there is a good chance that this activity would invalidate the spousal non-involvement exception, and there would be a controlled group.

8 hours ago, C. B. Zeller said:

I think there is a good chance that this activity would invalidate the spousal non-involvement exception, and there would be a controlled group.

C.B. Zeller, because this would be "participation in the management" of H's business by W's business?

Yes, but moreso that H is participating in the management of W's business. I think the fact that they have to have an accountant determine whether it is even reasonable for H's business to pay W's businesses is an indication that the two businesses may not be actually be managed independently. If the accountant determines it is not reasonable, then W's business would be providing services for free, which most rational business owners would not do, in the absence of some outside factors.