414 & Non-Voting Partnership Interests

Under 1563 and 414, brother-sister common control for corporations can be based on value or voting power. So five people owning all the voting stock of two corporations would create a brother-sister group regardless of the value of their shares relative to the overall value of either corporation. 

Under 1.414(c)-2(c)(2)(iii), effective control for a brother-sister group of partnerships is based solely on ownership of capital or profits interests. There is no separate reference to value or voting power, just ownership. 

Does this mean one individual could own the sole voting interests in two partnerships (but not sufficient economic ownership) yet not form a brother-sister group? This seems inconsistent. Or is there some implication that the ownership of capital/profits interests would be determined in part by reference to voting power?

Or am I missing something altogether?

Appreciate any insights.

I don’t know any answer to your questions, but consider this:

In that rule (including its six examples), all mentions of voting power refer to a corporation. Yet for other aspects, the rule carefully distinguishes how a concept applies regarding a corporation, a partnership, a sole proprietorship, and a trust or estate.

When the Treasury proposed the rule in 1975 (and proposed a related rule in 1983), adopted the rule in 1988, and revised it in 1994, that a partnership might involve management powers that could be described in ways similar to voting power regarding a corporation ought to have been known to the Treasury and IRS lawyers who worked on the rulemaking.

Thanks Peter. I agree the text of the regulations draws clear distinctions between the two. But it seems like an odd result, particularly in light of Section 414(c)'s requirement that the implementing regulations "shall be based on principles similar to" those under Section 1563 that apply to corporations. While of course "similar to" leaves room for differences, this distinction creates a pretty large gap between corporations and partnerships that, as far as I can tell, doesn't have any justification as a partnership can have voting and non-voting interests in the same way a corporation can. Interesting nonetheless.

EBECatty, all I can tell you is that I have had this come up several times and have always applied the regs as written (what else?). Only thing relevant is capital or profits. In most partnerships, of course, voting power is going to be in similar proportions to profits and loss, and capital and p&l will be congruent, but not always. You can have a situation where losses are allocated disproportionately to capital, and then there is a make-up, so one partner's share of losses can be very large, but the losses reduce their relative ownership of capital. And then once profits start, it flips, so the partnership can flip in and out of being a member of different controlled groups. Can be significant for DB plan controlled group liability. But that's what the reg says. Years ago I had a case involving a large preferred partnership interest held by a financial backer that had no voting power. The regs exclude nonvoting preferred stock, but say nothing about excluding nonvoting preferred partnership interests. If memory serves me correctly I found a bankruptcy case in the 5th Circuit that held that nonvoting preferred counted.