Beneficial Interest / Controlled Groups

I've never heard of beneficial interests before, but I am now learning that the shares of a surgical center owned by a hospital are held for the "beneficial interest" of the surgeons who perform their surgeries there.  Now, its an affiliated service group either way (i'm omitting details, take my word for it!), but I am curious as to how the controlled group rules are impacted by beneficial ownership.  

I'm reading it's the same concept as Merrill Lynch holding 10MM shares of Facebook in it's own name for the beneficial interest of its brokerage account customers.  (i.e., the account holder owns the securities, albeit indirectly).

Any insight appreciated!

for cg purposes ...

interests held by estates are deemed owned prorata by beneficiaries.  Stock ownership is considered at trust level for bro-sis controlled groups so beneficial interest makes no difference.

Generically, beneficial interests are everywhere.  They are distinct from, but go hand in hand with legal interests.  The legal owner is the owner that has title to property and must be the one that executes buying and selling.  If the legal owner is subject to terms that make the ownership for the benefit of another, the other is a beneficial owner and the legal owner has a fiduciary duty to the beneficial owner.  What the benefit and the scope of the fiduciary duty is determined by doe instrument, such as a trust agreement/instrument, or common law (unwritten or implied).  For example, someone might have a beneficial interest in interest (but not principal) of a bond, or might have a beneficial interest in both the principal and interest.  The bond would be owned by the legal owner, subject to the rights of the beneficial owner(s).  A beneficial interest also falls under the term “indirect ownership.”

This is a very broad and complex subject of property and contract law.  Beware acting or advising on your own conclusions based on labels.

So it is possible to not be the legal owner, to have only a beneficial interest, and still be treated as a direct owner for controlled group rules?

Believe me I will leave it to the lawyers but I'd like to know more about this topic so I have a better understanding of what I don't know! 

15 minutes ago, PensionPro said:

for cg purposes ...

interests held by estates are deemed owned prorata by beneficiaries.  Stock ownership is considered at trust level for bro-sis controlled groups so beneficial interest makes no difference.

I just saw this now.  I appreciate the attempt but I'm not sure what it means.  If the hospital owns shares for the beneficial interest of a surgeon, is the surgeon considered an owner for CG purposes.  I gather the answer is "it depends on the legal documents" which is what QDRO was essentially saying.

56 minutes ago, austin3515 said:

I've never heard of beneficial interests before, but I am now learning that the shares of a surgical center owned by a hospital are held for the "beneficial interest" of the surgeons who perform their surgeries there.  Now, its an affiliated service group either way (i'm omitting details, take my word for it!), but I am curious as to how the controlled group rules are impacted by beneficial ownership.  

I'm reading it's the same concept as Merrill Lynch holding 10MM shares of Facebook in it's own name for the beneficial interest of its brokerage account customers.  (i.e., the account holder owns the securities, albeit indirectly).

Any insight appreciated!

Some info:

Q 17:8 Are the attribution rules of Code §267(c) used elsewhere in pension law?   

Yes. The prohibited transaction rules of Code §4975 use the §267(c) attribution rules as their own, although §4975 substitutes its own definition of family. [Code §4975(e)(4); Q 17:4] Even though §267(c) is limited to attribution of corporate stock, §4975 uses its principles for attribution of ownership of partnership interests and beneficial interests in trusts as well. [Code §4975(e)(5)]

And this:

Q 9:13 How is stock treated which is held by a qualified trust?   

Retirement trusts frequently hold stock in corporations as an investment vehicle. For ordinary income tax purposes, such as determining corporate tax rates, stock held by a trust exempt under Code §§401 and 501 is not attributed to the beneficiaries. [Code §1563(e)(3)(C)]

However, this rule does not apply for qualified plan purposes. [Code §414(b)] Stock held by a retirement trust is attributed to the participants and other beneficiaries of that trust to determine if two corporations are a controlled group under Code §414(b). [BL 22; BL 53; BL 159]

Example 9.13.1 Jill owns 100% of the stock of J, Inc. J sponsors a profit-sharing plan, and Jill is the only participant in the plan. The plan owns all of the shares of Corporations A and B. A and B are in a brother-sister controlled group because the trust owns 100% of each of them. For ordinary income tax purposes, that is the end of the matter. However, for qualified plan purposes, Jill is deemed to own all of the stock held by the trust. Therefore, A and B are in a brother-sister controlled group with J, she being the owner or deemed owner of all three.

As stock held by a qualified trust is attributed to the beneficiaries of the trust, the normal trust attribution rules apply. [Q 9:12] The following examples illustrate these rules:

Example 9.13.2 John and Mary are the only two participants in the ABC Retirement Trust. John’s beneficial interest is 60% of the trust and Mary’s is 40%. Absent specific allocations, John is deemed to own 60% of any stock held in the trust.

Example 9.13.3 Continuing Example 9.13.2, Mary has 100 shares of XYZ company stock allocated to her account, which can be used only for her. She is deemed to own all 100 shares of that stock and John none.

Sometimes, stock held by a retirement trust may be disregarded altogether if doing so would create a controlled group. [Q 8:23 and Q 8:26]

Ahh, now it's getting interesting.  So you're saying the hospital is the trustee of a trust that owns the surgical center shares for the benefit of the surgeons?What I mean of course is, that is what you presume is going on here?  A trust/beneficiary connection?

Who the heck knows what it means?  It could be some sort of special ownership relationship required by the regulations applicable to surgical centers in the state in question.  It may not be a trust.  

2 hours ago, austin3515 said:

Ahh, now it's getting interesting.  So you're saying the hospital is the trustee of a trust that owns the surgical center shares for the benefit of the surgeons?What I mean of course is, that is what you presume is going on here?  A trust/beneficiary connection?

Maybe and maybe not.  This is where you ask the doc for a copy of the documents that show him as an owner.  Also, a copy of the tax return for the entity.  Once I have those, I can figure out exactly what is going on.  Alternatively, a conversation with counsel for the hospital would probably also shed light.

The cites from Derrin Watson's book deal with attribution of beneficial interest in a trust or an estate but not in a corporation as far as I can tell.  Not sure of the facts of your specific situation but you may benefit from reading PLR 201451009.  In the PLR the IRS permits non-physician-owned corporations and physician-owned PCs to be treated as members of an affiliated group and file a consolidated federal income tax return based on beneficial rather than legal ownership. It does not deal directly with controlled groups or affiliated service groups but the IRS cites Rev. Rul. 84-79, 1984-1 CB 190  wherein the IRS discussed relevant authority and reasoned that beneficial ownership of property whereby the beneficial owner exercises dominion over the property satisfies the direct ownership requirement of Section 1504(a) of the Code. The ultimate analysis is better left to legal counsel.  Hope this helps.