Case of the Week: Ownership and Spousal Attribution

The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and executive compensation arrangements.

A recent call with an advisor in Michigan is representative of a common inquiry involving ownership for controlled group purposes. The advisor asked:

When determining whether a controlled group exists, what are the ownership rules for businesses owned by a married couple?”

Highlights of Discussion

A controlled group of businesses is a group of related businesses that have a particular level of common ownership [see IRC §§ 414(b) and (c)]. If a controlled group exists, the employees of those businesses are considered together for certain qualified plan requirements.

When determining ownership, generally the ownership interests of one spouse are attributed to the other. There are some exceptions to this rule, however [see IRC § 1563(e)(5) and Treas. Reg. § 1.414(c)-4(b)(5)].

Ownership is not attributed to a spouse if:

  • the individuals are legally separated pursuant to a divorce decree or a decree of separate maintenance;
  • there is no direct ownership or participation in the management of the company at any time during the year;
  • the spouse is not a member of the board of directors, a fiduciary, or an employee of the company at any time during the year;
  • no more than 50% of business gross income is from passive investments;
  • stock is not subject to conditions that restrict a spouse’s right to dispose of the stock and that run in favor of the individual or his children under age 21 [see 1.414(c)-3(d)(6)(i)].

Example

Rachel and Ryan are married. Rachel is a doctor who owns 100% of her medical practice. Ryan is also a doctor and owns 50% of a separate medical practice (the other 50% is owned by an unrelated doctor).

Rachel is not an employee or direct owner in Ryan’s practice and less than 50% of the gross income for the practice is from passive investments. Rachel, however, is in charge of significant management activities for her husband’s practice.

Ryan does not directly own an interest or participate in Rachel’s practice and less than 50% of the gross income from Rachel’s practice is from passive investments. Consequently, Rachel is attributed the 50% interest that Ryan owns in her practice since she participates in Ryan’s practice.

Ryan is not attributed any ownership interest in Rachel’s practice.

Conclusion

In most cases, a spouse will be considered as owning the other spouse’s share in a business through attribution rules. There are exceptions, however, that should be carefully considered and documented.

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“Case of the Week” is the winner of an APEX Award for Publication Excellence for 2017.

Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.

©2017, Retirement Learning Center, LLC. Used with permission.

Add Your Comments

3 Comments

  1. url url'>Bernard Forseter
    Posted December 13, 2017 at 1:10 pm | Permalink

    Very good explanation. Please post similar information about corporations that are owned by a Father and his adult children. More than one example would be very helpful.

  2. Brenda
    Posted December 13, 2017 at 4:00 pm | Permalink

    I think you forgot the “bambino rule” – if they have children under the age of 21, even if divorced or never married, they are a controlled group though the children. This information is from S. Derrin Watson, J.D., APM who is the author of “Who’s the Employer”. He has done several sessions on this topic, including the Relius Sunguard Advanced Pension Conferences.

  3. Terry
    Posted December 15, 2017 at 2:12 pm | Permalink

    I agree with Brenda. I asked Derrin again at his ASPPA session at DC on affiliated service groups and he still gives the same answer. He calls such the “blessed event.” “A baby changes everything” as the song goes. Even though we may think this is a crazy rule, especially with two medical practices where only doctors can own stock, it’s out there. His comment his “Who wants to be the first test case?”

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