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Controlled Groups

Per IRC Section 414, a controlled group is any two or more corporations connected through stock ownership in any of the following ways:

Parent-subsidiary group

  • 80% of stock of each (subsidiary) corporation is owned by another member of the group
  • Parent corporation must own 80% of the stock of at least one of the other members of the group
  • The rules are subject to the stock attribution rules under Internal Revenue Code Section 318

Brother-sister group

  • The same five or fewer individuals own at least 80% of the stock of the corporations
  • “Individual” includes ownership by an estate or trust
  • “Ownership” includes having a controlling interest and effective control of the corporations
  • The rules are subject to the stock attribution rules under Internal Revenue Code Section 318

Combined group

  • Combination of a Parent-subsidiary and a Brother-sister group

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IRC Section 414(b) and (c) requires that all employees of commonly controlled corporations or trades or businesses be treated as employees of a single corporation or trade or business. Due to abuse of these rules, the IRS enacted IRC Section 414(m) which covers Affiliated Service Groups.

Who is part of a controlled group?

To determine whether you are part of a controlled group, you must consider stock attribution rules. The purpose of the stock attribution rules is to attribute shares, or interest in a company held by certain family members, to the person in question and determine whether that person is part of a controlled group.

Pursuant to IRC Section 318, an individual shall be considered as owning the stock, owned directly or indirectly, by or for:

(i) his/her spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance)

(ii) his/her children, grandchildren, parents

Companies in a controlled group can be treated as separate companies

A company can request to be treated as a Separate Line of Business under IRC Section 414(r) . The following are limitations for these requests:

  • Must have a valid business purpose
  • Must have at least 50 employees within each line of business
  • Restrictions on HCE ratios in each separate line of business
  • Must notify IRS to request their approval

See Can I Have a solo 401(k) if I also have employees for more information.

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