The Need for Employers to Get "Control" of IRS Controlled Group Rules

Traditional Controlled Groups The traditional IRS controlled group rules set forth the guidelines for aggregating entities as a single employer in the following forms: (i) A parent-subsidiary controlled group;6 (ii) A brother-sister controlled group;7 or (iii) A combined group of organizations.8 A parent-subsidiary controlled group, generally, is one or more chains of organizations where the common parent organizations owns at least 80% of the total combined voting power of all classes of stock entitled to vote, or at least 80% of the value of all classes of stock of each organization.9 In the case of an organization which is a partnership, ownership of at least 80% of the profits interest or capital interest of such partnership.11' A brother-sister controlled group, generally, is two or more organizations where: (1) five or fewer persons who are individuals, estates, or trusts own at least 80% of the total combined voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock11 of each organizations, and (2) the same five or fewer persons, taking into account ownership only to the extent that it is identical with respect to each entity, own more than 50% of the total voting power of all classes of stock entitled to vote, or total value of shares of all classes of stock12 of each organization.13 A combined group of organizations is three or more organizations, each of which is a member of either a parent-subsidiary or a brother-sister controlled group, and at least one of which is both the common parent of a parent-subsidiary controlled group and a member of a brother-sister controlled group.14 While these categories of controlled groups may seem straight forward, determining each person's ownership percentage in an organization can be complex. Based on these attribution rules, an individual will be deemed to own indirectly all interests that are attributed to him or her.15 These attribution rules include: * A spouse is generally considered to own the organization interests of his/her spouse, although certain exceptions apply.16 * A parent is generally considered to own the organization interests of his/her children under the age of 21.17 * Generally, individual owners or partners of corporations or partnerships are considered to own the interests held by the corporations or partnerships, provided the owner or partner has at least a 5 percent ownership stake in the corporation or partnership.18 * If a person ha