Would you agree that a control group exists under the following assumptions?

Owner A Owner B
Company X 100% 0%
Company Y 60% 40%

Furthermore, neither company provides any type of service for each other. Owner A became a 60% owner in company Y in October 1997.

Nope. You say it is not an affiliated service group, so there's one down. As one Corporation doesn't own the other it is not a Parent-Subsidiary, so two down. That leaves brother-sister in which the same 5 or fewer people need to control both. Mr. B has no interest in company X, so this requirement is not met. They are free to go their own ways, absent of course some bizarre fact or circumstance. Hope this helps.

Thanks dbvail. I appreciate the input.

For what purpose are you looking at this group re its status as a controlled group? If you are looking at it for purposes of pension plans, the controlled group ownership threshold is 50%, not 80%.

Therefore, based on your example, since one individual owns more than 50% of both businesses, they are a controlled group for pension purposes and thus considered a single employer for coverage, non-discrimination testing, etc.

I agree with dbvail's posting below.

The common ownership figure is lowered from 80% to > 50% for the purposes of 415 limit testing only. For all other compliance testing purposes, they are treated as separate controlled groups.

How about this scenario?

Company A
Father and Mother 63%
Son 1 18.5%
Son 2 18.5%

Company B
Son 1 100%

Both sons are over age 21. Father and Mother (spouses) don't meet any exception that would allow them to be disaggregated for ownership.

I say no brother - sister exists and no controlled group exists. Did I miss something on this one?

Nope. Section 1563 rules apply so the kids stand independent and alone. Absent any affiliated services issues these are separate entities for qualified plan purposes. At least as I see it.

LORRAINE, THESE TWO COMPANIES MAINTAIN TWO SEPARATE 401(K) PLANS. I AM LOOKING AT THIS CONTROLLED GROUP QUESTION FOR (NON-DISCRIMINATION)TESTING ISSUES.

I too agree with dbvail's analysis.

Has anyone worked with brother-sister control groups within an S-corp with voting and nonvoting stock? I am trying to figure out which stock ownership I should be using under 414©.

The nonvoting stock is not preferred so it meets the definition of stock. However, the regs speak of 80% of voting stock or 80% of the value of all classes of stock. The same goes for the 50% "effective" control rule. Does that mean I have to go through the analysis considering just the voting stock and then run through the same analysis again using the combined stock. Can I treat the value of voting stock and nonvoting stock equally? There are eight different corporations involved and doing stock appraisals is probably not going to seem reasonable to the client.

Kurt