Multiple Entities

[ericleve]

I have a prospect who I am trying to convert to a client, but he has a system of two business entities and I don't know if it is proper or not.

He owns 100% of a restaurant and does business as a corporation. He also has another corporation owned 50% by him and 50% by his wife. The second corp is described as "managing the advertising and administrative functions" of the restaurant.

Here's where my question comes in - it looks like he set up this second corporation so he could give himself and his spouse (the only employees of this corporation) bigger and better fringe benefits and not discriminate against the employees of the other corp.

Of course that is not the only reason he set this up but it seems to be a pretty big benefit. Is there something wrong with this picture or is this okay?

[Burke]

Well, I would ask a bunch of questions. Is he paying a pretty substantial amount for "administration" to this second corporation? Is it reasonable? Does he take a salary from corp #1? Do both of them take salaries from corp #2? Does he have records of time actually spent by both in actively running corp #2. You could probably think of some others.

[Snaggletooth]

Probably Legal

Eric Leve, this may be not morally upstanding, but there is a monumental host of devices such as this to allow persons to "cherry pick" and avoid discrimination problems.

And if you think people go out of their way to create such devices, you should see what is done by the medical insurance industry. They have all sorts of devices, policy churning, and legislation written by the industry itself to essentially cover people between 20-50, and then legally bail out when groups have people over 50. Many people don't like the socialist agenda of "universal coverage" but I'm here to tell you that is the ONLY way it's going to stop.

Very much off-topic for a tax board, so I'll shut up and get back to the original question.

As a tax practitioner, it shouldn't matter whether discrimination-avoidance is the purpose or not. If something about this violates the law, I don't think it is tax law that is violated. There may be something that is not in accordance with §125 or §105, but I believe that would be the problem of the plan administrator. Of course, if the deduction is disallowed, it would be your responsibility to follow accordingly.

[JohnH]

You may also need to look at the "controlled group" rules as well, especially if they are "C" corps. There may be implications regarding how the tax brackets can be allocated.

[veritas]

Puleeeze

[QUOTE=Snaggletooth;64962
And if you think people go out of their way to create such devices, you should see what is done by the medical insurance industry. They have all sorts of devices, policy churning, and legislation written by the industry itself to essentially cover people between 20-50, and then legally bail out when groups have people over 50. Many people don't like the socialist agenda of "universal coverage" but I'm here to tell you that is the ONLY way it's going to stop.

.[/QUOTE]

It's all the evil insuance companies?

How about the states stopping competition and loading up policies with coverages many don't want and don't need.

How about young people who would rather spend money on iphones with text messaging and internet access but can't buy an insurance policy for a hundred bucks a month?

I could go on but you get the idea.

[JoshinNC]

Well said

It's all the evil insuance companies?

How about the states stopping competition and loading up policies with coverages many don't want and don't need.

How about young people who would rather spend money on iphones with text messaging and internet access but can't buy an insurance policy for a hundred bucks a month?

I could go on but you get the idea.

my elegant Western companion

[JohnH]

I agree - well said.

[Snaggletooth]

More than you think...

It's all the evil insuance companies?

Veritas - my esteemed colleague - I was going to let this go, since it is not a tax topic, but you seem to be developing a following, and I'll respond one more time (only) just for the sake of additional reasoning and not to be quarrelsome.

It's never "all" of any industry, as each industry comprising our economy is pushing and shoving to position itself to enjoy the maximum benefit. However, in any typical state, the strongest lobbies are from banking and insurance. I would be hard pressed to think of a state where this is not true.

Many times these two industries whine and complain about state regulations to arouse public emphathy, but when you look behind the scenes you find out that they have worked in concert with state commissions to write the very regulations they publicly criticize. If you are in a state which dictate certain groups must be covered it is almost assured that the insurance companies were in compliance from the outset, perhaps to justify higher premiums.

This is perhaps more true with health insurance when the federal government is considered. Popular bills such as COBRA and HIPAA are written so politicians can take credit with the public, but the fine print assures that health insurers can still dictate their own practices to ultimately uninsure targeted groups. "Spreading the risk" is spread over relatively healthy working people ages 20-50. I could write for days about the various devices they have to maintain this, but it's time to let this go and return the forum to tax topics.

[JohnH]

Controlled Group

Taxpayer and his mother are 50-50 shareholders in Corp A (a c-corp).
Taxpayer and his spouse are both employees of Corp A.

Taxpayer's spouse is also a 50-50 shareholder in corp B (also a c-corp).
The other shareholder in corp B is not related to taxpayer, spouse, or mother.
Taxpayer is not involved in the activities of Corp B.

Corp A and Corp B are in totally different lines of business and do not conduct business with one another.

Is there any way that this arrangement comprises a brother-sister controlled group requiring the allocation of the corp tax brackets? I don't think so, but right now my mind is mush.