From the just released Version 3.00 of my data-book: Implementing PPACA, A Strategic Guide for Businesses -- Send a request (with your address if I dont already have it), and Ill send you a copy. Sorry, the download function from our website doesnt quite work yet. Controlling Company Size under PPACA --- An Approach that Probably Wont Work Splitting a company with more than 50 FTE employees (enough to trigger the Employer Mandate) into two or more companies that are not subject to the Mandate (or forming multiple new entities for the same reason) sounds like a possibility… Until you try to reconcile the owner’s ego and tax reduction strategies with reality. If the current owners are Control Freaks or if tax avoidance is one of your goals, splitting the company to avoid PPACAs Employer Mandate is probably not an option! Many small companies are closely held. Company owners are rightly proud of what they have accomplished – building a company that employs 75 (or so) people is not easy or common. If the owner has “done it all on their own,” they are even more likely to think “no one else can run the company like I can.” Hence, giving up control of even a portion of “their” company can be traumatic. Therein lies the rub: For many tax purposes, two or more entities under common ownership or control are treated as if they are one company. Specifically, all of the PPACA counting algorithms invoke this principle of common control. Naïve split-up or spin-off strategies are very likely to result in formation of a “brother-sister controlled group,” which IRC §1563 {and IRS Regulations §1.1563(a)(3)} define as: (3) Brother-sister controlled group— (i) Definition. The term brother-sister controlled group means two or more corporations if the same five or fewer persons who are individuals, estates, or trusts own (directly and with the application of the rules contained in § 1.1563-3(b)) stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of each corporation, taking into account the stock ownership of each such person only to the extent such stock ownership is identical with respect to each such corporation. Similar provisions create “controlled groups” comprised of other entities. The definition has two obvious corollaries: 1. A split-off or spin-off creates two Employer Mandate immune entities only if a. The “controlling shareholder groups” for both of the entities consist of six or more people, and/or b. At least one person in each entitys controlling shareholder group has no common interest in the other entities. 2. A split-off or spin-off creates two Employer Mandate immune entities only if the “company father” relinquishes a controlling interest in both post-split entities. As we mentioned before, this can be a bitter pill for the founding father to swallow. But wait, there’s more! The rules contained in § 1.1563-3(b) “attribute” one family member’s (and some “outsider’s”) interests in the entity to (effectively) all other family members. Thus, • each family member is deemed to own all of the interests owned by other members of the family (or by certain outsiders), and • each family member may be deemed to own a controlling interest – even if they do not have control by themselves. This frames a third corollary that hard core company founders usually find even harder to swallow: 3. A split-off or spin-off creates two Employer Mandate immune entities only if some or all of the controlling shareholder group members of each company are unrelated and are not affiliated with another entity in which members of the controlling shareholder group hold interests. We call these unrelated people “strangers” where I come from! But still, the IRC inflicts one final indignity: The split-up is unlikely to qualify for tax free status under IRC §§ 355, 368. • Only current owners in the pre-split company have even a ghost of a chance to qualify for tax free spin-off, split-up status under IRC §§ 355, 368 (ironically, if they qualify they defeat the mandate avoidance purpose of the split-up). • All of the unrelated new shareholders in the split-up companies will owe tax on receipt of their interest (the transfer will be considered compensatory). Tax will be based on the FMV of the interest received. • If a family member receives an interest, there may be gift/estate tax consequences. o At bare minimum, a gift tax return will probably be required. o For extremely high value transfers, some or all of the Estate/Gift tax exemption will be consumed, and Gift/Estate tax may be payable. (Gift Tax is the donor’s responsibility – so the founder ends up paying for the privilege of losing control over their company.) With all that on the table; split-ups and spin-offs of existing companies are probably not an ideal (or even practical) Mandate avoidance strategy. Start-up “splits” show more promise, but must be carefully managed.
Posted on: Fri, 08 Nov 2013 14:58:37 +0000
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