MBT Unitary Business Group Query: What If An Entity Belongs To Two Different Unitary Business Groups
I received the following question from Mike Drake at Maner, Costerisan & Ellis in Lansing:
If a member can fit into two (2) different Unitary Business Groups, what standard do you apply to determine into which group the member is to be included? Is it based on Flow of value? If flow of value is not the determining factors in which group a member is to be included, what other factors do you consider?
Under the SBT you had rules under IRC 414/1563 to give guidance as to what group a member would be in. One of the factors, if everything else is equal, is that the taxpayer can elect which group the member is to be included.
Back to our 318 question here is the direct ownership
A B C
Mom 100% 0 0
Son 0 100% 50%
Son’s wife 0 0 50%
Under spousal attribution you would have the following
A B C
Mom 100% 0 0
Son 0 100% 100%
Son’s wife 0 100% 100%
Under family attribution you would have the following
A B C
Mom 100% 100% 50%
Son 0 100% 100%
Son’s wife 0 0% 50%
Does B belong with A or does B belong with C?
Any help would be appreciated.
Maybe spousal attribution [318((a)(1)(A)(i)] would take president over family attribution [318(a)(1)(A)(ii)] because it appears first in the law. Or, maybe the Regs in Section 1.318-1(b)(2) would block the double inclusion and include the ownership in the manner in which it will impute to the person concerned the largest total stock ownership.
I submit that there is only one UBG. First, 318(a)(1) attributes Mom and Wife's ownership of A and C, respectively, to Son. Then 318(a)(5)(A) states Son is "actual" owner for then applying 318(a)(1)(C). 318(a)(1)(C) gives control of A and C to B. B is the designated member assuming there is a flow of value. 318(a)(5)(B) prohibits Mom from being attributed to C and Wife from being attributed to A. It seems that B is the only entity that could satisfy control over two entities.
If A and C both satisfy control of B, it would seem that flow of value is the next test to determine UBG. It seems that if both A and C had flow of value with B, then I suggest that A, B and C are a UBG and B would be the designated member.
If it is plausible that both A and C satisfy control and flow of value with B, but A, B and C, collectively, should not be a UBG, then whichever combination of UBG and stand alone entity generates the least amount of MBT liability would be the next factor I suggest considering.
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Marcus,
Thank you for the indepth analysis of the issue. My gut feeling from the start was that A, B and C were a "unitary business group". However, you made the case by wading through the various provisions of Section 318.
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