Controlled Groups

The controlled group definition is found in section 414(b) & (c) of the Internal Revenue Code. Section 414(b) covers controlled groups consisting of corporations and defines a controlled group as a combination of two or more corporations that are under common control within the meaning of section 1563(a).

A control group relationship may exist if the businesses have one of the following relationships:

• Parent-Subsidiary
• Brother-Sister
• Combination of the above

Parent Subsidiary Group

A parent-subsidiary controlled group exists when one or more chains of corporations are connected through stock ownership with a common parent corporation; and

• 80 percent of the stock of each corporation, (except the common parent) is owned by one or more corporations in the group; and
• The parent corporation must own 80 percent of at least one other corporation.

Sections 1563(a) and 414(b) and (c).

Brother-Sister Group

A brother-sister controlled group is a group of two or more corporations, in which five or fewer common owners (a common owner must be an individual, a trust, or an estate) own directly or indirectly a controlling interest of each group and have effective control.

• Controlling interest – 1.414(c)-2(b)(2) – generally means 80 percent or more of the stock of each corporation (but only if such common owner owns stock in each corporation); and
• Effective control – 1.414(c)-2(c)(2) – generally more than 50 percent of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation.

Combined Group

A combined group consists of three or more organizations that are organized as follows:

• Each organization is a member of either a parent-subsidiary or brother-sister group; and
• At least one corporation is the common parent of a parent-subsidiary; and is also a member of a brother-sister group.

If you are uncertain whether your company is part of a controlled group, please check with your attorney or tax accountant.