The groups of corporations under common control and related by a specific percentage of stock ownership are treated as controlled groups for income tax purposes. There are several types of controlled groups, and the stock ownership requirements differ for each.

A parent-subsidiary controlled group is one or more chains of corporations that are connected with a common parent corporation through stock ownership and satisfy the following two stock ownership requirements:

  1. The common parent corporation must own at least 80 percent of the voting power or at least 80 percent of the value of all classes of stock of at least one other corporation in the group.
  1. One or more corporations in the group must own at least 80 percent of the voting power or 80 percent of the value of all classes of stock of every corporation in the group.

A brother-sister controlled group is a group of two or more corporations with respect to which five or fewer persons own, directly or indirectly, more than 50 percent of the voting power or more than 50 percent of the value of all classes of stock of each corporation in the group.

A combined group is any group of three or more corporations. Each corporation is a member of either a parent-subsidiary controlled group or a brother-sister controlled group. One of the corporations is both the parent-subsidiary control group and a member of the brother-sister controlled group.

A group of certain types of insurance companies may also be considered a controlled group.

It is generally disadvantageous for a corporation to be considered a member of a controlled group because there are limitations on certain types of tax benefits that the members may utilize. For example, members of a controlled group are limited to one minimum accumulated earnings credit. Also, controlled group members are treated as a single taxpayer in determining the tax liability limitation for purposes of the general business credit and the annual dollar limitation for the election’s purposes to expense depreciable business assets.

A controlled group must generally allocate the specified tax benefit items equally among themselves unless they adopt an apportionment plan that distributes such items unequally. Each member must consent to adopt the tax year’s apportionment plan by filing Schedule O (Form 1120), Consent Plan, and Apportionment Schedule for a Controlled Group, with its return for the tax year. This form must be filed even if no particular apportionment plan is adopted.

If you would like to discuss the rules that apply to controlled groups, please do not hesitate to call.