The rules for parent-subsidiary controlled group and a brother-sister controlled group of corporations, or a combined group of corporations under Code Section 414(b) are provided below:
Parent-Subsidiary Controlled Group of Corporations
Under Code Section 414(b), a parent-subsidiary controlled group is one or more chains of corporations connected through stock ownership with a common parent if:
- 80% or more of the total combined voting power of all classes of stock entitled to vote (or 80% or more of the total value of all shares of all classes of stock) of each of the corporations, except the common parent corporation, is owned, directly or indirectly, by one or more of the other corporations; and
- The common parent corporation owns, directly or indirectly, 80% or more of the total combined voting power of all classes of stock entitled to vote (or 80% or more of the total value of shares of all classes of stock) of at least one of the other corporations.
The parent may have multiple subsidiaries, and may have multiple tiers of subsidiaries.
A Brother-Sister Controlled Group of Corporations
Under Code Section 414(b), a brother-sister controlled group of corporations is a group where five or fewer persons who are individuals, estates, or trusts own, directly or indirectly, stock possessing-
- 80% or more of the total combined voting power of all classes of stock entitled to vote (or 80% or more of the total value of all shares of all classes of stock) of each corporation; and
- More than 50% of the total combined voting power of all classes of stock entitled to vote (or more than 50% of the total value of all shares of all classes of stock) of each corporation, taking into account the stock ownership of each owner only to the extent that the level of ownership interest is identical with respect to each corporation.
The five or fewer individuals, estates, or trusts with respect to whom stock ownership is considered for purposes of determining whether the 80% requirement is satisfied must be the same individuals, estates, or trusts whose stock ownership is considered for purposes of the greater-than-50% requirement. Thus, the brother-sister controlled group should be of concern where five or fewer shareholders (who are individuals, estates, or trusts)-(a) own at least 80% of each corporation and (b) own more than 50% of all corporations taking into account identical ownership interests with respect to each corporation.
Combined Group of Corporations
Under Code Section 414(b), a controlled group of corporations also may comprise an overlapping parent-subsidiary controlled group and a brother-sister controlled group of corporations. This occurs if:
- Each corporation is a member of either a parent-subsidiary controlled group or a brother-sister controlled group; and
- At least one of the corporations is the common parent of the parent-subsidiary controlled group and also is a member of a brother-sister controlled group.
