Controlled Group

Definition

A Controlled Group refers to a collection of corporations that are related by ownership to the extent that their stock is predominantly held by a small number of individuals, typically five or fewer. These groups, which include configurations like brother-sister groups, parent-subsidiary groups, combined groups, and certain insurance companies, must adhere to special rules when computing various tax obligations including income tax, the alternative minimum tax (AMT) exemption, the accumulated earnings credit, and the environmental tax exemption.

Examples

1. Brother-Sister Group: Corporation A and Corporation B, where five or fewer individuals own at least 80% of the stock in each corporation.

2. Parent-Subsidiary Group: Corporation A owns 80% or more of the stock in Corporation B, creating a parent-subsidiary relationship.

3. Combined Group: A collection of corporations that meet both the parent-subsidiary and brother-sister relationship tests.

4. Insurance Companies: Certain insurance companies owning sufficient shares in various corporations to be considered part of a controlled group.

Frequently Asked Questions

What criteria define a controlled group?

• Answer: A controlled group is defined based on specific ownership criteria which include at least 80% stock ownership by five or fewer individuals among multiple corporations.

How does being part of a controlled group affect tax computations?

• Answer: Corporations in a controlled group must follow special tax rules that affect the computation of income tax, AMT exemption, and other tax-related items.

What is the “80% test”?

• Answer: The 80% test means that five or fewer individuals must own at least 80% of stock in each corporation in the controlled group.

Can a single corporation be part of multiple controlled groups?

• Answer: Yes, depending on the ownership structure, a single corporation can be part of multiple controlled groups.

Are there any advantages to being in a controlled group?

• Answer: Although controlled groups have special tax rules, they may benefit from potential tax deferrals or planning opportunities through strategic group tax calculations.

What is the impact of the accumulated earnings credit in a controlled group?

• Answer: The accumulated earnings credit is shared among the corporations in the controlled group, which can affect the tax deferral strategies of the group.

How does a controlled group affect the AMT exemption?

• Answer: The AMT exemption must be calculated on a combined group basis rather than individually for each corporation within the controlled group.

Are environmental tax exemptions shared across a controlled group?

• Answer: Yes, specific environmental tax exemptions must be computed with consideration to the entire controlled group.

How do controlled groups comply with tax regulations?

• Answer: Controlled groups need to ensure they accurately combine tax attributes and follow IRS regulations specific to such corporate relationships.

Are there penalties for not complying with controlled group tax rules?

• Answer: Yes, failing to comply with specified rules can result in penalties, additional tax liabilities, and potential audits.

Related Terms

• Brother-Sister Group: A type of controlled group where five or fewer individuals own at least 80% of stock in two or more corporations.

• Parent-Subsidiary Group: A group where one corporation (the parent) owns 80% or more of another corporation (the subsidiary).

• Alternative Minimum Tax (AMT): A tax mechanism to ensure that corporations and individuals pay a minimum level of tax.

• Accumulated Earnings Credit: A tax-related credit allowed for reasonable accumulation of earnings in a controlled group.

• Environmental Tax Exemption: Tax exemptions related to environmental considerations, computed for controlled groups.

Online References

1. IRS Controlled Groups
2. Investopedia - Controlled Group
3. Tax Advisor - Controlled Group Rules

Suggested Books for Further Studies

1. “Federal Income Taxation of Corporations and Shareholders” by B. Bittker and J. Eustice

   • A comprehensive guide on tax rules affecting corporations and shareholders, including controlled groups.

2. “Corporate Taxation: Examples & Explanations” by C. Pratt and T. Kulsrud

   • This book provides practical examples and explanations for understanding corporate taxation regulations, including those for controlled groups.

3. “U.S. Master Tax Guide” by CCH Tax Law Editors

   • An annually updated book that provides in-depth coverage of tax laws, including regulations for controlled groups.

Fundamentals of Controlled Groups: Business Law Basics Quiz

Thank you for learning about controlled groups and tackling these introductory quiz questions on business law basics!