TITLE 26 - US CODE - CHAPTER 6 - CONSOLIDATED RETURNS

Subchapter A - Returns and Payment of Tax

26 USC 1501 - Privilege to file consolidated returns

An affiliated group of corporations shall, subject to the provisions of this chapter, have the privilege of making a consolidated return with respect to the income tax imposed by chapter 1 for the taxable year in lieu of separate returns. The making of a consolidated return shall be upon the condition that all corporations which at any time during the taxable year have been members of the affiliated group consent to all the consolidated return regulations prescribed under section 1502 prior to the last day prescribed by law for the filing of such return. The making of a consolidated return shall be considered as such consent. In the case of a corporation which is a member of the affiliated group for a fractional part of the year, the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group.

26 USC 1502 - Regulations

The Secretary shall prescribe such regulations as he may deem necessary in order that the tax liability of any affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be returned, determined, computed, assessed, collected, and adjusted, in such manner as clearly to reflect the income-tax liability and the various factors necessary for the determination of such liability, and in order to prevent avoidance of such tax liability. In carrying out the preceding sentence, the Secretary may prescribe rules that are different from the provisions of chapter 1 that would apply if such corporations filed separate returns.

26 USC 1503 - Computation and payment of tax

(a) [General rule] 1 
In any case in which a consolidated return is made or is required to be made, the tax shall be determined, computed, assessed, collected, and adjusted in accordance with the regulations under section 1502 prescribed before the last day prescribed by law for the filing of such return.
[(b) Repealed. Pub. L. 94–455, title X, § 1052(c)(5), Oct. 4, 1976, 90 Stat. 1648] 
(c) Special rule for application of certain losses against income of insurance companies taxed under section 801 

(1) In general 
If an election under section 1504 (c)(2) is in effect for the taxable year and the consolidated taxable income of the members of the group not taxed under section 801 results in a consolidated net operating loss for such taxable year, then under regulations prescribed by the Secretary, the amount of such loss which cannot be absorbed in the applicable carry-back periods against the taxable income of such members not taxed under section 801 shall be taken into account in determining the consolidated taxable income of the affiliated group for such taxable year to the extent of 35 percent of such loss or 35 percent of the taxable income of the members taxed under section 801, whichever is less. The unused portion of such loss shall be available as a carryover, subject to the same limitations (applicable to the sum of the loss for the carryover year and the loss (or losses) carried over to such year), in applicable carryover years.
(2) Losses of recent nonlife affiliates 
Notwithstanding the provisions of paragraph (1), a net operating loss for a taxable year of a member of the group not taxed under section 801 shall not be taken into account in determining the taxable income of a member taxed under section 801 (either for the taxable year or as a carryover or carryback) if such taxable year precedes the sixth taxable year such members have been members of the same affiliated group (determined without regard to section 1504 (b)(2)).
(d) Dual consolidated loss 

(1) In general 
The dual consolidated loss for any taxable year of any corporation shall not be allowed to reduce the taxable income of any other member of the affiliated group for the taxable year or any other taxable year.
(2) Dual consolidated loss 
For purposes of this section
(A) In general 
Except as provided in subparagraph (B), the term dual consolidated loss means any net operating loss of a domestic corporation which is subject to an income tax of a foreign country on its income without regard to whether such income is from sources in or outside of such foreign country, or is subject to such a tax on a residence basis.
(B) Special rule where loss not used under foreign law 
To the extent provided in regulations, the term dual consolidated loss shall not include any loss which, under the foreign income tax law, does not offset the income of any foreign corporation.
(3) Treatment of losses of separate business units 
To the extent provided in regulations, any loss of a separate unit of a domestic corporation shall be subject to the limitations of this subsection in the same manner as if such unit were a wholly owned subsidiary of such corporation.
(4) Income on assets acquired after the loss 
The Secretary shall prescribe such regulations as may be necessary or appropriate to prevent the avoidance of the purposes of this subsection by contributing assets to the corporation with the dual consolidated loss after such loss was sustained.
(e) Special rule for determining adjustments to basis 

(1) In general 
Solely for purposes of determining gain or loss on the disposition of intragroup stock and the amount of any inclusion by reason of an excess loss account, in determining the adjustments to the basis of such intragroup stock on account of the earnings and profits of any member of an affiliated group for any consolidated year (and in determining the amount in such account)
(A) such earnings and profits shall be determined as if section 312 were applied for such taxable year (and all preceding consolidated years of the member with respect to such group) without regard to subsections (k) and (n) thereof, and
(B) earnings and profits shall not include any amount excluded from gross income under section 108 to the extent the amount so excluded was not applied to reduce tax attributes (other than basis in property).
(2) Definitions 
For purposes of this subsection
(A) Intragroup stock 
The term intragroup stock means any stock which
(i) is in a corporation which is or was a member of an affiliated group of corporations, and
(ii) is held by another corporation which is or was a member of such group.

Such term includes any other property the basis of which is determined (in whole or in part) by reference to the basis of stock described in the preceding sentence.

(B) Consolidated year 
The term consolidated year means any taxable year for which the affiliated group makes a consolidated return.
(C) Application of section 312 (n)(7) not affected 
The reference in paragraph (1) to subsection (n) of section 312 shall be treated as not including a reference to paragraph (7) of such subsection.
(3) Adjustments 
Under regulations prescribed by the Secretary, proper adjustments shall be made in the application of paragraph (1)
(A) in the case of any property acquired by the corporation before consolidation, for the difference between the adjusted basis of such property for purposes of computing taxable income and its adjusted basis for purposes of computing earnings and profits, and
(B) in the case of any property, for any basis adjustment under section 50 (c).
(4) Elimination of election to reduce basis of indebtedness 
Nothing in the regulations prescribed under section 1502 shall permit any reduction in the amount otherwise included in gross income by reason of an excess loss account if such reduction is on account of a reduction in the basis of indebtedness.
(f) Limitation on use of group losses to offset income of subsidiary paying preferred dividends 

(1) In general 
In the case of any subsidiary distributing during any taxable year dividends on any applicable preferred stock
(A) no group loss item shall be allowed to reduce the disqualified separately computed income of such subsidiary for such taxable year, and
(B) no group credit item shall be allowed against the tax imposed by this chapter on such disqualified separately computed income.
(2) Group items 
For purposes of this subsection
(A) Group loss item 
The term group loss item means any of the following items of any other member of the affiliated group which includes the subsidiary:
(i) Any net operating loss and any net operating loss carryover or carryback under section 172.
(ii) Any loss from the sale or exchange of any capital asset and any capital loss carryover or carryback under section 1212.
(B) Group credit item 
The term group credit item means any credit allowable under part IV of subchapter A of chapter 1 (other than section 34) to any other member of the affiliated group which includes the subsidiary and any carryover or carryback of any such credit.
(3) Other definitions 
For purposes of this subsection
(A) Disqualified separately computed income 
The term disqualified separately computed income means the portion of the separately computed taxable income of the subsidiary which does not exceed the dividends distributed by the subsidiary during the taxable year on applicable preferred stock.
(B) Separately computed taxable income 
The term separately computed taxable income means the separate taxable income of the subsidiary for the taxable year determined
(i) by taking into account gains and losses from the sale or exchange of a capital asset and section 1231 gains and losses,
(ii) without regard to any net operating loss or capital loss carryover or carryback, and
(iii) with such adjustments as the Secretary may prescribe.
(C) Subsidiary 
The term subsidiary means any corporation which is a member of an affiliated group filing a consolidated return other than the common parent.
(D) Applicable preferred stock 
The term applicable preferred stock means stock described in section 1504 (a)(4) in the subsidiary which is
(i) issued after November 17, 1989, and
(ii) held by a person other than a member of the same affiliated group as the subsidiary.
(4) Regulations 
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the provisions of this subsection, including regulations
(A) to prevent the avoidance of this subsection through the transfer of built-in losses to the subsidiary,
(B) to provide rules for cases in which the subsidiary owns (directly or indirectly) stock in another member of the affiliated group, and
(C) to provide for the application of this subsection where dividends are not paid currently, where the redemption and liquidation rights of the applicable preferred stock exceed the issue price for such stock, or where the stock is otherwise structured to avoid the purposes of this subsection.
[1] Subsec. (a) heading editorially supplied.

26 USC 1504 - Definitions

(a) Affiliated group defined 
For purposes of this subtitle
(1) In general 
The term affiliated group means
(A) 1 or more chains of includible corporations connected through stock ownership with a common parent corporation which is an includible corporation, but only if
(B) 
(i) the common parent owns directly stock meeting the requirements of paragraph (2) in at least 1 of the other includible corporations, and
(ii) stock meeting the requirements of paragraph (2) in each of the includible corporations (except the common parent) is owned directly by 1 or more of the other includible corporations.
(2) 80-percent voting and value test 
The ownership of stock of any corporation meets the requirements of this paragraph if it
(A) possesses at least 80 percent of the total voting power of the stock of such corporation, and
(B) has a value equal to at least 80 percent of the total value of the stock of such corporation.
(3) 5 years must elapse before reconsolidation 

(A) In general 
If
(i) a corporation is included (or required to be included) in a consolidated return filed by an affiliated group for a taxable year which includes any period after December 31, 1984, and
(ii) such corporation ceases to be a member of such group in a taxable year beginning after December 31, 1984,

with respect to periods after such cessation, such corporation (and any successor of such corporation) may not be included in any consolidated return filed by the affiliated group (or by another affiliated group with the same common parent or a successor of such common parent) before the 61st month beginning after its first taxable year in which it ceased to be a member of such affiliated group.

(B) Secretary may waive application of subparagraph (A) 
The Secretary may waive the application of subparagraph (A) to any corporation for any period subject to such conditions as the Secretary may prescribe.
(4) Stock not to include certain preferred stock 
For purposes of this subsection, the term stock does not include any stock which
(A) is not entitled to vote,
(B) is limited and preferred as to dividends and does not participate in corporate growth to any significant extent,
(C) has redemption and liquidation rights which do not exceed the issue price of such stock (except for a reasonable redemption or liquidation premium), and
(D) is not convertible into another class of stock.
(5) Regulations 
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including (but not limited to) regulations
(A) which treat warrants, obligations convertible into stock, and other similar interests as stock, and stock as not stock,
(B) which treat options to acquire or sell stock as having been exercised,
(C) which provide that the requirements of paragraph (2)(B) shall be treated as met if the affiliated group, in reliance on a good faith determination of value, treated such requirements as met,
(D) which disregard an inadvertent ceasing to meet the requirements of paragraph (2)(B) by reason of changes in relative values of different classes of stock,
(E) which provide that transfers of stock within the group shall not be taken into account in determining whether a corporation ceases to be a member of an affiliated group, and
(F) which disregard changes in voting power to the extent such changes are disproportionate to related changes in value.
(b) Definition of “includible corporation” 
As used in this chapter, the term includible corporation means any corporation except
(1) Corporations exempt from taxation under section 501.
(2) Insurance companies subject to taxation under section 801.
(3) Foreign corporations.
(4) Corporations with respect to which an election under section 936 (relating to possession tax credit) is in effect for the taxable year.
[(5) Repealed. Pub. L. 94–455, title X, § 1053(d)(2), Oct. 4, 1976, 90 Stat. 1649.]
(6) Regulated investment companies and real estate investment trusts subject to tax under subchapter M of chapter 1.
(7) A DISC (as defined in section 992 (a)(1)).
(8) An S corporation.
(c) Includible insurance companies 
Notwithstanding the provisions of paragraph (2) of subsection (b)
(1) Two or more domestic insurance companies each of which is subject to tax under section 801 shall be treated as includible corporations for purposes of applying subsection (a) to such insurance companies alone.
(2) 
(A) If an affiliated group (determined without regard to subsection (b)(2)) includes one or more domestic insurance companies taxed under section 801, the common parent of such group may elect (pursuant to regulations prescribed by the Secretary) to treat all such companies as includible corporations for purposes of applying subsection (a) except that no such company shall be so treated until it has been a member of the affiliated group for the 5 taxable years immediately preceding the taxable year for which the consolidated return is filed.
(B) If an election under this paragraph is in effect for a taxable year
(i) section 243 (b)(3) and the exception provided under section 243 (b)(2) with respect to subsections (b)(2) and (c) of this section,
(ii) section 542 (b)(5), and
(iii) subsection (a)(4) and (b)(2)(D) of section 1563, and the reference to section 1563 (b)(2)(D) contained in section 1563 (b)(3)(C),

shall not be effective for such taxable year.

(d) Subsidiary formed to comply with foreign law 
In the case of a domestic corporation owning or controlling, directly or indirectly, 100 percent of the capital stock (exclusive of directors qualifying shares) of a corporation organized under the laws of a contiguous foreign country and maintained solely for the purpose of complying with the laws of such country as to title and operation of property, such foreign corporation may, at the option of the domestic corporation, be treated for the purpose of this subtitle as a domestic corporation.
(e) Includible tax-exempt organizations 
Despite the provisions of paragraph (1) of subsection (b), two or more organizations exempt from taxation under section 501, one or more of which is described in section 501 (c)(2) and the others of which derive income from such 501(c)(2) organizations, shall be considered as includible corporations for the purpose of the application of subsection (a) to such organizations alone.
(f) Special rule for certain amounts derived from a corporation previously treated as a DISC 
In determining the consolidated taxable income of an affiliated group for any taxable year beginning after December 31, 1984, a corporation which had been a DISC and which would otherwise be a member of such group shall not be treated as such a member with respect to
(1) any distribution (or deemed distribution) of accumulated DISC income which was not treated as previously taxed income under section 805(b)(2)(A) of the Tax Reform Act of 1984, and
(2) any amount treated as received under section 805(b)(3) of such Act.

26 USC 1505 - Cross references

(1) For suspension of running of statute of limitations when notice in respect of a deficiency is mailed to one corporation, see section 6503 (a)(1).
(2) For allocation of income and deductions of related trades or businesses, see section 482.

Subchapter B - Related Rules

TITLE 26 - US CODE - PART I - IN GENERAL

26 USC 1551 - Disallowance of the benefits of the graduated corporate rates and accumulated earnings credit

(a) In general 
If
(1) any corporation transfers, on or after January 1, 1951, and on or before June 12, 1963, all or part of its property (other than money) to a transferee corporation,
(2) any corporation transfers, directly or indirectly, after June 12, 1963, all or part of its property (other than money) to a transferee corporation, or
(3) five or fewer individuals who are in control of a corporation transfer, directly or indirectly, after June 12, 1963, property (other than money) to a transferee corporation,

and the transferee corporation was created for the purpose of acquiring such property or was not actively engaged in business at the time of such acquisition, and if after such transfer the transferor or transferors are in control of such transferee corporation during any part of the taxable year of such transferee corporation, then for such taxable year of such transferee corporation the Secretary may (except as may be otherwise determined under subsection (c)) disallow the benefits of the rates contained in section 11 (b) which are lower than the highest rate specified in such section, or the accumulated earnings credit provided in paragraph (2) or (3) of section 535 (c), unless such transferee corporation shall establish by the clear preponderance of the evidence that the securing of such benefits or credit was not a major purpose of such transfer.

(b) Control 
For purposes of subsection (a), the term control means
(1) With respect to a transferee corporation described in subsection (a)(1) or (2), the ownership by the transferor corporation, its shareholders, or both, of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of the stock; or
(2) With respect to each corporation described in subsection (a)(3), the ownership by the five or fewer individuals described in such subsection of stock possessing
(A) at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of the stock of each corporation, and
(B) more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of each corporation, taking into account the stock ownership of each such individual only to the extent such stock ownership is identical with respect to each such corporation.

For purposes of this subsection, section 1563 (e) shall apply in determining the ownership of stock.

(c) Authority of the Secretary under this section 
The provisions of section 269 (c) and the authority of the Secretary under such section, shall, to the extent not inconsistent with the provisions of this section, be applicable to this section.

26 USC 1552 - Earnings and profits

(a) General rule 
Pursuant to regulations prescribed by the Secretary the earnings and profits of each member of an affiliated group required to be included in a consolidated return for such group filed for a taxable year shall be determined by allocating the tax liability of the group for such year among the members of the group in accord with whichever of the following methods the group shall elect in its first consolidated return filed for such a taxable year:
(1) The tax liability shall be apportioned among the members of the group in accordance with the ratio which that portion of the consolidated taxable income attributable to each member of the group having taxable income bears to the consolidated taxable income.
(2) The tax liability of the group shall be allocated to the several members of the group on the basis of the percentage of the total tax which the tax of such member if computed on a separate return would bear to the total amount of the taxes for all members of the group so computed.
(3) The tax liability of the group (excluding the tax increases arising from the consolidation) shall be allocated on the basis of the contribution of each member of the group to the consolidated taxable income of the group. Any tax increases arising from the consolidation shall be distributed to the several members in direct proportion to the reduction in tax liability resulting to such members from the filing of the consolidated return as measured by the difference between their tax liabilities determined on a separate return basis and their tax liabilities based on their contributions to the consolidated taxable income.
(4) The tax liability of the group shall be allocated in accord with any other method selected by the group with the approval of the Secretary.
(b) Failure to elect 
If no election is made in such first return, the tax liability shall be allocated among the several members of the group pursuant to the method prescribed in subsection (a)(1).

TITLE 26 - US CODE - PART II - CERTAIN CONTROLLED CORPORATIONS

26 USC 1561 - Limitations on certain multiple tax benefits in the case of certain controlled corporations

(a) General rule 
The component members of a controlled group of corporations on a December 31 shall, for their taxable years which include such December 31, be limited for purposes of this subtitle to
(1) amounts in each taxable income bracket in the tax table in section 11 (b)(1) which do not aggregate more than the maximum amount in such bracket to which a corporation which is not a component member of a controlled group is entitled,
(2) one $250,000 ($150,000 if any component member is a corporation described in section 535 (c)(2)(B)) amount for purposes of computing the accumulated earnings credit under section 535 (c)(2) and (3),
(3) one $40,000 exemption amount for purposes of computing the amount of the minimum tax, and
(4) one $2,000,000 amount for purposes of computing the tax imposed by section 59A.

The amounts specified in paragraph (1), the amount specified in paragraph (3), and the amount specified in paragraph (4) shall be divided equally among the component members of such group on such December 31 unless all of such component members consent (at such time and in such manner as the Secretary shall by regulations prescribe) to an apportionment plan providing for an unequal allocation of such amounts. The amounts specified in paragraph (2) shall be divided equally among the component members of such group on such December 31 unless the Secretary prescribes regulations permitting an unequal allocation of such amounts. Notwithstanding paragraph (1), in applying the last 2 sentences of section 11 (b)(1) to such component members, the taxable income of all such component members shall be taken into account and any increase in tax under such last 2 sentences shall be divided among such component members in the same manner as amounts under paragraph (1). In applying section 55 (d)(3), the alternative minimum taxable income of all component members shall be taken into account and any decrease in the exemption amount shall be allocated to the component members in the same manner as under paragraph (3).

(b) Certain short taxable years 
If a corporation has a short taxable year which does not include a December 31 and is a component member of a controlled group of corporations with respect to such taxable year, then for purposes of this subtitle
(1) the amount in each taxable income bracket in the tax table in section 11 (b), and
(2) the amount to be used in computing the accumulated earnings credit under section 535 (c)(2) and (3),

of such corporation for such taxable year shall be the amount specified in subsection (a)(1) or (2), as the case may be, divided by the number of corporations which are component members of such group on the last day of such taxable year. For purposes of the preceding sentence, section 1563 (b) shall be applied as if such last day were substituted for December 31.

26 USC 1562 - Repealed. Pub. L. 91172, title IV, 401(a)(2), Dec. 30, 1969, 83 Stat. 600]

Section, added Pub. L. 88–272, title II, § 235(a), Feb. 26, 1964, 78 Stat. 117, amended Pub. L. 91–172, title IV, § 401(b)(2)(A), Dec. 30, 1969, 83 Stat. 602, set limits on the privilege of groups to elect multiple surtax exemptions.

26 USC 1563 - Definitions and special rules

(a) Controlled group of corporations 
For purposes of this part, the term controlled group of corporations means any group of
(1) Parent-subsidiary controlled group 
One or more chains of corporations connected through stock ownership with a common parent corporation if
(A) stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of stock of each of the corporations, except the common parent corporation, is owned (within the meaning of subsection (d)(1)) by one or more of the other corporations; and
(B) the common parent corporation owns (within the meaning of subsection (d)(1)) stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of stock of at least one of the other corporations, excluding, in computing such voting power or value, stock owned directly by such other corporations.
(2) Brother-sister controlled group 
Two or more corporations if 5 or fewer persons who are individuals, estates, or trusts own (within the meaning of subsection (d)(2)) stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of each corporation, taking into account the stock ownership of each such person only to the extent such stock ownership is identical with respect to each such corporation.
(3) Combined group 
Three or more corporations each of which is a member of a group of corporations described in paragraph (1) or (2), and one of which
(A) is a common parent corporation included in a group of corporations described in paragraph (1), and also
(B) is included in a group of corporations described in paragraph (2).
(4) Certain insurance companies 
Two or more insurance companies subject to taxation under section 801 which are members of a controlled group of corporations described in paragraph (1), (2), or (3). Such insurance companies shall be treated as a controlled group of corporations separate from any other corporations which are members of the controlled group of corporations described in paragraph (1), (2), or (3).
(b) Component member 

(1) General rule 
For purposes of this part, a corporation is a component member of a controlled group of corporations on a December 31 of any taxable year (and with respect to the taxable year which includes such December 31) if such corporation
(A) is a member of such controlled group of corporations on the December 31 included in such year and is not treated as an excluded member under paragraph (2), or
(B) is not a member of such controlled group of corporations on the December 31 included in such year but is treated as an additional member under paragraph (3).
(2) Excluded members 
A corporation which is a member of a controlled group of corporations on December 31 of any taxable year shall be treated as an excluded member of such group for the taxable year including such December 31 if such corporation
(A) is a member of such group for less than one-half the number of days in such taxable year which precede such December 31,
(B) is exempt from taxation under section 501 (a) (except a corporation which is subject to tax on its unrelated business taxable income under section 511) for such taxable year,
(C) is a foreign corporation subject to tax under section 881 for such taxable year,
(D) is an insurance company subject to taxation under section 801 (other than an insurance company which is a member of a controlled group described in subsection (a)(4)), or
(E) is a franchised corporation, as defined in subsection (f)(4).
(3) Additional members 
A corporation which
(A) was a member of a controlled group of corporations at any time during a calendar year,
(B) is not a member of such group on December 31 of such calendar year, and
(C) is not described, with respect to such group, in subparagraph (B), (C), (D), or (E) of paragraph (2),

shall be treated as an additional member of such group on December 31 for its taxable year including such December 31 if it was a member of such group for one-half (or more) of the number of days in such taxable year which precede such December 31.

(4) Overlapping groups 
If a corporation is a component member of more than one controlled group of corporations with respect to any taxable year, such corporation shall be treated as a component member of only one controlled group. The determination as to the group of which such corporation is a component member shall be made under regulations prescribed by the Secretary which are consistent with the purposes of this part.
(c) Certain stock excluded 

(1) General rule 
For purposes of this part, the term stock does not include
(A) nonvoting stock which is limited and preferred as to dividends,
(B) treasury stock, and
(C) stock which is treated as excluded stock under paragraph (2).
(2) Stock treated as “excluded stock” 

(A) Parent-subsidiary controlled group 
For purposes of subsection (a)(1), if a corporation (referred to in this paragraph as parent corporation) owns (within the meaning of subsections (d)(1) and (e)(4)), 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock in another corporation (referred to in this paragraph as subsidiary corporation), the following stock of the subsidiary corporation shall be treated as excluded stock
(i) stock in the subsidiary corporation held by a trust which is part of a plan of deferred compensation for the benefit of the employees of the parent corporation or the subsidiary corporation,
(ii) stock in the subsidiary corporation owned by an individual (within the meaning of subsection (d)(2)) who is a principal stockholder or officer of the parent corporation. For purposes of this clause, the term principal stockholder of a corporation means an individual who owns (within the meaning of subsection (d)(2)) 5 percent or more of the total combined voting power of all classes of stock entitled to vote or 5 percent or more of the total value of shares of all classes of stock in such corporation,
(iii) stock in the subsidiary corporation owned (within the meaning of subsection (d)(2)) by an employee of the subsidiary corporation if such stock is subject to conditions which run in favor of such parent (or subsidiary) corporation and which substantially restrict or limit the employees right (or if the employee constructively owns such stock, the direct owners right) to dispose of such stock, or
(iv) stock in the subsidiary corporation owned (within the meaning of subsection (d)(2)) by an organization (other than the parent corporation) to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by the parent corporation or subsidiary corporation, by an individual, estate, or trust that is a principal stockholder (within the meaning of clause (ii)) of the parent corporation, by an officer of the parent corporation, or by any combination thereof.
(B) Brother-sister controlled group 
For purposes of subsection (a)(2), if 5 or fewer persons who are individuals, estates, or trusts (referred to in this subparagraph as common owners) own (within the meaning of subsection (d)(2)), 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock in a corporation, the following stock of such corporation shall be treated as excluded stock
(i) stock in such corporation held by an employees trust described in section 401 (a) which is exempt from tax under section 501 (a), if such trust is for the benefit of the employees of such corporation,
(ii) stock in such corporation owned (within the meaning of subsection (d)(2)) by an employee of the corporation if such stock is subject to conditions which run in favor of any of such common owners (or such corporation) and which substantially restrict or limit the employees right (or if the employee constructively owns such stock, the direct owners right) to dispose of such stock. If a condition which limits or restricts the employees right (or the direct owners right) to dispose of such stock also applies to the stock held by any of the common owners pursuant to a bona fide reciprocal stock purchase arrangement, such condition shall not be treated as one which restricts or limits the employees right to dispose of such stock, or
(iii) stock in such corporation owned (within the meaning of subsection (d)(2)) by an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such corporation, by an individual, estate, or trust that is a principal stockholder (within the meaning of subparagraph (A)(ii)) of such corporation, by an officer of such corporation, or by any combination thereof.
(d) Rules for determining stock ownership 

(1) Parent-subsidiary controlled group 
For purposes of determining whether a corporation is a member of a parent-subsidiary controlled group of corporations (within the meaning of subsection (a)(1)), stock owned by a corporation means
(A) stock owned directly by such corporation, and
(B) stock owned with the application of paragraphs (1), (2), and (3) of subsection (e).
(2) Brother-sister controlled group 
For purposes of determining whether a corporation is a member of a brother-sister controlled group of corporations (within the meaning of subsection (a)(2)), stock owned by a person who is an individual, estate, or trust means
(A) stock owned directly by such person, and
(B) stock owned with the application of subsection (e).
(e) Constructive ownership 

(1) Options 
If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.
(2) Attribution from partnerships 
Stock owned, directly or indirectly, by or for a partnership shall be considered as owned by any partner having an interest of 5 percent or more in either the capital or profits of the partnership in proportion to his interest in capital or profits, whichever such proportion is the greater.
(3) Attribution from estates or trusts 

(A) Stock owned, directly or indirectly, by or for an estate or trust shall be considered as owned by any beneficiary who has an actuarial interest of 5 percent or more in such stock, to the extent of such actuarial interest. For purposes of this subparagraph, the actuarial interest of each beneficiary shall be determined by assuming the maximum exercise of discretion by the fiduciary in favor of such beneficiary and the maximum use of such stock to satisfy his rights as a beneficiary.
(B) Stock owned, directly or indirectly, by or for any portion of a trust of which a person is considered the owner under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners) shall be considered as owned by such person.
(C) This paragraph shall not apply to stock owned by any employees trust described in section 401 (a) which is exempt from tax under section 501 (a).
(4) Attribution from corporations 
Stock owned, directly or indirectly, by or for a corporation shall be considered as owned by any person who owns (within the meaning of subsection (d)) 5 percent or more in value of its stock in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation.
(5) Spouse 
An individual shall be considered as owning stock in a corporation owned, directly or indirectly, by or for his spouse (other than a spouse who is legally separated from the individual under a decree of divorce whether interlocutory or final, or a decree of separate maintenance), except in the case of a corporation with respect to which each of the following conditions is satisfied for its taxable year
(A) The individual does not, at any time during such taxable year, own directly any stock in such corporation;
(B) The individual is not a director or employee and does not participate in the management of such corporation at any time during such taxable year;
(C) Not more than 50 percent of such corporations gross income for such taxable year was derived from royalties, rents, dividends, interest, and annuities; and
(D) Such stock in such corporation is not, at any time during such taxable year, subject to conditions which substantially restrict or limit the spouses right to dispose of such stock and which run in favor of the individual or his children who have not attained the age of 21 years.
(6) Children, grandchildren, parents, and grandparents 

(A) Minor children 
An individual shall be considered as owning stock owned, directly or indirectly, by or for his children who have not attained the age of 21 years, and, if the individual has not attained the age of 21 years, the stock owned, directly or indirectly, by or for his parents.
(B) Adult children and grandchildren 
An individual who owns (within the meaning of subsection (d)(2), but without regard to this subparagraph) more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock in a corporation shall be considered as owning the stock in such corporation owned, directly or indirectly, by or for his parents, grandparents, grandchildren, and children who have attained the age of 21 years.
(C) Adopted child 
For purposes of this section, a legally adopted child of an individual shall be treated as a child of such individual by blood.
(f) Other definitions and rules 

(1) Employee defined 
For purposes of this section the term employee has the same meaning such term is given by paragraphs (1) and (2) of section 3121 (d).
(2) Operating rules 

(A) In general 
Except as provided in subparagraph (B), stock constructively owned by a person by reason of the application of paragraph (1), (2), (3), (4), (5), or (6) of subsection (e) shall, for purposes of applying such paragraphs, be treated as actually owned by such person.
(B) Members of family 
Stock constructively owned by an individual by reason of the application of paragraph (5) or (6) of subsection (e) shall not be treated as owned by him for purposes of again applying such paragraphs in order to make another the constructive owner of such stock.
(3) Special rules 
For purposes of this section
(A) If stock may be considered as owned by a person under subsection (e)(1) and under any other paragraph of subsection (e), it shall be considered as owned by him under subsection (e)(1).
(B) If stock is owned (within the meaning of subsection (d)) by two or more persons, such stock shall be considered as owned by the person whose ownership of such stock results in the corporation being a component member of a controlled group. If by reason of the preceding sentence, a corporation would (but for this sentence) become a component member of two controlled groups, it shall be treated as a component member of one controlled group. The determination as to the group of which such corporation is a component member shall be made under regulations prescribed by the Secretary which are consistent with the purposes of this part.
(C) If stock is owned by a person within the meaning of subsection (d) and such ownership results in the corporation being a component member of a controlled group, such stock shall not be treated as excluded stock under subsection (c)(2), if by reason of treating such stock as excluded stock the result is that such corporation is not a component member of a controlled group of corporations.
(4) Franchised corporation 
If
(A) a parent corporation (as defined in subsection (c)(2)(A)), or a common owner (as defined in subsection (c)(2)(B)), of a corporation which is a member of a controlled group of corporations is under a duty (arising out of a written agreement) to sell stock of such corporation (referred to in this paragraph as franchised corporation) which is franchised to sell the products of another member, or the common owner, of such controlled group;
(B) such stock is to be sold to an employee (or employees) of such franchised corporation pursuant to a bona fide plan designed to eliminate the stock ownership of the parent corporation or of the common owner in the franchised corporation;
(C) such plan
(i) provides a reasonable selling price for such stock, and
(ii) requires that a portion of the employees share of the profits of such corporation (whether received as compensation or as a dividend) be applied to the purchase of such stock (or the purchase of notes, bonds, debentures or other similar evidence of indebtedness of such franchised corporation held by such parent corporation or common owner);
(D) such employee (or employees) owns directly more than 20 percent of the total value of shares of all classes of stock in such franchised corporation;
(E) more than 50 percent of the inventory of such franchised corporation is acquired from members of the controlled group, the common owner, or both; and
(F) all of the conditions contained in subparagraphs (A), (B), (C), (D), and (E) have been met for one-half (or more) of the number of days preceding the December 31 included within the taxable year (or if the taxable year does not include December 31, the last day of such year) of the franchised corporation,

then such franchised corporation shall be treated as an excluded member of such group, under subsection (b)(2), for such taxable year.

(5) Brother-sister controlled group definition for provisions other than this part 

(A) In general 
Except as specifically provided in an applicable provision, subsection (a)(2) shall be applied to an applicable provision as if it read as follows:
(2) dq](2) Brother-sister controlled group 
Two or more corporations if 5 or fewer persons who are individuals, estates, or trusts own (within the meaning of subsection (d)(2) stock possessing (A) at least 80 percent of the total combined voting power of all classes of stock entitled to vote, or at least 80 percent of the total value of shares of all classes of stock, of each corporation, and (B) more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of each corporation, taking into account the stock ownership of each such person only to the extent such stock ownership is identical with respect to each such corporation.
(B) Applicable provision 
For purposes of this paragraph, an applicable provision is any provision of law (other than this part) which incorporates the definition of controlled group of corporations under subsection (a).

26 USC 1564 - Repealed. Pub. L. 101508, title XI, 11801(a)(38), Nov. 5, 1990, 104 Stat. 1388521]

Section, added Pub. L. 91–172, title IV, § 401(b)(1), Dec. 30, 1969, 83 Stat. 600; amended Pub. L. 94–455, title XIX, §§ 1901(b)(1)(J)(vi), (21)(A)(ii), 1906 (b)(13)(A), Oct. 4, 1976, 90 Stat. 1791, 1797, 1834, related to transitional rules in the case of certain controlled corporations.