Legal Definitions - controlled group

A controlled group refers to two or more separate corporations that are treated as a single entity for specific tax purposes. This classification applies when five or fewer individuals or entities hold a substantial ownership interest in all the corporations within the group. The Internal Revenue Code imposes special rules on controlled groups to ensure consistent tax treatment and prevent companies from dividing their operations into multiple corporations solely to gain tax benefits that would not be available to a single, larger company.

Here are a few examples to illustrate this concept:

• Example 1: Parent-Subsidiary Structure

  Imagine "Alpha Corp." is a holding company that owns 100% of the voting stock in "Beta Solutions Inc." and "Gamma Logistics LLC." In this scenario, Alpha Corp., Beta Solutions Inc., and Gamma Logistics LLC would form a controlled group. Alpha Corp., as the single parent entity, substantially owns both Beta Solutions and Gamma Logistics, meaning they are treated as a unified group for various tax calculations, such as determining tax credits or limitations on deductions.

• Example 2: Brother-Sister Structure

  Consider three individuals: Mr. Chen, Ms. Rodriguez, and Dr. Singh. Mr. Chen owns 70% of "City Developers Inc.," Ms. Rodriguez owns 65% of "Urban Planners Co.," and Dr. Singh owns 55% of "Metro Architects Group." Furthermore, these three individuals collectively own more than 80% of the stock in each of these three companies. Even though none of these companies directly owns another, because the same small group of individuals (Mr. Chen, Ms. Rodriguez, and Dr. Singh) collectively holds significant ownership in all three, "City Developers Inc.," "Urban Planners Co.," and "Metro Architects Group" would be considered a controlled group for tax purposes.

• Example 3: Combined Group

  Let's say "Holding Company X" owns 85% of "Manufacturing Corp. A." Separately, the same two individuals, Sarah and David, who own 100% of Holding Company X, also collectively own 90% of "Distribution Corp. B." In this situation, Manufacturing Corp. A and Distribution Corp. B, along with Holding Company X, could form a controlled group. This is because the ownership of Manufacturing Corp. A flows through Holding Company X, which is controlled by Sarah and David, and Sarah and David also directly control Distribution Corp. B. The concentrated ownership by five or fewer persons (Sarah and David) across these entities triggers the controlled group classification, subjecting them to unified tax rules.