Slide 8-1
Principles of Taxation:
Advanced Strategies
Chapter 8
 Multiple Entity Business Structures

McGraw-Hill/Irwin
Copyright (c) 2003 by the McGraw-Hill Companies Inc
Slide 8-2
Controlled Corporate Groups


Prevents groups of corporations owned by the same people
from splitting income and getting benefit of progressive
tax rates
Tax benefits must be allocated amount members of the
group:
 Progressive rates
 Accumulated earnings credit
 Alternative minimum tax exemption
 Sec. 179 limit
 Limit for using cash method of accounting
McGraw-Hill/Irwin
Copyright (c) 2003 by the McGraw-Hill Companies Inc
Slide 8-3
Controlled Groups

Three types:
 Brother-sister
 Parent-subsidiary
 Combined Group
McGraw-Hill/Irwin
Copyright (c) 2003 by the McGraw-Hill Companies Inc
Slide 8-4
Brother-Sister Controlled
Group

Two or more corporations in which five or fewer
individuals estates or trusts meet both of the
following ownership tests:

80% or more of voting power or value of
stock owned collectively by the individuals

50% or more of voting power or value of
stock owned identically by shareholders

Identical ownership: shareholder’s lowest
ownership percentage in corporation in
the group
McGraw-Hill/Irwin
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Slide 8-5
Brother-Sister Control Group

Example 1:
Shareholder
Lennox
Jacobi
Identical
Ownership
Casey
20%
40%
20%
Falcini
30%
5%
5%
Terrell
25%
35%
25%
Woo
25%
20%
20%
Total
100%
100%
70%
Total Ownership 100%; Identical Ownership 70%
McGraw-Hill/Irwin
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Slide 8-6
Brother-Sister Control Group

Example 2:
Shareholder
Marin
WLT
Identical
Ownership
Leigh
20%
10%
10%
Tsu
55%
10%
10%
Weinstein
25%
80%
25%
Total
100%
100%
45%
Total ownership 100%; Identical ownership
45%
McGraw-Hill/Irwin
Copyright (c) 2003 by the McGraw-Hill Companies Inc
Slide 8-7
Parent-Subsidiary Group
One corporation owns directly at least 80%
of the voting power or value of another
corporation
 All other corporations of which 80% of
voting power or value of stock owned by
another member is included in the group

McGraw-Hill/Irwin
Copyright (c) 2003 by the McGraw-Hill Companies Inc
Slide 8-8
Combined Control Group

Group where one corporation is the parent
of a parent-subsidiary group and the
member of a brother-sister control group
McGraw-Hill/Irwin
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Slide 8-9
Consolidated Tax Returns
Members of an affiliated group may elect to
file a consolidated tax return
 Once a group files a consolidated return it
must continue filing consolidated returns

McGraw-Hill/Irwin
Copyright (c) 2003 by the McGraw-Hill Companies Inc
Slide 8-10
Affiliated Group
Parent directly owns 80% of voting power
and value of stock in at least one other
corporation
 Any other corporation of which 80% of
stock is owned by one or more members
included in group

McGraw-Hill/Irwin
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Slide 8-11
Affiliated Group

Gunner, Alpha, Beta and Delphi members
of affiliated group
Gunner
85%
35%
Alpha
53%
60%
Beta
45%
45%
Kappa
McGraw-Hill/Irwin
Delphi
Copyright (c) 2003 by the McGraw-Hill Companies Inc
Slide 8-12
Comparison to Consolidated
Financial Statement
Test for filing consolidated financials is
50% or more interest
 Foreign as well as domestic corporations
included in consolidated financial
statements

McGraw-Hill/Irwin
Copyright (c) 2003 by the McGraw-Hill Companies Inc
Slide 8-13
Consolidated Return
Regulations
Regulations issued pursuant to code section
1502 govern returns
 Affiliated group filing consolidated return
referred to as consolidated group
 Parent acts as agent for entire group

McGraw-Hill/Irwin
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Slide 8-14
Income on Consolidated Tax
Return
Parent’s income for entire year
 All income for other members while they
were part of the affiliated group
 Each subsidiary must adopt parent’s tax
year

McGraw-Hill/Irwin
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Slide 8-15
Consolidated Taxable Income




Each member computes income on separate
company basis
Separate income adjusted for intercompany
transactions
Take items such as capital gains, 1231 gains,
charitable contributions out of separate income
Add separate incomes together with consolidated
capital gains, 1231 gains, charitable contributions
McGraw-Hill/Irwin
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Slide 8-16
Intercompany Items

Generally treated same way as if
corporations were not members of a
consolidated group
 Exception: Matching rule- timing of
transaction different for different
members of the group
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Slide 8-17
Matching Rule

Examples:
 Performance of service where recipient
capitalizes payment
 Sales of assets between members
 Sales of depreciable property
 Intercompany dividends
McGraw-Hill/Irwin
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Slide 8-18
Consolidated Return Mechanics
Tax liability, credits and alternative
minimum tax determined on a consolidated
basis
 Parent files return and pays estimated taxes

McGraw-Hill/Irwin
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Slide 8-19
Basis Adjustments

Adjustments necessary to ensure income is
not taxed twice
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Slide 8-20
Positive Basis Adjustments
Subsidiary’s share of taxable income
 Tax-exempt income
 Capital contributions

McGraw-Hill/Irwin
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Slide 8-21
Negative Basis Adjustments
Losses used to reduce consolidated taxable
income
 Nondeductible expenses
 Distributions

McGraw-Hill/Irwin
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Slide 8-22
Excess Loss Accounts
Losses generated by subsidiary in excess of
basis
 Recaptured if subsidiary sold outside
consolidated group

McGraw-Hill/Irwin
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Slide 8-23
338(h)(10) Elections
Allows sale of subsidiary outside group
with full set-up of assets to fair market
value
 Treated as a sale of assets by old
consolidated group
 No gain on stock sale
 Tax paid by selling group with resulting
lower purchase price

McGraw-Hill/Irwin
Copyright (c) 2003 by the McGraw-Hill Companies Inc
Slide 8-24
Loss Disallowance Rules
Prevents duplication in losses on sale of
subsidiaries due to unrealized losses
 No loss allowed on sale of stock outside
consolidated group

McGraw-Hill/Irwin
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Slide 8-25
Qualified Subchapter S Subsidiaries
Corporation that meets all S corporation
eligibility requirements except it is owned
by another S corporation
 Treated as operating division of S
corporation owner

McGraw-Hill/Irwin
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Slide 8-26
Single Member LLCs

Normally treated as a disregarded entity for
tax purposes
McGraw-Hill/Irwin
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