McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
9
Multiple-Entity Business
Structures
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-3
Reasons
Limit Liability
Multi-state Operations
Avoid Dilution of Ownership Interests
Separate Financial Reporting
Divergence in Owner’s Interests
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-4
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
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-5
Controlled Groups
Three types:
Brother-sister
Parent-subsidiary
Combined Group
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-6
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


McGraw-Hill
Identical ownership: shareholder’s lowest
ownership percentage in corporation in the group
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-7
Brother-Sister Control Group
Example 1:
Shareholder Lennox
Jacobi
Identical
Ownership
Casey
20%
40%
20%
Falcini
30%
5%
5%
Thorsen
25%
35%
25%
Woo
25%
20%
20%
Total
100%
100%
70%
Total Ownership 100%; Identical Ownership 70%
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-8
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
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-9
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
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-10
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
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-11
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
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-12
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
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-13
Affiliated Group
Gunner, Alpha, Beta and Delphi members of
affiliated group
Gunner
85%
35%
Alpha
53%
60%
Beta
45%
45%
Kappa
McGraw-Hill
Delphi
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Comparison to Consolidated
Financial Statement
Slide 9-14
Test for filing consolidated financials is 50%
or more interest
Foreign as well as domestic corporations
included in consolidated financial
statements
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-15
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
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Income on Consolidated
Tax Return
Slide 9-16
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
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-17
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
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-18
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
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-19
Matching Rule
Examples:
Performance of service where recipient
capitalizes payment
Sales of assets between members
Sales of depreciable property
Intercompany dividends
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-20
Consolidated Return Mechanics
Tax liability, credits and alternative minimum
tax determined on a consolidated basis
Parent files return and pays estimated
taxes
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-21
Basis Adjustments
Adjustments necessary to ensure income is
not taxed twice
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-22
Positive Basis Adjustments
Subsidiary’s share of taxable income
Tax-exempt income
Capital contributions
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-23
Negative Basis Adjustments
Losses used to reduce consolidated taxable
income
Nondeductible expenses
Distributions
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-24
Excess Loss Accounts
Losses generated by subsidiary in excess
of basis
Recaptured if subsidiary sold outside
consolidated group
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-25
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
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Qualified Subchapter S
Subsidiaries
Slide 9-26
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
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9-27
Single Member LLCs
Normally treated as a disregarded entity for
tax purposes
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.