June 2015
Presented by Idan Cohen, E.A.

 Controlled group provisions first introduced into the Internal Revenue Code in 1964 to provide tax incentives for small businesses operating as corporate entities.
 Qualified Research Expenses for the R&D credit start from Conception of Idea and end just prior to Commercial Production.
‒ A controlled group is a combination of two or more corporations or trades or businesses that are under common control.
‒ If a controlled group exists, all members of the controlled group are treated as a single taxpayer.
 Today, the Code includes various ownership tests to determine if a controlled group exists for purposes of applying certain Code sections. Examples include:
‒ Research credit
‒ ERISA
‒ ACA
Qualifying costs include wages, contractor costs and supplies and materials.
2

 Rule – I.R.C. § 1563(a)(1)
A parent-subsidiary controlled group exists if:
‒ One organization (parent) owns at least 80% of one or more other organization (subsidiaries), and
‒ If a subsidiary owns at least 80% of a third organization, the third organization is included in the parent-subsidiary controlled group.
 Notes
‒ Parent-subsidiary controlled groups involve ownership of organizations by other organizations.
‒ Ownership by individuals is not considered in this category.
• Special Rule for Research Credit
• Section 41(f)(5) provides, in part, that for purposes of the research credit, a "controlled group of corporations" has the same meaning given to such term by § 1563(a), except that "more than 50 percent" shall be substituted for "at least 80 percent" each place it appears in § 1563(a)(1).
3

Parent
Controlled Red
Conception of Idea and end just prior to Commercial Production.
90% 80% 65%
Brown
Subsidiary
Green
Subsidiary
Yellow
The breakdown of stock ownership is as follows:
Corp
Brown
Green
Yellow
Red Owns
90%
80%
65%
Unrelated Share
10%
20%
35%
Analysis:
1 Red owns 80% or more of the stock of Brown and Green Corps. Therefore, Red is the common parent of a parent-subsidiary group consisting of
Red, Brown, and Green.
2 Yellow is not a member of the group because Red owns less than 80% in Yellow.
Qualifying costs include wages, contractor costs and supplies and materials.
4

Parent
Controlled Red
Group
Qualified Research Expenses for the R&D credit start from Conception of Idea and end just prior to Commercial Production.
65%
Brown
Subsidiary
Green
Subsidiary
80%
Yellow
Subsidiary
The breakdown of stock ownership is as follows:
Corp
Brown
Green
Yellow
Purple
Red Owns
90%
80%
65%
0%
Green Owns
0%
Unrelated Share
0%
80%
10%
20%
35%
20%
Analysis:
Qualifying costs include wages, contractor costs and supplies and materials.
2 This result would be the same if Red, rather than Green, owned 80% interest in Purple (direct ownership).
5

Analysis:
The breakdown of stock ownership is as follows:
Corp
Brown
Green
Yellow
Purple
Orange
Red Owns
55%
100%
80%
0%
0%
Brown Owns Yellow Owns
0%
0%
100%
0%
0%
0%
0%
40%
Unrelated Share
45%
0%
20%
0%
60%
Parent
1 Here we have two different controlled groups with two different common parents: a Red is the common parent of a parent-subsidiary group consisting of Red, Green (owned 100% by Red), and Yellow (owned 80% by Red) .
b Brown is the common parent of a parent-subsidiary group consisting of Brown and Purple (owned 100% by Brown).
Red
55% 100
%
Controlled
Group
Parent
Brown Green
Controlled
Group
80%
Yellow
Subsidiary
Subsidiary
40%
100
%
Subsidiary
6

 Rule – I.R.C. § 1563(a)(2)
A brother-sister controlled group is a group of two or more corporations, in which five or fewer common owners:
‒ Own directly or indirectly a "controlling interest" of each corporation in the group, AND
‒ Have "effective control" over each of these corporations, where:
‒ Controlling interest ("Ownership Test")- generally means 80% or more of the stock of each corporation; AND
‒ Effective control ("50% Test")- generally means more than 50% of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation.
 Notes
‒ Brother-sister controlled groups involve ownership by "common owners" of organizations.
‒ A "common owner" must be an individual, a trust, or an estate.
7

A B
50%
D
0%
5%
15%
25%
10% 0%
C
35%
20%
E
40%
Red Brown
Red and Brown Test
Corp
Ownership Test Red
Ownership Test Brown
50% Test
Analysis:
SH A
5%
15%
5%
SH B
25%
10%
10%
SH C
0%
35%
0%
SH D
50%
0%
0%
SH E
20%
40%
20%
Total
100%
100%
35%
1 Red and Brown are not members of a brother-sister controlled group, since while "Ownership Test" is met, the "50% Test" is not met.
8

A B
50%
D
25%
5%
0%
25%
30% 0%
C
20%
20%
E
25%
Red Green
Red and Green Test
Corp
Ownership Test Red
Ownership Test Green
Identical Ownership
Analysis:
SH A
4%
1%
1%
SH B
25%
30%
25%
SH C
1%
19%
1%
SH D
1 Red and Green are members of a brother-sister controlled group, since both tests are met.
50%
25%
25%
SH E
20%
25%
20%
Total
100%
100%
72%
9

 Rule – I.R.C. § 1563(a)(3)
A combined group consists of 3 or more organizations that are organized as follows:
‒ Each organization is a member of either a parent-subsidiary or brother-sister group; and
‒ At least one corporation is the common parent of a parent-subsidiary; and is also a member of a brother-sister group.
10

80%
A
70%
20%
B
30%
Combined
Group
Brother-
Red
Parent-
Subsidiary
Group
Green
85%
Brother
Subsidiary
Brown
Sister
The breakdown of stock ownership of Corps Red and Brown by 2 SHs and ownership of Green by Red is as follows:
Corp
Ownership Test Red
Ownership Test Brown
Identical Ownership
Green
Analysis:
SH A
80%
70%
70%
0%
SH B
20%
30%
20%
0%
Total SHs A and B
100%
100%
90%
0%
Red Owns
0%
85%
1 Red, Brown, and Green are each members of the same combined group of trades or businesses under common control because: a Red, Brown, and Green are each members of either a parent-subsidiary or a brother-sister group; and b Red is the common parent of the parent-subsidiary group consisting of Red and Green; and c Red is a member of a brother-sister group consisting of Red and Brown.
11