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​Controlled Group Determinations - Internal Revenue Code

Treas. Reg. §1.414(b)-1:
(a)  Definition of controlled group of corporations. For purposes of this section, the term “controlled group of corporations” has the same meaning as is assigned to the term in section 1563(a) and the regulations thereunder, except that (1) the term “controlled group of corporations” shall not include an “insurance group” described in section 1563(a)(4), and (2) section 1563(e)(3)(C) (relating to stock owned by certain employees' trusts) shall not apply. For purposes of this section, the term “members of a controlled group” means two or more corporations connected through stock ownership described in section 1563(a) (1), (2), or (3), whether or not such corporations are “component members of a controlled group” within the meaning of section 1563(b). Two or more corporations are members of a controlled group at any time such corporations meet the requirements of section 1563(a) (as modified by this paragraph). For purposes of this section, if a corporation is a member of more than one controlled group of corporations, such corporation shall be treated as a member of each controlled group.

Code §1563 (a):
(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).

Treas. Reg. §1.1563-1
(i) Definition. For purposes of sections 1561 through 1563, a corporation is with respect to its taxable year a component member of a controlled group of corporations for the group's testing date if such corporation -
(A) Is a member of such controlled group on such testing date and is not treated as an excluded member under paragraph (b)(2) of this section; or
(B) Is not a member of such controlled group on such testing date but is treated as an additional member under paragraph (b)(3) of this section.

Stock Options

• “Because ERISA does not define ‘option’ [courts and the IRS] must borrow from traditional common law to develop the necessary federal common law for interpreting the statutory language.”  IUE AFL-CIO Pension Fund v. Barker & Williamson, Inc., 788 F.2d 118 (3d Cir. 1986).
  
• An option is the right to purchase stock from the corporation or its shareholders that is not subject to any conditions other than the lapse of time or payment of the purchase price.  Cf. Rev. Rul. 89-64, 1989-1 C.B. 91; Rev. Rul. 68-801, 1968-2 C.B. 124; Field Service Advice Memorandum 1993-0402-5 (CCH) (April 2, 1993).
  
• A right to purchase stock is not considered an option for this purpose if it is subject to contingencies beyond the purchaser’s control.  Central Transport, Inc. v. Central States, Southeast and Southwest Area Pension Fund, 640 F. Supp. 56 (E.D. Tenn. 1986), aff’d, 816 F.2d 678 (6th Cir.), cert. denied, 484 U.S. 926 (1987). 
  
• Contingencies included for the benefit of the purchaser alone are disregarded for this purpose.  See Board of Trustees of Trucking Employees of North Jersey Welfare Fund, Inc.–Pension Fund v. Centra, 983 F.2d 495 (3d Cir. 1992); Mid-America Indus., Inc. v. United States, 477 F.2d 1029 (8th Cir. 1973).
  

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