
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC1563]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                     CHAPTER 6--CONSOLIDATED RETURNS
 
                       Subchapter B--Related Rules
 
                PART II--CERTAIN CONTROLLED CORPORATIONS
 
Sec. 1563. Definitions and special rules


(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--
            (A) 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 the stock of each 
        corporation, and
            (B) 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).

                   (4) Certain insurance companies

        Two or more insurance companies subject to taxation under 
    section 801 which are members of a controlled group of corporations 
    described in paragraph (1), (2), or (3). Such insurance companies 
    shall be treated as a controlled group of corporations separate from 
    any other corporations which are members of the controlled group of 
    corporations described in paragraph (1), (2), or (3).

(b) Component member

                          (1) General rule

        For purposes of this part, a corporation is a component member 
    of a controlled group of corporations on a December 31 of any 
    taxable year (and with respect to the taxable year which includes 
    such December 31) if such corporation--
            (A) is a member of such controlled group of corporations on 
        the December 31 included in such year and is not treated as an 
        excluded member under paragraph (2), or
            (B) is not a member of such controlled group of corporations 
        on the December 31 included in such year but is treated as an 
        additional member under paragraph (3).

                        (2) Excluded members

        A corporation which is a member of a controlled group of 
    corporations on December 31 of any taxable year shall be treated as 
    an excluded member of such group for the taxable year including such 
    December 31 if such corporation--
            (A) is a member of such group for less than one-half the 
        number of days in such taxable year which precede such December 
        31,
            (B) is exempt from taxation under section 501(a) (except a 
        corporation which is subject to tax on its unrelated business 
        taxable income under section 511) for such taxable year,
            (C) is a foreign corporation subject to tax under section 
        881 for such taxable year,
            (D) is an insurance company subject to taxation under 
        section 801 (other than an insurance company which is a member 
        of a controlled group described in subsection (a)(4)), or
            (E) is a franchised corporation, as defined in subsection 
        (f)(4).

                       (3) Additional members

        A corporation which--
            (A) was a member of a controlled group of corporations at 
        any time during a calendar year,
            (B) is not a member of such group on December 31 of such 
        calendar year, and
            (C) is not described, with respect to such group, in 
        subparagraph (B), (C), (D), or (E) of paragraph (2),

    shall be treated as an additional member of such group on December 
    31 for its taxable year including such December 31 if it was a 
    member of such group for one-half (or more) of the number of days in 
    such taxable year which precede such December 31.

                       (4) Overlapping groups

        If a corporation is a component member of more than one 
    controlled group of corporations with respect to any taxable year, 
    such corporation shall be treated as a component member of only one 
    controlled group. The determination as to the group of which such 
    corporation is a component member shall be made under regulations 
    prescribed by the Secretary which are consistent with the purposes 
    of this part.

(c) Certain stock excluded

                          (1) General rule

        For purposes of this part, the term ``stock'' does not include--
            (A) nonvoting stock which is limited and preferred as to 
        dividends,
            (B) treasury stock, and
            (C) stock which is treated as ``excluded stock'' under 
        paragraph (2).

               (2) Stock treated as ``excluded stock''

        (A) Parent-subsidiary controlled group

            For purposes of subsection (a)(1), if a corporation 
        (referred to in this paragraph as ``parent corporation'') owns 
        (within the meaning of subsections (d)(1) and (e)(4)), 50 
        percent or more of the total combined voting power of all 
        classes of stock entitled to vote or 50 percent or more of the 
        total value of shares of all classes of stock in another 
        corporation (referred to in this paragraph as ``subsidiary 
        corporation''), the following stock of the subsidiary 
        corporation shall be treated as excluded stock--
                (i) stock in the subsidiary corporation held by a trust 
            which is part of a plan of deferred compensation for the 
            benefit of the employees of the parent corporation or the 
            subsidiary corporation,
                (ii) stock in the subsidiary corporation owned by an 
            individual (within the meaning of subsection (d)(2)) who is 
            a principal stockholder or officer of the parent 
            corporation. For purposes of this clause, the term 
            ``principal stockholder'' of a corporation means an 
            individual who owns (within the meaning of subsection 
            (d)(2)) 5 percent or more of the total combined voting power 
            of all classes of stock entitled to vote or 5 percent or 
            more of the total value of shares of all classes of stock in 
            such corporation,
                (iii) stock in the subsidiary corporation owned (within 
            the meaning of subsection (d)(2)) by an employee of the 
            subsidiary corporation if such stock is subject to 
            conditions which run in favor of such parent (or subsidiary) 
            corporation and which substantially restrict or limit the 
            employee's right (or if the employee constructively owns 
            such stock, the direct owner's right) to dispose of such 
            stock, or
                (iv) stock in the subsidiary corporation owned (within 
            the meaning of subsection (d)(2)) by an organization (other 
            than the parent corporation) to which section 501 (relating 
            to certain educational and charitable organizations which 
            are exempt from tax) applies and which is controlled 
            directly or indirectly by the parent corporation or 
            subsidiary corporation, by an individual, estate, or trust 
            that is a principal stockholder (within the meaning of 
            clause (ii)) of the parent corporation, by an officer of the 
            parent corporation, or by any combination thereof.

        (B) Brother-sister controlled group

            For purposes of subsection (a)(2), if 5 or fewer persons who 
        are individuals, estates, or trusts (referred to in this 
        subparagraph as ``common owners'') own (within the meaning of 
        subsection (d)(2)), 50 percent or more of the total combined 
        voting power of all classes of stock entitled to vote or 50 
        percent or more of the total value of shares of all classes of 
        stock in a corporation, the following stock of such corporation 
        shall be treated as excluded stock--
                (i) stock in such corporation held by an employees' 
            trust described in section 401(a) which is exempt from tax 
            under section 501(a), if such trust is for the benefit of 
            the employees of such corporation,
                (ii) stock in such corporation owned (within the meaning 
            of subsection (d)(2)) by an employee of the corporation if 
            such stock is subject to conditions which run in favor of 
            any of such common owners (or such corporation) and which 
            substantially restrict or limit the employee's right (or if 
            the employee constructively owns such stock, the direct 
            owner's right) to dispose of such stock. If a condition 
            which limits or restricts the employee's right (or the 
            direct owner's right) to dispose of such stock also applies 
            to the stock held by any of the common owners pursuant to a 
            bona fide reciprocal stock purchase arrangement, such 
            condition shall not be treated as one which restricts or 
            limits the employee's right to dispose of such stock, or
                (iii) stock in such corporation owned (within the 
            meaning of subsection (d)(2)) by an organization to which 
            section 501 (relating to certain educational and charitable 
            organizations which are exempt from tax) applies and which 
            is controlled directly or indirectly by such corporation, by 
            an individual, estate, or trust that is a principal 
            stockholder (within the meaning of subparagraph (A)(ii)) of 
            such corporation, by an officer of such corporation, or by 
            any combination thereof.

(d) Rules for determining stock ownership

               (1) Parent-subsidiary controlled group

        For purposes of determining whether a corporation is a member of 
    a parent-subsidiary controlled group of corporations (within the 
    meaning of subsection (a)(1)), stock owned by a corporation means--
            (A) stock owned directly by such corporation, and
            (B) stock owned with the application of paragraphs (1), (2), 
        and (3) of subsection (e).

                 (2) Brother-sister controlled group

        For purposes of determining whether a corporation is a member of 
    a brother-sister controlled group of corporations (within the 
    meaning of subsection (a)(2)), stock owned by a person who is an 
    individual, estate, or trust means--
            (A) stock owned directly by such person, and
            (B) stock owned with the application of subsection (e).

(e) Constructive ownership

                             (1) Options

        If any person has an option to acquire stock, such stock shall 
    be considered as owned by such person. For purposes of this 
    paragraph, an option to acquire such an option, and each one of a 
    series of such options, shall be considered as an option to acquire 
    such stock.

                  (2) Attribution from partnerships

        Stock owned, directly or indirectly, by or for a partnership 
    shall be considered as owned by any partner having an interest of 5 
    percent or more in either the capital or profits of the partnership 
    in proportion to his interest in capital or profits, whichever such 
    proportion is the greater.

               (3) Attribution from estates or trusts

        (A) Stock owned, directly or indirectly, by or for an estate or 
    trust shall be considered as owned by any beneficiary who has an 
    actuarial interest of 5 percent or more in such stock, to the extent 
    of such actuarial interest. For purposes of this subparagraph, the 
    actuarial interest of each beneficiary shall be determined by 
    assuming the maximum exercise of discretion by the fiduciary in 
    favor of such beneficiary and the maximum use of such stock to 
    satisfy his rights as a beneficiary.
        (B) Stock owned, directly or indirectly, by or for any portion 
    of a trust of which a person is considered the owner under subpart E 
    of part I of subchapter J (relating to grantors and others treated 
    as substantial owners) shall be considered as owned by such person.
        (C) This paragraph shall not apply to stock owned by any 
    employees' trust described in section 401(a) which is exempt from 
    tax under section 501(a).

                  (4) Attribution from corporations

        Stock owned, directly or indirectly, by or for a corporation 
    shall be considered as owned by any person who owns (within the 
    meaning of subsection (d)) 5 percent or more in value of its stock 
    in that proportion which the value of the stock which such person so 
    owns bears to the value of all the stock in such corporation.

                             (5) Spouse

        An individual shall be considered as owning stock in a 
    corporation owned, directly or indirectly, by or for his spouse 
    (other than a spouse who is legally separated from the individual 
    under a decree of divorce whether interlocutory or final, or a 
    decree of separate maintenance), except in the case of a corporation 
    with respect to which each of the following conditions is satisfied 
    for its taxable year--
            (A) The individual does not, at any time during such taxable 
        year, own directly any stock in such corporation;
            (B) The individual is not a director or employee and does 
        not participate in the management of such corporation at any 
        time during such taxable year;
            (C) Not more than 50 percent of such corporation's gross 
        income for such taxable year was derived from royalties, rents, 
        dividends, interest, and annuities; and
            (D) Such stock in such corporation is not, at any time 
        during such taxable year, subject to conditions which 
        substantially restrict or limit the spouse's right to dispose of 
        such stock and which run in favor of the individual or his 
        children who have not attained the age of 21 years.

       (6) Children, grandchildren, parents, and grandparents

        (A) Minor children

            An individual shall be considered as owning stock owned, 
        directly or indirectly, by or for his children who have not 
        attained the age of 21 years, and, if the individual has not 
        attained the age of 21 years, the stock owned, directly or 
        indirectly, by or for his parents.

        (B) Adult children and grandchildren

            An individual who owns (within the meaning of subsection 
        (d)(2), but without regard to this subparagraph) 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 in a corporation shall 
        be considered as owning the stock in such corporation owned, 
        directly or indirectly, by or for his parents, grandparents, 
        grandchildren, and children who have attained the age of 21 
        years.

        (C) Adopted child

            For purposes of this section, a legally adopted child of an 
        individual shall be treated as a child of such individual by 
        blood.

(f) Other definitions and rules

                        (1) Employee defined

        For purposes of this section the term ``employee'' has the same 
    meaning such term is given by paragraphs (1) and (2) of section 
    3121(d).

                         (2) Operating rules

        (A) In general

            Except as provided in subparagraph (B), stock constructively 
        owned by a person by reason of the application of paragraph (1), 
        (2), (3), (4), (5), or (6) of subsection (e) shall, for purposes 
        of applying such paragraphs, be treated as actually owned by 
        such person.

        (B) Members of family

            Stock constructively owned by an individual by reason of the 
        application of paragraph (5) or (6) of subsection (e) shall not 
        be treated as owned by him for purposes of again applying such 
        paragraphs in order to make another the constructive owner of 
        such stock.

                          (3) Special rules

        For purposes of this section--
            (A) If stock may be considered as owned by a person under 
        subsection (e)(1) and under any other paragraph of subsection 
        (e), it shall be considered as owned by him under subsection 
        (e)(1).
            (B) If stock is owned (within the meaning of subsection (d)) 
        by two or more persons, such stock shall be considered as owned 
        by the person whose ownership of such stock results in the 
        corporation being a component member of a controlled group. If 
        by reason of the preceding sentence, a corporation would (but 
        for this sentence) become a component member of two controlled 
        groups, it shall be treated as a component member of one 
        controlled group. The determination as to the group of which 
        such corporation is a component member shall be made under 
        regulations prescribed by the Secretary which are consistent 
        with the purposes of this part.
            (C) If stock is owned by a person within the meaning of 
        subsection (d) and such ownership results in the corporation 
        being a component member of a controlled group, such stock shall 
        not be treated as excluded stock under subsection (c)(2), if by 
        reason of treating such stock as excluded stock the result is 
        that such corporation is not a component member of a controlled 
        group of corporations.

                     (4) Franchised corporation

        If--
            (A) a parent corporation (as defined in subsection 
        (c)(2)(A)), or a common owner (as defined in subsection 
        (c)(2)(B)), of a corporation which is a member of a controlled 
        group of corporations is under a duty (arising out of a written 
        agreement) to sell stock of such corporation (referred to in 
        this paragraph as ``franchised corporation'') which is 
        franchised to sell the products of another member, or the common 
        owner, of such controlled group;
            (B) such stock is to be sold to an employee (or employees) 
        of such franchised corporation pursuant to a bona fide plan 
        designed to eliminate the stock ownership of the parent 
        corporation or of the common owner in the franchised 
        corporation;
            (C) such plan--
                (i) provides a reasonable selling price for such stock, 
            and
                (ii) requires that a portion of the employee's share of 
            the profits of such corporation (whether received as 
            compensation or as a dividend) be applied to the purchase of 
            such stock (or the purchase of notes, bonds, debentures or 
            other similar evidence of indebtedness of such franchised 
            corporation held by such parent corporation or common 
            owner);

            (D) such employee (or employees) owns directly more than 20 
        percent of the total value of shares of all classes of stock in 
        such franchised corporation;
            (E) more than 50 percent of the inventory of such franchised 
        corporation is acquired from members of the controlled group, 
        the common owner, or both; and
            (F) all of the conditions contained in subparagraphs (A), 
        (B), (C), (D), and (E) have been met for one-half (or more) of 
        the number of days preceding the December 31 included within the 
        taxable year (or if the taxable year does not include December 
        31, the last day of such year) of the franchised corporation,

    then such franchised corporation shall be treated as an excluded 
    member of such group, under subsection (b)(2), for such taxable 
    year.

(Added Pub. L. 88-272, title II, Sec. 235(a), Feb. 26, 1964, 78 Stat. 
120; amended Pub. L. 91-172, title IV, Sec. 401(c), (d), Dec. 30, 1969, 
83 Stat. 602; Pub. L. 91-373, title I, Sec. 102(b), Aug. 10, 1970, 84 
Stat. 696; Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A), Oct. 4, 1976, 
90 Stat. 1834; Pub. L. 98-369, div. A, title II, Sec. 211(b)(22), July 
18, 1984, 98 Stat. 757; Pub. L. 99-514, title X, Sec. 1024(c)(17), Oct. 
22, 1986, 100 Stat. 2408; Pub. L. 100-647, title I, Sec. 1018(s)(3)(A), 
Nov. 10, 1988, 102 Stat. 3587.)


                               Amendments

    1988--Subsec. (d)(1)(B). Pub. L. 100-647 substituted ``paragraphs 
(1), (2), and (3) of subsection (e)'' for ``subsection (e)(1)''.
    1986--Subsec. (b)(2)(D). Pub. L. 99-514 struck out ``or section 
821'' after ``section 801''.
    1984--Subsecs. (a)(4), (b)(2)(D). Pub. L. 98-369 substituted 
``section 801'' for ``section 802''.
    1976--Subsecs. (b)(4), (f)(3)(B). Pub. L. 94-455 struck out ``or his 
delegate'' after ``Secretary''.
    1970--Subsec. (f)(1). Pub. L. 91-373 substituted ``by paragraphs (1) 
and (2) of section 2131(d)'' for ``in section 3306(i)''.
    1969--Subsec. (a)(2). Pub. L. 91-172, Sec. 401(c), redesignated 
existing provisions with minor changes as par. (A) and added par. (B).
    Subsec. (c)(2)(A)(iv). Pub. L. 91-172, Sec. 401(d)(1), added cl. 
(iv).
    Subsec. (c)(2)(B). Pub. L. 91-172, Sec. 401(d)(2), substituted ``5 
or fewer persons who are individuals, estates, or trusts (referred to in 
this subparagraph as `common owners') own'' for ``a person who is an 
individual, estate, or trust (referred to in this paragraph as `common 
owner') owns'' and in cl. (ii), substituted ``any of such common 
owners'', ``any of the common owners'' for ``such common owner'' and 
``the common owner'', respectively and added cl. (iii).


                    Effective Date of 1988 Amendment

    Section 1018(s)(3)(B) of Pub. L. 100-647 provided that: ``The 
amendment made by subparagraph (A) [amending this section] shall apply 
to taxable years beginning after the date of the enactment of this Act 
[Nov. 10, 1988].''


                    Effective Date of 1986 Amendment

    Amendment by Pub. L. 99-514 applicable to taxable years beginning 
after Dec. 31, 1986, see section 1024(e) of Pub. L. 99-514, set out as a 
note under section 831 of this title.


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-369 applicable to taxable years beginning 
after Dec. 31, 1983, see section 215 of Pub. L. 98-369, set out as an 
Effective Date note under section 801 of this title.


                    Effective Date of 1969 Amendment

    Amendment by Pub. L. 91-172 applicable with respect to taxable years 
ending on or after Dec. 31, 1970, see section 401(h)(3) of Pub. L. 91-
172, set out as a note under section 1561 of this title.


                             Effective Date

    Section applicable with respect to taxable years ending after Dec. 
31, 1963, see section 235(d) of Pub. L. 88-272, set out as an Effective 
Date of 1964 Amendment note under section 1551 of this title.

                  Section Referred to in Other Sections

    This section is referred to in sections 38, 41, 52, 120, 127, 129, 
144, 147, 179, 194, 243, 263A, 267, 269B, 368, 382, 384, 404, 409, 414, 
447, 460, 465, 585, 593, 613A, 806, 831, 848, 861, 904, 936, 943, 993, 
1042, 1202, 1504, 1551, 1561, 5061 of this title; title 2 section 691e; 
title 29 sections 1060, 1107, 1322; title 42 section 1395w-25.
