Controlled Groups

[Guest Laura Millwood]

In reading the IRC regulations on controlled groups, the focus seems to be on 5 or fewer shareholders. In a situation where there are two companies and the ownership is identical, and you can meet the effective control test (5 shareholders who own 50%+), but you can not meet the controlling interest test (the group of 5 does not have 80% ownership), do you have a controlled group? I am getting confused with the situation of identical ownership (21 owners), but there are not 5 who meet the tests. Please help. Thank you.

[Dowist]

You apply the rules mechanically - if you don't have 5 or fewer owners that own 80% of both companies, you don't have a controlled group - at least not a brother-sister controlled group.

If these companies are affiliated (work together or do business with one another) you might have an affiliated service group - see ss 414(m).

[MWeddell]

I agree that one applies the rules mechanically but be aware of family attribution of stock ownership rules which might make the ownership percentage of some individuals higher than what it at first appears.