26 C.F.R. § 1.1562-5 Continuing and successor controlled groups.
Title 26 - Internal Revenue
(a) Controlled group continuing in existence. For purposes of §§1.1561–3 and 1.1562–1 through 1.1562–4: (1) Parent-subsidiary group. A parent-subsidiary controlled group of corporations shall be considered as remaining in existence as long as (i) such group is not considered, under paragraph (c)(3) of this section, to be a successor controlled group in respect of another controlled group, and (ii) its common parent corporation remains as a common parent and satisfies the requirements of paragraph (a)(2)(i)(b) of §1.1563–1 with respect to the ownership of stock of at least one corporation. (2) Brother-sister group. A brother-sister controlled group of corporations shall be considered as remaining in existence as long as the requirements of paragraph (a)(3)(i) of §1.1563–1 continue to be satisfied with respect to at least two corporations, taking into account the stock ownership of only those five or fewer persons whose stock ownership was taken into account with respect to the election under section 1562(a)(1). (3) Combined group. A combined group of corporations shall be considered as remaining in existence as long as (i) the brother-sister controlled group of corporations referred to in paragraph (a)(4)(i) of §1.1563–1 in respect of such combined group remains in existence (within the meaning of subparagraph (2) of this paragraph), and (ii) at least one such corporation is a common parent of a parent-subsidiary controlled group of corporations referred to in such paragraph (a)(4)(i). (4) Insurance group. If, by reason of paragraph (a)(5)(i) of §1.1563–1, two or more insurance companies subject to taxation under section 802 are treated as an insurance group separate from any corporations which are members of a controlled group described in paragraph (a) (2), (3), or (4) of §1.1563–1, such insurance group shall be considered as remaining in existence as long as (i) the controlled group described in paragraph (a) (2), (3), or (4) of such section, as the case may be, remains in existence (within the meaning of subparagraph (1), (2), or (3) of this paragraph), and (ii) there are at least two insurance companies which satisfy the requirements of paragraph (a)(5)(i) of such section. (b) Controlled group no longer in existence—(1) General. Except as provided in subparagraph (3) of this paragraph, a controlled group of corporations is considered as going out of existence with respect to a December 31 if such group ceases to remain in existence under the principles of paragraph (a) of this section during the calendar year ending on such date. (2) Examples. The provisions of subparagraph (1) of this paragraph may be illustrated by the following examples, in which each corporation referred to uses the calendar year as its taxable year: Example (1). Corporation P was organized on January 1, 1964, and acquired all the stock of corporation S–1 on February 1, 1964, and all the stock of corporation S–2 on March 1, 1965. On April 1, 1965, P sold all its S–1 stock to the public. Beginning on February 1, 1964, P is the common parent corporation of a parent-subsidiary controlled group of corporations. Under paragraph (a)(1) of this section, the controlled group remains in existence throughout the remainder of 1964 and throughout 1965 even though after April 1, 1965, P satisfies the stock ownership requirements of paragraph (a)(2)(i)(b) of §1.1563–1 only with respect to the stock of S–2, a corporation which was not a member of the group at the time the group was formed, and even though S–1 ceased to be a member of the group after the group was formed. Accordingly, if the controlled group makes a valid election under section 1562(a)(1) with respect to December 31, 1964, such election will remain in effect with respect to December 31, 1965, unless terminated under section 1562(c) (1), (2), or (3). Moreover, if such election were made and subsequently terminated with respect to December 31, 1964, the group would not be eligible (by reason of section 1562(d)) to make an election under section 1562(a)(1) with respect to December 31, 1965. Example (2). Assume the same facts as in example (1) except that corporation S–2 is a franchised corporation as defined in section 1563(f)(4) for its 1965 taxable year. On December 31, 1965, S–2 is treated as an excluded member of the parent-subsidiary controlled group of which P is the common parent. See section 1563(b)(2)(E). Nevertheless, such controlled group is considered as remaining in existence throughout 1965. Example (3). Assume the same facts as in example (1) except that P sold its S–1 stock on February 28, 1965, instead of April 1, 1965. Under the principles of paragraph (a)(1) of this section, the parent-subsidiary controlled group ceases to remain in existence on February 28, 1965. Accordingly, under subparagraph (1) of this paragraph, such group is considered as going out of existence with respect to December 31, 1965. Thus, if the group makes a valid election under section 1562(a)(1) with respect to December 31, 1964, such election terminates with respect to December 31, 1965. Moreover, the new controlled group of corporations consisting of P and S–2 is not precluded (by reason of section 1562(d)) from making an election under section 1562(a)(1) with respect to December 31, 1965. Example (4). Smith, an individual, owns 80 percent of the only class of stock of corporations W and X on each day of 1966 and 1967. W, in turn, owns 80 percent of the only class of stock of corporation Y on each day of 1966. On April 15, 1967, X purchases 80 percent of the only class of corporation Z and on April 30, 1967, W sells all its stock in Y. Under paragraph (a)(3) of this section, the combined group remains in existence throughout 1966 and 1967 since (i) the brother-sister controlled group of corporations referred to in paragraph (a)(4)(i) of §1.1563–1 in respect of such combined group remains in existence, and (ii) at least one corporation is a common parent of a parent-subsidiary controlled group referred to in such paragraph. Example (5). Assume the same facts as in example (4) except that Y and Z are life insurance companies subject to taxation under section 802 of the Code. Further assume that throughout 1966 and 1967 Y owns all the stock of corporation S, and Z owns all the stock of corporation T. S and T are life insurance companies subject to taxation under section 802. Before April 15, 1967, under paragraph (a)(5)(i) of §1.1563–1, Y and S are treated as an insurance group of corporations. After April 30, 1967, under paragraph (a)(4) of this section, Z and T are treated as an insurance group which remains in existence throughout 1966 and 1967, since the combined group remains in existence within the meaning of paragraph (a)(3) of this section throughout 1966 and 1967, and there are at all times at least two insurance companies which satisfy the requirements of paragraph (a)(5)(i) of §1.1563–1. (However, after April 30, 1967, Y and S cease to be members of the combined group and are considered to be a new controlled group of corporations.) Example (6). Jones, an individual, owns all the stock of corporations M and N on each day of 1966. On February 1, 1967, he gives all the stock of M to his 18-year-old son who continues to hold the M stock throughout the remainder of 1967. Since Jones (or his son) owns, or is considered as owning under paragraph (b)(6)(i) of §1.1563–3, all the stock of M and N on each day of 1967, under paragraph (a)(2) of this section the brother-sister controlled group consisting of M and N remains in existence throughout 1967. (3) Special rule. If: (i) Under subparagraph (1) of this paragraph, a controlled group of corporations would (without regard to this subparagraph) be considered as going out of existence with respect to a December 31 because two or more corporations cease to be members of such group during the calendar year ending on such date, (ii) Under paragraph (c) of this section, there is no successor group in respect of such group, and (iii) At least two of such corporations are considered to be component members of such group on such December 31 by reason of the additional member rule of paragraph (b)(3) of §1.1563–1, then such group shall be considered as going out of existence with respect to the December 31 immediately succeeding such December 31. For example, assume that corporations P and S file their returns on the basis of the calendar year. P owns all the stock of S from January 1, 1965, through December 1, 1965. On December 2, 1965, P sells the stock of S to the public. Under subparagraph (1) of this paragraph the controlled group consisting of P and S would (without regard to this subparagraph) be considered as going out of existence with respect to December 31, 1965, because P and S ceased to be members of the group on December 2, 1965. However, since there is no successor group in respect of the controlled group, and P and S are considered to be component members of such group on December 31, 1965, by reason of the additional member rule of paragraph (b)(3) of §1.1563–1, under this subparagraph the group is considered as going out of existence with respect to December 31, 1966, and not December 31, 1965. (c) Successor groups—(1) Transactions involving a former owner or owners. If, as a result of the transfer of stock of a corporation or corporations (whether by sale, exchange, distribution, contribution to capital, or otherwise), a controlled group (“old group”) goes out of existence, and a new controlled group (“new group”) comes into existence, then the new group shall be considered to be a successor to the old group, provided one of the following applies: (i) A person or persons who own stock of the new group that meets the more-than-50-percent stock ownership requirement of section 1563(a)(2)(B) owned stock which met such stock ownership requirement with respect to the old group; (ii) A person or persons who owned more than 50 percent of the fair market value of the stock of the common parent of the old group owns, with respect to the new group, stock that meets the more-than-50-percent stock ownership requirement of section 1563(a)(2)(B); or (iii) A person or persons who owned stock that met the more-than-50-percent stock ownership requirement of section 1563(a)(2)(B) with respect to the old group owns more than 50 percent of the fair market value of the stock of the common parent of the new group. For purposes of this paragraph, the term “owns” includes direct ownership and ownership with the application of the rules contained in paragraph (b) of §1.1563–3. For purposes of this subparagraph, if as a result of the transfer of stock, a parent-subsidiary controlled group or a brother-sister controlled group becomes a part of a combined group, then such parent-subsidiary or brother-sister group shall be considered as going out of existence as a result of such transfer. Also for purposes of this subparagraph, if as a result of the transfer of stock, a combined group goes out of existence and a parent-subsidiary or brother-sister group which was part of such combined group remains, then such parent-subsidiary or brother-sister group shall be considered to be a new controlled group which came into existence as a result of such transfer. (2) Examples. The principles of subparagraph (1) of this paragraph may be illustrated by the following examples: Example (1). On each day of 1971, unrelated individuals Grey, Black, and Green own the following amounts of the only class of outstanding stock of each of corporations R and T: Grey owns 40 percent, Black owns 40 percent, and Green owns 20 percent. On March 1, 1972, Grey sells all his stock in both corporations to unrelated individual Clay. As a result of the transfer, the brother-sister controlled group consisting of R and T goes out of existence. Since Black and Green, who owned stock which met the more-than-50-percent stock ownership requirement of section 1563(a)(2)(B) with respect to the old group, owns stock of the new group (consisting of R and T) that meets the more-than-50-percent stock ownership requirement of section 1563(a)(2)(B), the new group is considered to be the successor to the old group. If Green also sold all his stock in both corporations to unrelated individual Barnes, Black would be the only stockholder of the new group whose stock ownership was taken into account in meeting the more-than-50-percent stock ownership requirement of section 1563(a)(2)(B) with respect to the old group. Since Black would not own stock of the new group that meets the more-than-50-percent stock ownership requirement of section 1563(a)(2)(B), the new group would not be considered a successor to the controlled group which went out of existence. Example (2). On each day of 1971, all the outstanding stock of corporation P is owned in the following manner: Smith owns 30 percent, Jones owns 30 percent, and White owns 40 percent. P owns all the stock of corporation S1, S2, W1 and W2. On December 31, 1971, P, S1, S2, W1, and W2 are component members of the same controlled group. If on March 1, 1972, P distributes all the stock of S1 and S2 equally to Smith and Jones and all the stock of W1 and W2 to White, the controlled group consisting of P, S1, S2, W1, and W2 goes out of existence. Since Smith and Jones, who together owned stock which met the more-than-50-percent stock ownership requirement of section 1563 (a)(2)(B) with respect to the old group, now together own stock of the new group (consisting of S1 and S2) that meets the more-than-50-percent stock ownership requirement of section 1563(a)(2)(B), such new group is considered the successor to the old group. On the other hand, since White, the sole shareholder of W1 and W2, did not own stock which met such stock ownership requirement with respect to the old group, the new group consisting of W1 and W2 is not considered a successor of the old group. (3) Transactions involving two common parents. If, as a result of the transfer of stock of a corporation or corporations (whether by sale, exchange, distribution, contribution to capital, or otherwise): (i) A parent-subsidiary controlled group of corporations goes out of existence because its common parent corporation ceases to be a common parent, and (ii) The stockholders (immediately before the transfer) of such common parent corporation, as a result of owning stock in such common parent, own (immediately after the transfer) more than 50 percent of the fair market value of the stock of a corporation which is the common parent corporation of a controlled group of corporations immediately after the transfer, the resulting controlled group shall be considered to be a successor group in respect of the controlled group which went out of existence as a result of the transfer. (4) Example. The provisions of subparagraph (3) of this paragraph may be illustrated by the following example: Example. Corporation Y, the common parent of a parent-subsidiary controlled group, acquires the assets of corporation X, the common parent of another controlled group, in a statutory merger. The stockholders of X exchange their X stock for 60 percent of the fair market value of all of the outstanding shares of Y. Since, as a result of the exchange, (i) the parent-subsidiary controlled group of which X was the common parent goes out of existence because X ceases to be a common parent, and (ii) the stockholders of X, as a result of owning stock in X, own immediately after the exchange more than 50 percent of the fair market value of the stock of Y (the common parent of a controlled group of corporations immediately after the exchange), the controlled group of which Y is the common parent after the merger is considered to be a successor group in respect of the controlled group of which X was the common parent, and the group of which Y was the common parent before the merger is considered, under paragraph (a)(1) of this section, as no longer in existence. Thus, for example, if before the merger the controlled group of which X was the common parent was not eligible, by reason of the application of section 1562(d), to make an election under section 1562(a)(1) with respect to a December 31 occurring before December 31, 1970, then the successor controlled group would also be ineligible to make an election with respect to a December 31 occurring before December 31, 1970, whether or not the controlled group of which Y was the common parent before the merger had an election in effect pursuant to section 1562(a)(1). [T.D. 6845, 30 FR 9747, Aug. 5, 1965, as amended by T.D. 7181, 37 FR 8067, Apr. 25, 1972]
Title 26: Internal Revenue
PART 1—INCOME TAXES
Certain Controlled Corporations
§ 1.1562-5 Continuing and successor controlled groups.
