Taxation of related corporations

Question 1

affiliated groups

Answer 1

An “affiliated group” exists when one corporation owns at least 80% of the voting power of another corporation and holds shares representing at least 80% of its value. This test must be met on every day of the year.

Question 2

Eligible to consolidate tax return

Answer 2

Consolidating permits the corporations to eliminate intercompany profits and losses, allows the profitable corporation to offset its income against losses of another corporation, and permits net capital losses of one corporation to offset capital gains of another.

1. Foreign corporations, exempt corporations, regulated investment companies, S corporations, and insurance companies are not eligible to consolidate.
2. The election to consolidate must be unanimous and it is binding on future returns (irrevocable) and creates a joint and several tax liability.
3. The members of the group must conform their tax year to the parent’s tax year.
4. Intercompany dividends are eliminated from consolidated taxable income.
5. The parent adjusts the basis of the stock of a consolidated subsidiary for allocable portion of income, losses, and dividends.

Question 3

Controlled group

Answer 3

Examples are: parent-subsidiary corporations, brother-sister groups, and certain insurance companies.

Question 4

controlled group - accum. earnings tax credit

Answer 4

A controlled group of corporations is entitled to one $250,000 accumulated earnings tax credit. A controlled group also receives only one Section 179 expense deduction.

Question 5

A parent-subsidiary controlled group exists if:

Answer 5

1. Stock possessing at least 80% of the voting power of all classes of stock entitled to vote, or at least 80% of the total value of shares of all classes of stock of each of the corporations, except the common parent, is owned by one or more of the other corporations, and
2. The common parent owns stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote, or at least 80% of the total value of shares of all classes of stock of at least one of the other corps

Question 6

A brother-sister controlled group exists if:

Answer 6

Two or more corporations are owned by five or fewer persons (individuals, estates, or trusts):

a. Who have a common ownership of more than 50% of the total combined voting powers of all classes of stock entitled to vote, or more than 50% of the total value of shares of all classes of stock of each corporation, and
b. Who possess stock representing at least 80% of the total combined voting power of all classes of stock entitled to vote, or at least 80% of the total value of shares of all classes of each corporation.
c. The 80% test does not apply for determining brother-sister corporations in some circumstances, such as limiting the accumulated earnings credit.