Title 26 — Internal Revenue CodeRelease 119-73
§1563 Definitions and special rules
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 6— - CONSOLIDATED RETURNS › Subchapter Subchapter B— - Related Rules › Part PART II— - CERTAIN CONTROLLED CORPORATIONS › § 1563
Summary
Defines when several corporations are treated as one group for tax rules and how to count who belongs. A group can be a parent-and-subsidiary chain when one company owns at least 80% of the stock (by voting power or value) of the others and a parent owns at least 80% of at least one of them. A group can also be a “brother‑sister” group when five or fewer people (individuals, estates, or trusts) own more than 50% (by voting power or value) of each company and their ownership is the same across the companies. Two types of groups can overlap to make a larger group, and insurance companies taxed under section 801 that are in a group are treated as a separate group. A company is a group member on the December 31 in a tax year if it is a member on that date and is not excluded, or if it was a member earlier in the year and is treated as an added member. A member is excluded for the year if it was in the group for less than one‑half of the days before that December 31, is tax‑exempt under section 501(a) (except for unrelated business income), is a foreign company taxed under section 881, is an insurance company under section 801 (with a special exception), or is a “franchised” company that meets specific sale-to-employee rules (including employees owning more than 20% and other conditions met for at least one‑half the days before December 31). If a company would belong to more than one controlled group, rules and regulations pick just one group. Also explains what counts as “stock” and who is treated as owning it. Certain nonvoting preferred stock and treasury stock are ignored. Some shares are “excluded” if held by employee trusts, by principal owners or officers, by employees whose shares are heavily restricted, or by charity organizations controlled by owners. Options to buy stock are treated as owned. Partnership, trust, estate, and corporate holdings can be imputed to partners, beneficiaries, and owners when the person has at least a 5% interest. Spouses and close family members are treated as owning each other’s stock in many cases (with special rules for younger children, parents, and adopted children). The term “employee” is the same as in section 3121(d). Finally, when other laws borrow this definition, a tighter test using 80% and 50% ownership can apply.
Full Legal Text
Title 26, §1563
Internal Revenue Code — Source: USLM XML via OLRC
(a)For purposes of this part, the term “controlled group of corporations” means any group of—
(1)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)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)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)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)(1)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)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)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),
(4)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)(1)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)(A)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)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)(1)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)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)(1)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)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)(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)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)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)(A)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)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)For purposes of this section, a legally adopted child of an individual shall be treated as a child of such individual by blood.
(f)(1)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)(A)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)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)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)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,
(5)(A)Except as specifically provided in an applicable provision, subsection (a)(2) shall be applied to an applicable provision as if it read as follows:
“(2)“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 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.”
(B)For purposes of this paragraph, an applicable provision is any provision of law (other than this part) which incorporates the definition of controlled group of corporations under subsection (a).
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2004—Subsec. (a)(2). Pub. L. 108–357, § 900(a), substituted “possessing” for “possessing—”, struck out “(B)” before “more than 50 percent of the total combined voting power”, and struck out subpar. (A) which read as follows: “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”. Subsec. (f)(5). Pub. L. 108–357, § 900(b), added par. (5). 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, § 401(c), redesignated existing provisions with minor changes as par. (A) and added par. (B). Subsec. (c)(2)(A)(iv). Pub. L. 91–172, § 401(d)(1), added cl. (iv). Subsec. (c)(2)(B). Pub. L. 91–172, § 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).
Statutory Notes and Related Subsidiaries
Effective Date
of 2004 Amendment Pub. L. 108–357, title VIII, § 900(c), Oct. 22, 2004, 118 Stat. 1650, provided that: “The
Amendments
made by this section [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [Oct. 22, 2004].”
Effective Date
of 1988 Amendment Pub. L. 100–647, title I, § 1018(s)(3)(B), Nov. 10, 1988, 102 Stat. 3587, 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 AmendmentAmendment 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 AmendmentAmendment 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 AmendmentAmendment 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 269 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 1563
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73