Brother-Sister Controlled Groups: Tax Court Stands Firm in the Face of Reversal

Abstract

INTRODUCTION|Corporations are generally considered separate legal entities under the Federal tax law. In the case of a "controlled group of corporations" as defined by Internal Revenue Code section 1563(a), however, corporations within the group may be denied their separate legal status for the purposes of several sections under the Code. Corporate taxpayers included within a controlled group are treated as a single corporate taxpayer for the purposes of these sections and thus do not enjoy the full tax benefits the corporations might otherwise be entitled to if recognized as separate corporate taxpayers. Sections of the Code affected by the characterization of a group of corporations as a controlled group include section 1561, which requires the allocation of one surtax exemption, accumulated earnings credit, and small business deduction for life insurance companies among the component members of the controlled group; section 46 limiting the controlled group to the use of one $25,000 investment credit; and section 179 which restricts the availability of first year bonus depreciation to the component members of the controlled group. Availability of the benefits otherwise granted by these sections to the individual corporations is therefore dependent upon the critical determination of whether the group of corporations involved may be classified as a controlled group...