26 U.S.C. § 1563 — Definitions and special rules

Page 2559 TITLE 26—INTERNAL REVENUE CODE § 1563 RETROACTIVE TERMINATION OF ELECTIONS Pub. L. 91–172, title IV, § 401(g), Dec. 30, 1969, 83 Stat. 604, authorized an affiliated group of corporations mak- ing a consolidated return for the taxable year which in- cluded Dec. 31, 1970, to terminate the election under section 1562 of this title with respect to any prior Dec. 31 which was included in a taxable year of any such cor- porations from which there was a net operating loss carryover to the 1970 consolidated return year and pro- vided that the termination of such election was to be valid only if in accord with subsecs. (c)(1) and (e) of sec- tion 1562 of this title other than the requirement of making the termination prior to the expiration of the 3 year period specified in subsec. (e) of section 1562 of this title. § 1563. Definitions and special rules (a) Controlled group of corporations For purposes of this part, the term ‘‘controlled group of corporations’’ means any group of— (1) Parent-subsidiary controlled group One or more chains of corporations con- nected through stock ownership with a com- mon parent corporation if— (A) stock possessing at least 80 percent of the total combined voting power of all class- es of stock entitled to vote or at least 80 per- cent of the total value of shares of all class- es of stock of each of the corporations, ex- cept the common parent corporation, is owned (within the meaning of subsection (d)(1)) by one or more of the other corpora- tions; 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 corpora- tions, excluding, in computing such voting power or value, stock owned directly by such other corporations. (2) Brother-sister controlled group Two or more corporations if 5 or fewer per- sons 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) Combined group 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 in- cluded in a group of corporations described in paragraph (1), and also (B) is included in a group of corporations described in paragraph (2). (4) Certain insurance companies 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 con- trolled group of corporations described in paragraph (1), (2), or (3). (b) Component member (1) General rule 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 cor- poration— (A) is a member of such controlled group of corporations on the December 31 included in such year and is not treated as an ex- cluded member under paragraph (2), or (B) is not a member of such controlled group of corporations on the December 31 in- cluded in such year but is treated as an addi- tional member under paragraph (3). (2) Excluded members A corporation which is a member of a con- trolled group of corporations on December 31 of any taxable year shall be treated as an ex- cluded member of such group for the taxable year including such December 31 if such cor- poration— (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 in- come 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 in- surance 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) Additional members 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 De- cember 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), shall be treated as an additional member of such group on December 31 for its taxable year including such December 31 if it was a member of such group for one-half (or more) of the number of days in such taxable year which precede such December 31. (4) Overlapping groups If a corporation is a component member of more than one controlled group of corpora- tions with respect to any taxable year, such corporation shall be treated as a component member of only one controlled group. The de- termination as to the group of which such cor- Page 2560 TITLE 26—INTERNAL REVENUE CODE § 1563 poration is a component member shall be made under regulations prescribed by the Sec- retary which are consistent with the purposes of this part. (c) Certain stock excluded (1) General rule 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) Stock treated as ‘‘excluded stock’’ (A) Parent-subsidiary controlled group For purposes of subsection (a)(1), if a cor- poration (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 vot- ing 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 mean- ing of subsection (d)(2)) who is a principal stockholder or officer of the parent cor- poration. For purposes of this clause, the term ‘‘principal stockholder’’ of a corpora- tion 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 cor- poration, (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 con- ditions which run in favor of such parent (or subsidiary) corporation and which sub- stantially 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 chari- table organizations which are exempt from tax) applies and which is controlled di- rectly or indirectly by the parent corpora- tion or subsidiary corporation, by an indi- vidual, estate, or trust that is a principal stockholder (within the meaning of clause (ii)) of the parent corporation, by an offi- cer of the parent corporation, or by any combination thereof. (B) Brother-sister controlled group 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 class- es of stock entitled to vote or 50 percent or more of the total value of shares of all class- es 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 di- rect 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 re- ciprocal 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 chari- table organizations which are exempt from tax) applies and which is controlled di- rectly 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 corpora- tion, by an officer of such corporation, or by any combination thereof. (d) Rules for determining stock ownership (1) Parent-subsidiary controlled group For purposes of determining whether a cor- poration 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 corpora- tion, and (B) stock owned with the application of paragraphs (1), (2), and (3) of subsection (e). (2) Brother-sister controlled group For purposes of determining whether a cor- poration is a member of a brother-sister con- trolled 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). Page 2561 TITLE 26—INTERNAL REVENUE CODE § 1563 (e) Constructive ownership (1) Options 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 consid- ered as an option to acquire such stock. (2) Attribution from partnerships 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) Attribution from estates or trusts (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 pur- poses of this subparagraph, the actuarial in- terest of each beneficiary shall be determined by assuming the maximum exercise of discre- tion by the fiduciary in favor of such bene- ficiary 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) Attribution from corporations 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) Spouse An individual shall be considered as owning stock in a corporation owned, directly or indi- rectly, by or for his spouse (other than a spouse who is legally separated from the indi- vidual under a decree of divorce whether inter- locutory or final, or a decree of separate main- tenance), 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 em- ployee and does not participate in the man- agement of such corporation at any time during such taxable year; (C) Not more than 50 percent of such cor- poration’s gross income for such taxable year was derived from royalties, rents, divi- dends, interest, and annuities; and (D) Such stock in such corporation is not, at any time during such taxable year, sub- ject to conditions which substantially re- strict 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 at- tained the age of 21 years. (6) Children, grandchildren, parents, and grandparents (A) Minor children An individual shall be considered as own- ing 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) Adult children and grandchildren An individual who owns (within the mean- ing 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, grand- children, and children who have attained the age of 21 years. (C) Adopted child For purposes of this section, a legally adopted child of an individual shall be treat- ed as a child of such individual by blood. (f) Other definitions and rules (1) Employee defined For purposes of this section the term ‘‘em- ployee’’ has the same meaning such term is given by paragraphs (1) and (2) of section 3121(d). (2) Operating rules (A) In general 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) Members of family Stock constructively owned by an indi- vidual by reason of the application of para- graph (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) Special rules 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 re- Page 2562 TITLE 26—INTERNAL REVENUE CODE § 1563 sults 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 com- ponent 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 reg- ulations 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 own- ership 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 re- sult is that such corporation is not a compo- nent member of a controlled group of cor- porations. (4) Franchised corporation If— (A) a parent corporation (as defined in sub- section (c)(2)(A)), or a common owner (as de- fined in subsection (c)(2)(B)), of a corpora- tion 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 fran- chised to sell the products of another mem- ber, or the common owner, of such con- trolled group; (B) such stock is to be sold to an employee (or employees) of such franchised corpora- tion 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 em- ployee’s share of the profits of such cor- poration (whether received as compensa- tion 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 corpora- tion or common owner); (D) such employee (or employees) owns di- rectly 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 sub- paragraphs (A), (B), (C), (D), and (E) have been met for one-half (or more) of the num- ber of days preceding the December 31 in- cluded within the taxable year (or if the tax- able year does not include December 31, the last day of such year) of the franchised cor- poration, then such franchised corporation shall be treated as an excluded member of such group, under subsection (b)(2), for such taxable year. (5) Brother-sister controlled group definition for provisions other than this part (A) In general Except as specifically provided in an appli- cable provision, subsection (a)(2) shall be ap- plied to an applicable provision as if it read as follows: ‘‘(2) Brother-sister controlled group ‘‘Two or more corporations if 5 or fewer per- sons who are individuals, estates, or trusts own (within the meaning of subsection (d)(2) stock possessing— ‘‘(A) at least 80 percent of the total com- bined voting power of all classes of stock en- titled 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 ac- count the stock ownership of each such per- son only to the extent such stock ownership is identical with respect to each such cor- poration.’’ (B) Applicable provision For purposes of this paragraph, an applica- ble provision is any provision of law (other than this part) which incorporates the defi- nition of controlled group of corporations under subsection (a). (Added Pub. L. 88–272, title II, § 235(a), Feb. 26, 1964, 78 Stat. 120; amended Pub. L. 91–172, title IV, § 401(c), (d), Dec. 30, 1969, 83 Stat. 602; Pub. L. 91–373, title I, § 102(b), Aug. 10, 1970, 84 Stat. 696; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 98–369, div. A, title II, § 211(b)(22), July 18, 1984, 98 Stat. 757; Pub. L. 99–514, title X, § 1024(c)(17), Oct. 22, 1986, 100 Stat. 2408; Pub. L. 100–647, title I, § 1018(s)(3)(A), Nov. 10, 1988, 102 Stat. 3587; Pub. L. 108–357, title VIII, § 900(a), (b), Oct. 22, 2004, 118 Stat. 1650.) Editorial Notes AMENDMENTS 2004—Subsec. (a)(2). Pub. L. 108–357, § 900(a), sub- stituted ‘‘possessing’’ for ‘‘possessing—’’, struck out ‘‘(B)’’ before ‘‘more than 50 percent of the total com- bined voting power’’, and struck out subpar. (A) which read as follows: ‘‘at least 80 percent of the total com- bined 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 ‘‘sub- section (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 sub- stituted ‘‘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), redesig- nated existing provisions with minor changes as par. (A) and added par. (B). Page 2563 TITLE 26—INTERNAL REVENUE CODE § 2001 1 Section numbers editorially supplied. 1 Section numbers editorially supplied. 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, es- tate, 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’’, re- spectively 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 tax- able 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 AMENDMENT Amendment 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 AMENDMENT Amendment 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 AMENDMENT Amendment 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 end- ing 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. [§ 1564. Repealed. Pub. L. 101–508, title XI, § 11801(a)(38), Nov. 5, 1990, 104 Stat. 1388–521] Section, added Pub. L. 91–172, title IV, § 401(b)(1), Dec. 30, 1969, 83 Stat. 600; amended Pub. L. 94–455, title XIX, §§ 1901(b)(1)(J)(vi), (21)(A)(ii), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1791, 1797, 1834, related to transitional rules in the case of certain controlled corporations. Statutory Notes and Related Subsidiaries SAVINGS PROVISION For provisions that nothing in repeal by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liabil- ity for tax for periods ending after Nov. 5, 1990, see sec- tion 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. Subtitle B—Estate and Gift Taxes Chapter Sec.1 11. Estate tax .............................................. 2001 12. Gift tax .................................................. 2501 13. Tax on generation-skipping transfers ... 2601 14. Special valuation rules .......................... 2701 15. Gifts and bequests from expatriates ...... 2801 Editorial Notes AMENDMENTS 2008—Pub. L. 110–245, title III, § 301(b)(2), June 17, 2008, 122 Stat. 1646, added item for chapter 15. 1990—Pub. L. 101–508, title XI, § 11602(c), Nov. 5, 1990, 104 Stat. 1388–500, added item for chapter 14. 1986—Pub. L. 99–514, title XIV, § 1431(b), Oct. 22, 1986, 100 Stat. 2729, struck out ‘‘certain’’ after ‘‘Tax on’’ in item for chapter 13. 1976—Pub. L. 94–455, title XX, § 2006(b)(1), Oct. 4, 1976, 90 Stat. 1888, added item for chapter 13. CHAPTER 11—ESTATE TAX Subchapter Sec.1 A. Estates of citizens or residents ............. 2001 B. Estates of nonresidents not citizens ...... 2101 C. Miscellaneous ........................................ 2201 Subchapter A—Estates of Citizens or Residents Part I. Tax imposed. II. Credits against tax. III. Gross estate. IV. Taxable estate. PART I—TAX IMPOSED Sec. 2001. Imposition and rate of tax. 2002. Liability for payment. Editorial Notes AMENDMENTS 1976—Pub. L. 94–455, title XX, § 2001(c)(1)(N)(i), Oct. 4, 1976, 90 Stat. 1853, substituted ‘‘Imposition and rate of tax’’ for ‘‘Rate of tax’’ in item 2001. § 2001. Imposition and rate of tax (a) Imposition A tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. (b) Computation of tax The tax imposed by this section shall be the amount equal to the excess (if any) of— (1) a tentative tax computed under sub- section (c) on the sum of— (A) the amount of the taxable estate, and (B) the amount of the adjusted taxable gifts, over (2) the aggregate amount of tax which would have been payable under chapter 12 with re- spect to gifts made by the decedent after De- cember 31, 1976, if the modifications described in subsection (g) had been applicable at the time of such gifts. For purposes of paragraph (1)(B), the term ‘‘ad- justed taxable gifts’’ means the total amount of the taxable gifts (within the meaning of section 2503) made by the decedent after December 31, 1976, other than gifts which are includible in the gross estate of the decedent.