The Internal Revenue Code: What is a Controlled Group?

The Internal Revenue Code: What is a Controlled Group?

Estimated reading time: 4 minutes

controlled-group

The Internal Revenue Code is the portion of the federal statutory tax law here in the U.S. that covers a number of taxes as well as procedure and administration, all regulated and implemented by the IRS.

The Code contains rules for both controlled groups and affiliated service groups to determine if two or more employers must be grouped together and treated as single employer under certain specific circumstances. Because of the necessity to comply with employee benefit laws, it is important to understand if your Wisconsin business is linked other businesses to form one of these two defined groups.

Here is an overview of what defines a controlled group to help you navigate the Code and its regulations.

What is a Controlled Group?

A controlled group is defined under Code sections 414(b) and (c) and is defined as a group of two or more corporations, trades or businesses (including partnerships and proprietorships) that have one of the following relationships:

  1. Parent-subsidiary
  2. Brother-sister
  3. Combination of parent-subsidiary and brother-sister

Constructive ownership rules also apply to determine whether a group is a controlled group under the Code, treating a person as owning an interest in an organization that is not actually owned by that person. Attribution may result from family or business relationships.

What is a Parent-Subsidiary Controlled Group?

A parent-subsidiary controlled group is a chain or organization that are connected through ownership of a controlling interest with a common parent organization. A controlling interest in each of the organizations, excluding the common parent, must be owned by one or more of the other organizations in the group and the common parent organization must own a controlling interest in at least one of the other organizations.

What is a Brother-Sister Controlled Group?

A brother-sister controlled group means that two or more corporations with the same five or fewer individuals, estates or trusts own controlling interest (80% or more) in each organization and have effective control, typically more than 50% of the organization’s stock or profits. This only applies if the extent of ownership is identical with respect to each such organization.

What is a Combined Controlled Group?

A combined controlled group is defined as three or more organizations, each a member of either a parent-subsidiary or brother-sister controlled group with at least one organization being the common parent organization of a parent-subsidiary controlled group as well as a member of a brother-sister controlled group.

What is Constructive Ownership?

Finally, there is constructive ownership, which applies to controlled group rules that treat an individual as owning an interest in an organization based on a family or business relationship, which can get much more complex.

For example, an individual will be considered to own an interest, owned directly or indirectly, by his or her children under age 21 or by his or her spouse, unless legally separated or divorced. An exception applies if there is no direct ownership, no participation in the organization and if no more than 50 percent of the organization’s gross income is from passive investments.

An interest owned, directly or indirectly, by or for a partnership, corporation or trust is treated as owned by any individual having an interest of five percent or more in the organization, in proportion to the individual’s interest in the organization.


Determining whether two or more organizations must be treated as a single employer under the controlled group or affiliated service group rules involves a complex analysis of ownership interests. Because these rules are so complex, an employer’s controlled group or affiliated service group status should be reviewed by legal counsel.

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