CCA 200952052: Two S corporations were not a brother-sister controlled group under the 80 percent test

Plain-English summary

Chief Counsel Advice addresses the controlled-group rules relevant to an eligible small business and a $15 million income limitation. The advice explains that the brother-sister controlled-group rule uses both a 50 percent and an 80 percent test for purposes outside the provisions governing controlled-group tax years. Because the taxpayer owned all of one S corporation but only 55 percent of another, the corporations did not satisfy the 80 percent test and were not members of a controlled group. The income limitation therefore applied separately to each corporation.

Ruling snapshot

• Question: Were two S corporations a brother-sister controlled group for applying the eligible-small-business income limitation?
• Outcome: Advice given
• Key authorities: IRC §§ 52(a), 1563(a)(2), and 1563(f)(5)

Full text (IRS public release)

ID: CCA_2009112417431853 Number: 200952052
Release Date: 12/24/2009
Office: ---------------------
UILC: 172.02-01, 1563.01-02

From: ---------------
Sent: Tuesday, November 24, 2009 5:43:46 PM
To: -------------------
Cc: ---------------
Subject: controlled group rules of sections 52 and 1563

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Here is how the controlled group rules work in this area:

Section 172(b)(1)(H) as in effect at the time the taxpayer made its election defined an eligible small business within the meaning of section 448(c) substituting $15 million for
$5 million.

Section 448(c) provides for a gross receipts test. In determining whether that test is met, section 448(c) also applies the aggregation rules of section 52(a) or (b).

Section 52(a) provides that the term “controlled group of corporations” has the same meaning given to such term by section 1563(a), with modifications that are not relevant here.

Section 1563(a)(2) provides for a 50% test for a brother-sister controlled group. However, section 1563(a) begins, for purposes of this part. This “part” is sections 1561 and 1563. Thus, the 50% test only applies for purposes of section 1561.

Section 1563(f)(5) provides that for all other purposes of the Code, section 1563(a)(2) shall mean both a 50% test and an 80% test. In this case, the taxpayer does not satisfy the 80% test (as I understand the facts the taxpayer owns all the stock of one S corporation but only 55% of the other S corporation). Therefore, the two “S” corporations are not members of a controlled group. Consequently, the $15 million income limitation is applied separately to each corporation.

Please let me know if you have any other questions.

Thanks,

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