FINAL REGULATIONS CHANGE THE EIGHTY PERCENT CONTROL TEST FOR BROTHER- SISTER CONTROLLED GROUP TO CONFORM WITH VOGEL FERTILIZER DECISION.

Common control under section 414(b) is defined by reference to section 1563(a), determined without regard to subsections (a)(4) and (e)(3)(C). Section 52 provides, that for purposes of certain job credits, employees of members of the same group of controlled corporations or other business organizations are treated as employed by a single employer. The section 52 regulations are based on section 1563 principles and the final changes to the final regulations incorporate those principles.

The first change to the regulation as proposed was to add references to sections 408(k) and 416 as sections to which the regulations apply.

The second change is regulation 1.414(c)-3 which now has a paragraph (f). The proposed regulation provides generally, that for purposes of determining control of an organization, certain defined interests will not be counted as either an "interest" or as "stock." However, in some situations the application of this general rule under the proposed regulation resulted in the exclusion of an organization from a controlled group. The new paragraph (f) provides that if an interest is owned by a person directly or constructively and that ownership results in the inclusion of an organization in a group of trades or businesses under common control, then that interest will not be treated as not outstanding under paragraph (b) or (c) of regulation 1.414(c)-3 if the result would be that the organization will not be a member of a group of trades or businesses under common control. This rule, the Service states, "which is necessary to prevent the exclusion rules from being used to avoid common control status, is analogous to the rule in section 1563(f)(3)(C), which applies for purposes of determining whether a corporation is a component member of a controlled group of corporations."

For further information, contact Charles M. Whedbee of the IRS Legislation and Regulations Division, Office of Chief Counsel, IRS, Washington, D.C. 20224, (Attn: CC:LR:T), or telephone (202) 566-3458.

ACTION: Final regulations and withdrawal of temporary regulations.

SUMMARY: This document provides final regulations relating to organizations under common control for purposes of certain rules relating to pension, profit-sharing, and stock bonus plans. The applicable tax law was enacted as part of the Employee Retirement Income Security Act of 1974 (ERISA) and amended by the Revenue Act of 1978 (1978 Act) and the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). This document also contains final amendments to the income tax regulations relating to the definition of a brother-sister group of corporations under common control. These amendments conform the regulations to the decision in United States v. Vogel Fertilizer by the Supreme Court which held that a person's stock ownership is not taken into account for purposes of the 80% control test unless that person owns stock in each corporation of the putative brother- sister controlled group. These regulations provide the public with the guidance needed to comply with the law.

DATES: Generally, the amendments to the regulations under section 52 of the Code (relating to tax credits for employees) apply to taxable years beginning after December 31, 1976. The amendments to section 1.414(b)-1 and sections 1.414(c)-1 through -4 (relating to employees of trades or businesses under common control) generally are effective for plan years beginning after September 2, 1974 (subject to special rules for plans in existence on January 1, 1974). Sections 1.414(b)-1(c) and 1.414(c)-1 are amended to include references to section 408(k), which was added to the Code by the 1978 Act, and section 416, which was added by TEFRA. The additions of sections 408 (k) and 416 are effective for taxable years beginning after December 31, 1978, and December 31, 1983, respectively. The amendments to section 1.1563-1, which defines a controlled group of corporations, are effective for taxable years ending after December 31, 1970. However, section 1.1563-1(d) provides that certain of the amendments will not apply retroactively if the result would be adverse to certain taxpayers.

FOR FURTHER INFORMATION CONTACT: Charles M. Whedbee of the Legislation and Regulations Division, Office of the Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224, Attention CC:LR:T (202-566-3458, not a toll-free call).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains final amendments to the Income Tax Regulations (26 CFR Parts 1, 11, and 13) under section 414(b) and (c) of the Internal Revenue Code of 1954, relating to the aggregation of employees of members of a group of corporations, trades, or businesses that are under common control. The employees are treated as if employed by a single employer for purposes of applying certain rules relating to pension, profit-sharing, and stock bonus plans, enacted by the Employee Retirement Income Security Act of 1974 (88 Stat. 925). These regulations were published in proposed form in the Federal Register on November 5, 1975 (40 FR 51467), following the adoption of temporary regulations by Treasury decision, published on October 29, 1975 (40 FR 51435). The final regulations reflect amend- ments to section 414(b) and (c) made by section 152(d) of the 1978 Act (92 Stat. 2799) and section 240(c)(1) of TEFRA (96 Stat. 520), which made the provisions of section 414(b) and (c) applicable with respect to simplified employee pension plans under section 408(k) and to the special rules for top-heavy plans under section 416, respectively.

The final amendments to the regulations under section 1563, relating to the definition of a brother-sister group of corporations under common control, conform those regulations to a decision of the Supreme Court, United States v. Vogel Fertilizer Co., 455 U.S. 16 (1982). The amendments were proposed in a notice of rulemaking published in the Federal Register on November 16, 1983 (48 FR 52081). Section 414(c) delegates authority to the Secretary to prescribe regulations for the determination of common control, limited to rules based upon principles similar to those which apply in the case of section 414(b). Common control in section 414(b) is defined by reference to section 1563(a), determined without regard to subsections (a)(4) (relating to certain insurance companies) and (e)(3)(C) (relating to attribution from an employee's trust described in section 401(a)). In addition, section 52 provides that, for purposes of certain jobs credits, employees of members of the same group of controlled corporations or other business organizations are treated as employed by a single employer. Regulations prescribed under section 52 are also based on principles similar to the rules under section 1563. Because the proposed and temporary regulations under section 414(b) and (c) and the regulations under section 52 paralleled the regulations under section 1563, the November 16, 1983 notice of rulemaking proposed conforming amendments to those regulations. Those amendments are also adopted by this Treasury decision.

COMMENTS

Comments were received in response to both notices of proposed rulemaking, but no public hearing was requested and none was held. Generally, the comments raised issues that had already been considered before publication of the two notices of proposed rulemaking.

Several comments contended that the regulations initially proposed under section 414(b) and (c) were partly inconsistent with the legislative history of ERISA. They objected that the proposed regulations aggregating employees of commonly controlled entities for various tests relating to coverage, vesting, and benefit limitations of employee plans could be interpreted to require complete uniformity among the separate plans established by individual organizations within the group. The proposed regulations, therefore, did not give effect to certain permissible variances described in the report of the House Ways and Means Committee. The comments suggested that the final regulations contain a provision to the effect that section 414(b) and (c) was "not intended to mean that all pension plans of a controlled group of corporations or partnerships must be exactly alike, or that a controlled group could not have pension plans for some corporations but not for others" (H.R. Rep. No. 779, 93d Cong., 2d Sess. 49 (1974)). This suggestion is not adopted. These regulations are intended to be definitional only, and do not determine the actual treatment of the employees of a group defined as being a single employer. Thus, once a group of organizations is defined as a single employer, whether or not plans maintained by members of that group are qualified is tested under sections 401, 408(k), 410, 411, 415, and 416.

Other comments suggested that foreign organizations be ignored for purposes of section 414(b) and (c) and that only employees of organizations that are under common control and engaged in similar businesses be aggregated. These suggestions are also rejected as beyond the scope of definitional regulations.

Only one comment was received in response to the second notice of rulemaking. The comment noted that the decision in Vogel Fertilizer and the proposed amendments to the regulations result in the retroactive disaggregation of what were brother-sister controlled groups under the regulations before their amendment by this Treasury decision. Such disaggregation may decrease the tax liability of the individual organizations that no longer have to share a graduated rate schedule (or a single surtax exemption for taxable years beginning before January 1, 1979) or other deductions and credits. The comment suggested that the effects of this disaggregation be mitigated by allowing taxpayers to file amended returns, including claims for refunds, even for closed taxable years. This suggestion is not adopted because the period of limitation on filing a claim for credit or tefund as specified in section 6511 cannot be extended by regulation.

DESCRIPTION OF CHANGES

Two changes have been made to the regulations as proposed. The first is to add references to sections 408(k) and 416 as provisions to which these regulations apply. These references were added to sections 414(b) and (c) by section 152(d) of the 1978 Act and section 240(c)(1) of TEFRA, respectively.

A new paragraph (f) has been added to section 1.414(c)-3. That section generally provides that for purposes of determining control of an organization, certain defined interests will not be counted as either an "interest" or as "stock". However, in some situations the application of this general rule will result in the exclusion of an organization from a controlled group. The new paragraph provides that if an interest is owned by a person directly or constructively and that ownership results in the inclusion of an organization in a group of trades or businesses under common control, then that interest will not be treated as not outstanding under paragraph (b) or (c) of section 1.414(c)-3 if the result would be that the organization would not be a member of a group of trades or businesses under common control. This rule, which is necessary to prevent the exclusion rules from being used to avoid common control status, is analogous to the rule of section 1563(f)(3)(C), which applies for purposes of determining whether a corporation is a component member of a controlled group of corporations. New paragraph (f) of section 1.414(c)-3 is effective April 1, 1988.

REMOVAL OF TEMPORARY REGULATIONS

The final regulations under section 414(b) and (c) supersede the temporary regulations (sections 11.414(c)-1 through 11.414(c)-5) under ERISA, published in the Federal Register on October 29, 1975 (40 FR 51435). This document, therefore, removes those temporary regulations.

Temporary regulations under the Tax Reform Act of 1969 (26 CFR sections 13.16 and 13.16-1) were superseded by final regulations published on April 25, 1972 (37 FR 8068): As proposed in the notice of rulemaking published on November 16, 1983 (48 FR 52081), those temporary regulations are removed.

EXECUTIVE ORDER 12291 AND REGULATORY FLEXIBILITY ACT

The Commissioner of the Internal Revenue has determined that this final rule is not a major rule as defined in Executive Order 12291 and that a Regulatory Impact Analysis is therefore not required. The Regulatory Flexibility Act does not apply to the portion of this document that adopts the amendments to the regulations proposed in 1975. The Internal Revenue Service has also concluded that the portion of the final regulations contained herein, which adopt the amendments proposed in 1983, are interpretative and that the notice and public procedure requirements of 5 U.S.C. 553 do not apply. Accordingly, these final regulations do not constitute regulations subject to the Regulatory Flexibility Act (5 U.S.C. Chapter 6).

PAPERWORK REDUCTION ACT

The collection of information requirements contained in these regulations have been submitted to the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act of 1980. These requirements have been approved by OMB.

DRAFTING INFORMATION

The principal author of these final regulations is Michel A. Daze of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations, both on matters of substance and style.

LIST OF SUBJECTS

26 CFR SECTIONS 1.0-1 - 1.58-8

Income taxes, Tax liability, Tax rates, Credits

26 CFR SECTIONS 1.401-0 - 1.425-1

Income taxes, Employee benefit plans, Pensions, Stock options, Individual Retirement Accounts, Employee stock ownership plans

26 CFR SECTIONS 1.1501-1 - 1.1564-1

Income taxes, Controlled group of corporations, Consolidated returns

26 CFR Part 11

Income taxes, Pensions, Employee Retirement Income Security Act of 1974

26 CFR Part 13

Income taxes, Tax Reform Act of 1969

28 CFR Part 602

Reporting and recordkeeping requirements

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR Part 1, Part 11, Part 13, and Part 602 are amended as follows:

PART 1 -- [AMENDED]

Paragraph 1. The authority citation for Part 1 is amended to add the following citations:

Authority: 26 U.S.C. 7805. * * * Section 1.52-1 also issued under 26 U.S.C. 52(b); sections 1.414(c)-1 through 1.414(c)-5 also issued under 26 U.S.C. 414(c).

Par. 2. Section 1.52-1 is amended as follows:

1. Paragraphs (c)(1)(i), (c)(1)(ii), and (d)(1)(i) are amended by removing "section 11.414(c)-4(b)(1)" and adding instead "section 1.414(c)-4(b)(1)".

2. Paragraph (d)(1)(i) is also amended by removing ", singly or in combination,".

3. A new flush paragraph to read as set forth below is added at the end of paragraph (d)(1)(ii).

4. Paragraph (g) is amended by removing "section 11.414(c)-3" from the first sentence and adding instead "section 1.414(c)-3".

5. A new paragraph (h) is added at the end thereof to read as set forth below.

SECTION 1.52-1 TRADES OR BUSINESSES THAT ARE UNDER COMMON CONTROL

* * * * *

(d) BROTHER-SISTER GROUP OF TRADE OR BUSINESSES UNDER COMMON CONTROL -- (1) IN GENERAL. * * * The five or fewer persons whose ownership is considered for purposes of the controlling interest requirement for each organization must be the same persons whose ownership is considered for purposes of the effective control requirement.

* * * * *

(h) TRANSITIONAL RULE -- (1) IN GENERAL. Paragraph (d) of this section, as amended by T.D. 8179, applies to all taxable years to which section 52(b) applies.

(2) ELECTION. In the case of taxable years ending before March 2, 1988,

(i) If, pursuant to paragraph (b) of this section, an organization indicated in a timely filed return that it chose to be a member of a brother-sister group under common control, and it is not a member of such group because of the amendments to paragraph (d) of this section made by T.D. 8179, such organization may make the choice described in paragraph (b) of this section by filing an amended return on or before September 2, 1988. If such organization would otherwise still be a member of more than one group of trades or businesses under common control, and

(ii) If an organization

(A) Is a member of a brother-sister group of trades or businesses under common control under section 1.52-1(d)(1), as in effect before amendment by T.D. 8179 ("old group"), for such taxable year and

(B) Is not such a member for such taxable year because of the amendments made by such Treasury decision,

such organization (whether or not a corporation) nevertheless will be treated as a member of such old group if all the organizations (whether or not corporations) that are members of the old group meet all the requirements of section 1.1563-1(d)(3) with respect to such taxable year.

Par. 3. The following new sections are added immediately after section 1.413-2.

SECTION 1.414(b)-1 CONTROLLED GROUP OF CORPORATIONS.

(a) DEFINITION OF CONTROLLED GROUP OF CORPORATIONS. For purposes of this section, the term "controlled group of corporations" has the same meaning as is assigned to the term in section 1563(a) and the regulations thereunder, except that (1) the term "controlled group of corporations" shall not include an "insurance group" described in section 1563(a)(4), and (2) section 1563(e)(2)(C) (relating to stock owned by certain employees' trusts) shall not apply. For purposes of this section, the term "members of a controlled group" means two or more corporations connected through stock ownership described in section 1563(a)(1), (2), or (3), whether or not such corporations are "component members of a controlled group" within the meaning of section 1563(b). Two or more corporations are members of a controlled group at any time such corporations meet the requirements of section 1563(a) (as modified by this paragraph). For purposes of this section, if a corporation is a member of more than one controlled group of corporations, such corporation shall be treated as a member of each controlled group.

(b) SINGLE PLAN ADOPTED BY TWO OR MORE MEMBERS. If two or more members of a controlled group of corporations adopt a single plan for a plan year, then the minimum funding standard provided in section 412, the tax imposed by section 4971, and the applicable limitations provided by section 404(a) shall be determined as if such members were a single employer. In such a case, the amount of such items and the allocable portion attributable to each member shall be determined in the manner provided in regulations under sections 412, 4971, and 404(a).

(c) CROSS REFERENCE. For rules relating to the application of sections 401, 408(k), 410, 411, 415, and 416 with respect to two or more trades or businesses which are under common control, see section 414(c) and the regulations thereunder.

SECTION 1.414(c)-1 COMMONLY CONTROLLED TRADES OR BUSINESSES.

For purposes of applying the provisions of sections 401 (relating to qualified pension, profit-sharing, and stock bonus plans), 408(k) (relating to simplified employee pensions), 410 (relating to minimum participation standards), 411 (relating to minimum vesting standards), 415 (relating to limitations on benefits and contributions under qualified plans), and 416 (relating to top-heavy plans), all employees of two or more trades or businesses under common control within the meaning of section 1.414(c)-2 for any period shall be treated as employed by a single employer. See sections 401, 408(k), 411, 415, and 416 and the regulations thereunder for rules relating to employees of trades or businesses which are under common control. See section 1.414(c)-5 for effective date.

SECTION 1.414(c)-2 TWO OR MORE TRADES OR BUSINESSES UNDER COMMON CONTROL.

(a) IN GENERAL. For purposes of this section, the term "two or more trades or businesses under common control" means any group of trades or businesses which is either a "parent-subsidiary group of trades or businesses under common control" as defined in paragraph (b) of this section, a "brother-sister group of trades or businesses under common control" as defined in paragraph (c) of this section, or a "combined group of trades or businesses under common control" as defined in paragraph (d) of this section. For purposes of this section and sections 1.414(c)-3 and 1.414(c)-4, the term "organization" means a sole proprietorship, a partnership (as defined in section 7701(a)(2)), a trust, an estate, or a corporation.

(b) PARENT-SUBSIDIARY GROUP OF TRADES OR BUSINESSES UNDER COMMON CONTROL -- (1) IN GENERAL. The term "parent-subsidiary group of trades or businesses under common control" means one or more chains of organizations conducting trades or businesses connected through ownership of a controlling interest with a common parent organization if --

(i) A controlling interest in each of the organizations, except the common parent organization, is owned (directly and with the application of section 1.414(c)-4(b)(1), relating to options) by one or more of the other organizations; and

(ii) The common parent organization owns (directly and with the application of section 1.414(c)-4(b)(1), relating to options) a controlling interest in at least one of the other organizations, excluding, in computing such controlling interest, any direct ownership interest by such other organizations.

(2) CONTROLLING INTEREST DEFINED -- (i) CONTROLLING INTEREST. For purposes of paragraphs (b) and (c) of this section, the phrase "controlling interest" means:

(A) In the case of an organization which is a corporation, ownership of stock possessing at least 80 percent of total combined voting power of all classes of stock entitled to vote of such corporation or at least 80 percent of the total value of shares of all classes of stock of such corporation;

(B) In the case of an organization which is a trust or estate, ownership of an actuarial interest of at least 80 percent of such trust or estate;

(C) In the case of an organization which is a partnership, ownership of at least 80 percent of the profits interest or capital interest of such partnership; and

(D) In the case of an organization which is a sole proprietorship, ownership of such sole proprietorship.

(ii) ACTUARIAL INTEREST. For purposes of this section, the actuarial interest of each beneficiary of a trust or estate shall be determined by assuming the maximum exercise of discretion by the fiduciary in favor of such beneficiary. The factors and methods prescribed in section 20.2031-7 or section 20.2031-10 (Estate Tax Regulations), whichever is appropriate, for use in ascertaining the value of an interest in property for estate tax purposes shall be used for purposes of this subdivision in determining a beneficiary's actuarial interest.

(c) BROTHER-SISTER GROUP OF TRADES OR BUSINESSES UNDER COMMON CONTROL -- (1) IN GENERAL. The term "brother-sister group of trades or businesses under common control" means two or more organizations conducting trades or businesses if (i) the same five or fewer persons who are individuals, estates, or trusts own (directly and with the application of section 1.414(c)-4) a controlling interest in each organization, and (ii) taking into account the ownership of each such person only to the extent such ownership is identical with respect to each such organization, such persons are in effective control of each organization. The five or fewer persons whose ownership is considered for purposes of the controlling interest requirement for each organization must be the same persons whose ownership is considered for purposes of the effective control requirement.

(2) EFFECTIVE CONTROL DEFINED. For purposes of this paragraph, persons are in "effective control" of an organization if --

(i) In the case of an organization which is a corporation, such persons own 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 such corporation;

(ii) In the case of an organization which is a trust or estate, such persons own an aggregate actuarial interest of more than 50 percent of such trust or estate;

(iii) In the case of an organization which is a partnership, such persons own an aggregate of more than 50 percent of the profits interest or capital interest of such partnership; and

(iv) In the case of an organization which is a sole proprietorship, one of such persons owns such sole proprietorship.

(d) COMBINED GROUP OF TRADES OR BUSINESSES UNDER COMMON CONTROL. The term "combined group of trades or businesses under common control" means any group of three or more organizations, if (1) each such organization is a member of either a parent-subsidiary group of trades or businesses under common control or a brother-sister group of trades or businesses under common control, and (2) at least one such organization is the common parent organization of a parent- subsidiary group of trades or businesses under common control and is also a member of a brother-sister group of trades or businesses under common control.

(e) EXAMPLES. The definitions of parent-subsidiary group of trades or businesses under common control, brother-sister group of trades or businesses under common control, and combined group of trades or businesses under common control may be illustrated by the following examples.

EXAMPLE (1). (a) The ABC Partnership owns stock possessing 60 percent of the total combined voting power of all classes of stock entitled to vote of S Corporation. ABC Partnership is the common parent of a parent-subsidiary group of trades or businesses under common control consisting of the ABC Partnership and S Corporation.

(b) Assume the same facts as in (a) and assume further that S owns 80 percent of the profits interest in the DEF Partnership. The ABC Partnership is the common parent of a parent-subsidiary group of trades or businesses under common control consisting of the ABC Partnership, S Corporation, and the DEF partnership. The result would be the same if the ABC Partnership, rather than S, owned 80 percent of the profits interest in the DEF Partnership.

EXAMPLE (2). L Corporation owns 80 percent of the only class of stock of T Corporation, and T, in turn, owns 40 percent of the capital interest in the GHI Partnership. L also owns 80 percent of the only class of stock of N Corporation and N, in turn, owns 40 percent of the capital interest in the GHI Partnership. L is the common parent of a parent-subsidiary group of trades or businesses under common control consisting of L Corporation, T Corporation, N Corporation, and the GHI Partnership.

EXAMPLE (3). ABC Partnership owns 75 percent of the only class of stock of X and Y Corporations; X owns all the remaining stock of Y, and Y owns all the remaining stock of X. Since interorganization ownership is excluded (that is, treated as not outstanding) for purposes of determining whether ABC owns a controlling interest of at least one of the other organizations, ABC is treated as the owner of stock possessing 100 percent of the voting power and value of all classes of stock of X and of Y for purposes of paragraph (b)(1)(ii) of this section. Therefore, ABC is the common parent of a parent-subsidiary group of trades or businesses under common control consisting of the ABC Partnership, X Corporation, and Y Corporation.

EXAMPLE (4). Unrelated individuals A, B, C, D, E, and F own an interest in sole proprietorship A, a capital interest in the GHI Partnership, and stock of corporations M, W, X, Y, and Z (each of which has only one class of stock outstanding) in the following proportions:

   Individuals                        Organizations

EXAMPLE (5). The outstanding stock of corporations U and V, which have only one class of stock outstanding, is owned by the following unrelated individuals:

     Individuals                                Corporations

EXAMPLE (6). A, an individual owns a controlling interest in ABC Partnership and DEF Partnership. ABC, in turn, owns a controlling interest in X Corporation. Since ABC, DEF, and X are each members of either a parent-subsidiary group or a brother- sister group of trades or businesses under common control, and ABC is the common parent of a parent-subsidiary group of trades or businesses under common control consisting of ABC and X, and also a member of a brother-sister group of trades or businesses under common control consisting of ABC and DEF, ABC Partnership, DEF Partnership, and X Corporation are members of the same combined group of trades or businesses under common control.

SECTION 1.414(c)-3 EXCLUSION OF CERTAIN INTEREST OR STOCK IN DETERMINING CONTROL

(a) IN GENERAL. For purposes of section 1.414(c)-2(b)(2)(i) and (c)(2), the term "interest" and the term "stock" do not include an interest which is treated as not outstanding under paragraph (b) of this section in the case of a parent-subsidiary group of trades or businesses under common control or under paragraph (c) of this section in the case of a brother-sister group of trades or businesses under common control. In addition, the term "stock" does not include treasury stock or nonvoting stock which is limited and preferred as to dividends. For definitions of certain terms used in this section, see paragraph (d) of this section.

(b) PARENT-SUBSIDIARY GROUP OF TRADES OR BUSINESSES UNDER COMMON CONTROL -- (1) IN GENERAL. If an organization (hereinafter in this section referred to as "parent organization") owns (within the meaning of paragraph (b)(2) of this section) --

(i) In the case of a corporation, 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 of such corporation.

(ii) In the case of a trust or an estate, an actuarial interest (within the meaning of section 1.414(c)-2(b)(2)(ii)) of 50 percent or more of such trust or estate, and

(iii) In the case of a partnership, 50 percent or more of the profits or capital interest of such partnership, then for purposes of determining whether the parent organization or such other organization (hereinafter in this section referred to as "subsidiary organization") is a member of a parent-subsidiary group of trades or businesses under common control, an interest in such subsidiary organization excluded under paragraph (b)(3), (4), (5), or (6) of this section shall be treated as not outstanding.

(2) OWNERSHIP. For purposes of paragraph (b)(1) of this section, a parent organization shall be considered to own an interest in or stock of another organization which it owns directly or indirectly with the application of paragraph (b)(1) of section 1.414(c)-4 and --

(i) In the case of parent organization which is a partnership, a trust, or an estate, with the application of paragraph (b)(2), 93), and (4) of section 1.414(c)-4 and

(ii) In the case of a parent organization which is a corporation, with the application of paragraph (b)(4) of section 1.414(c)-4.

(3) PLAN OF DEFERRED COMPENSATION. An interest which is an interest in or stock of the subsidiary organization held by a trust which is part of a plan of deferred compensation (within the meaning of section 406(a)(3) and the regulations thereunder) for the benefit of the employees of the parent organization or the subsidiary organization shall be excluded.

(4) PRINCIPAL OWNERS, OFFICERS, ETC. An interest which is an interest in or stock of the subsidiary organization owned (directly and with the application of section 1.414(c)-4) by an individual who is a principal owner, officer, partner, or fiduciary of the parent organization shall be excluded.

(5) EMPLOYEES. An interest which is an interest in or stock of the subsidiary organization owned (directly and with the application of section 1.414(c)-4) by an employee of the subsidiary organization shall be excluded if such interest or such stock is subject to conditions which substantially restrict or limit the employee's right (or if the employee constructively owns such interest or such stock, the direct or record owner's right) to dispose of such interest or such stock and which run in favor of the parent or subsidiary organization.

(6) CONTROLLED EXEMPT ORGANIZATION. An interest which is an interest in or stock of the subsidiary organization shall be excluded if owned (directly and with the application of section 1.414(c)-4) by an organization (other than the parent organization):

(i) To which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and

(ii) Which is controlled directly or indirectly (within the meaning of paragraph (d)(7) of this section ) by the parent organization or subsidiary organization, by an individual, estate, or trust that is a principal owner of the parent organization, by an officer, partner, or fiduciary of the parent organization, or by any combination thereof.

(c) BROTHER-SISTER GROUP OF TRADES OR BUSINESSES UNDER COMMON CONTROL -- (1) IN GENERAL. If five or fewer persons (hereinafter in this section referred to as "common owners") who are individuals, estates, or trusts own (directly and with the application of section 1.414(c)-4) --

(i) In the case of a corporation, 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent of more of the total value of shares of all classes of stock of such corporation.

(ii) In the case of a trust or an estate, an actuarial interest (within the meaning of section 1.414(c)-2(b)(2)(ii)) of 50 percent or more of such trust or estate, and

(iii) In the case of a partnership, 50 percent or more of the profits or capital interest of such partnership, then for purposes of determining whether such organization is a member of a brother-sister group of trades or businesses under common control, an interest in such organization excluded under paragraph (c)(2), (3), or (4) of this section shall be treated as not outstanding.

(2) EXEMPT EMPLOYEES' TRUST. An interest which is an interest in or stock of such organization held by an employees' trust described in section 401(a) which is exempt from tax under section 501(a) shall be excluded if such trust is for the benefit of the employees of such organization.

(3) EMPLOYEES. An interest which is an interest in or stock of such organization owned (directly and with the application of section 1.414(c)-4) by an employee of such organization shall be excluded if such interest or stock is subject to conditions which run in favor of a common owner of such organization or in favor of such organization and which substantially restrict or limit the employee's right (or if the employee constructively owns such interest or stock, the direct or record owner's right) to dispose of such interest or stock.

(4) CONTROLLED EXEMPT ORGANIZATION. An interest which is an interest in or stock of such organization shall be excluded if owned (directly and with the application of section 1.414(c)-4) by an organization:

(i) To which section 501(c)(3) (relating to certain educational and charitable organizations which are exempt from tax) applies, and

(ii) Which is controlled directly or indirectly (within the meaning of paragraph (d)(7) of this section) by such organization, by an individual, estate, or trust that is a principal owner of such organization, by an officer, partner, or fiduciary of such organization, or by any combination thereof.

(d) DEFINITIONS -- (1) EMPLOYEE. For purposes of this section, the term "employee" has the same meaning such term is given in section 3306(i) of the Code (relating to definitions for purposes of the Federal Unemployment Tax Act).

(2) PRINCIPAL OWNER. For purposes of this section, the term "principal owner" means a person who owns (directly and with the application of section 1.414(c)-4) --

(i) In the case of a corporation, 5 percent or more of the total combined voting power of all classes of stock entitled to vote in such corporation or 5 percent of more of the total value of shares of all classes of stock of such corporation;

(ii) In the case of a trust or estate, an actuarial interest of 5 percent or more of such trust or estate; or

(iii) In the case of partnership, 5 percent or more of the profits or capital interest of such partnership.

(3) OFFICER. For purposes of this section, the term "officer" includes the president, vice-presidents, general manager, treasurer, secretary, and comptroller of a corporation and any other person who performs duties corresponding to those normally performed by persons occupying such positions.

(4) PARTNER. For purposes of this section the term partner means any person defined in section 7701(a)(2) relating to definitions of partner).

(5) FIDUCIARY. For purposes of this section and section 1.414(c)-4, the term "fiduciary" has the same meaning as such term is given in section 7701(a)(6) and the regulations thereunder.

(6) SUBSTANTIAL CONDITIONS (i) IN GENERAL. For purposes of this section, an interest in or stock of an organization is subject to conditions which substantially restrict or limit the right to dispose of such interest or stock and which run in favor of another person if the condition extends directly or indirectly to such person preferential rights with respect to the acquisition of the direct owner's (or the record owner's) interest or stock. For a condition to be in favor of another person it is not necessary that such person be extended a discriminatory concession with respect to price. A right of first refusal with respect to an interest or stock in favor of another person is a condition which substantially restricts or limits the direct or record owner's right of disposition which runs in favor of such person. Further, any legally enforceable condition which prohibits the direct or record owner from disposing of his or her interest or stock without the consent of another person will be considered to be a substantial limitation running in favor of such person.

(ii) SPECIAL RULE. For purposes of paragraph (c)(3) of this section only, if a condition which restricts or limits an employee's right (or direct or record owner's right to dispose of his or her interest or stock in such organization held by a common owner pursuant to a bona fide reciprocal purchase arrangement, such condition shall not be treated as a substantial limitation or restriction. An example of a reciprocal purchase arrangement is an agreement whereby a common owner and the employee are given a right of first refusal with respect to stock of the employer corporation owned by the other party. If, however, the agreement also provides that the common owner has the right to purchase the stock of the employer corporation owned by the employee in the event the corporation should discharge the employee for reasonable cause, the purchase arrangement would not be reciprocal within the meaning of this subdivision.

(7) CONTROL. For purposes of paragraphs (b)(6) and (c)(4) of this section, the term "control" means control in fact. The determination of whether there exists control in fact will depend upon all of the facts and circumstances of each case, without regard to whether such control is legally enforceable and irrespective of the method by which such control is exercised or exercisable.

(e) EXAMPLES. The provisions of this section may be illustrated by the following examples:

EXAMPLE (1). ABC Partnership owns 70 percent of the capital interest and of the profits interest in the DEF Partnership. The remaining capital interest and profits interest in DEF is owned as follows: 4 percent by A (a general partner in ABC), and 26 percent by D (a limited partner in ABC). ABC satisfies the 50- percent capital interest or profits interest ownership requirement of paragraph (b)(1)(iii) of this section with respect to DEF. Since A and D are partners of ABC under paragraph (b)(4) of this section the capital and profits interests in DEF owned by A and D are treated as not outstanding for purposes of determining whether ABC and DEF are members of a parent-subsidiary group of trades or businesses under common control under section 1.414(c)-2(b). Thus, ABC is considered to own 100 percent (70 divided by 70) of the capital interest and profits interest in DEF. Accordingly, ABC and DEF are members of a parent-subsidiary group of trades or businesses under common control.

EXAMPLE (2). Assume the same facts as in example(1) and assume further that A owns 15 shares of the 100 shares of the only class of stock of S Corporation and DEF Partnership owns 75 shares of such stock. ABC satisfies the 50 percent stock requirement of paragraph (b)(1)(i) of this section with respect to S since ABC is considered as owning 52.5 percent (70 percent x 75 percent) of the S stock with the application of section 1.414(c)-(b)(2). Since A is a partner of ABC, the S stock owned by A is treated as not outstanding for purposes of determining whether S is a member of a parent-subsidiary group of trades of businesses under common control. Thus, DEF Partnership is considered to own stock possessing 88.2 percent (75 divided by 85) of the voting power and value of the S Stock. Accordingly, ABC Partnership, DEF Partnership, and S Corporation are members of a parent-subsidiary group of trades or businesses under common control.

EXAMPLE (3). ABC Partnership owns 60 percent of the only class of stock of Corporation Y. D, the president of Y, owns the remaining 40 percent of the stock of Y. D has agreed that if she offers her stock in Y for sale she will first offer the stock to ABC at a price equal to the fair market value of the stock on the first date the stock is offered for sale. Since D is an employee of Y within the meaning of section 3306(i) of the Code and her stock in Y is subject to a condition which substantially restricts or limits her right to dispose of such stock and runs in favor of ABC Partnership, under paragraph (b)(5) of this section such stock is treated as not outstanding for purposes of determining whether ABC and Y are members of a parent-subsidiary group of trades or businesses under common control. Thus, ABC Partnership is considered to win stock possessing 100 percent of the voting power and value of the stock of Y. Accordingly, ABC Partnership and Y Corporation are members of a parent-subsidiary group of trades or businesses under common control. The result would be the same if D's husband, instead of D, owned directly the 40 percent stock interest in Y and such stock was subject to a right of first refusal running in favor of ABC Partnership.

(f) EXCEPTION -- (1) IN GENERAL. If an interest in an organization (including stock of a corporation) is owned by a person directly or with the application of the rules of paragraph (b) of section 1.414(c)-4 and such ownership results in the membership of that organization in a group of two or more trades or businesses under common control for any period, then the interest will not be treated as an excluded interest under paragraph (b) or (c) of this section if the result of applying such provisions is that the organization is not a member of a group of two or more trades or businesses under common control for the period.

(2) EXAMPLE. The provisions of this paragraph may be illustrated by the following example:

EXAMPLE. Corporation P owns directly 50 of the 100 shares of the only class of stock of corporation S. A, an officer of P, owns directly 30 shares of S stock which P has an option to acquire. If, under paragraph (b)(4) of this section, the 30 shares owned directly by A are treated as not outstanding, P would be treated as owning stock possessing only 71 percent (50/70) of the total voting power and value of S stock, and S should not be a member of a parent-subsidiary group of trades or businesses under common control. However, because the 30 shares owned by A that P has an option to purchase are considered as owned by P under paragraph (b)(2) of this section, and that ownership plus P's direct ownership of 50 shares result in S's membership in a parent-subsidiary group of trades or businesses under common control for 1985, the provisions of this paragraph apply. Therefore, A's stock is not treated as an excluded interest and S is a member of a parent-subsidiary group consisting of P and S.

SECTION 1.414(C)-4 RULES FOR DETERMINING OWNERSHIP.

(a) IN GENERAL. In determining the ownership of an interest in an organization for purposes of section 1.414(c)-2 and section 1.414(c)-3, the constructive ownership rules of paragraph (b) of this section shall apply, subject to the operating rules contained in paragraph (c). For purposes of this section the term "interest" means: in the case of a corporation, stock; in the case of a trust or estate, an actuarial interest; in the case of a partnership, an interest in the profits or capital; and in the case of a sole proprietorship, the proprietorship.

(b) CONSTRUCTIVE OWNERSHIP -- (1) OPTIONS. If a person has an option to acquire any outstanding interest in an organization, such interest shall be considered as owned by such person. For this purpose, an option to acquire an option, and each one of a series of such options, shall be considered as an option to acquire such interest.

(2) ATTRIBUTION FROM PARTNERSHIPS -- (i) IN GENERAL. An interest 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 profits or capital of the partnership in proportion to such partner's interest in the profits or capital, whichever such proportion is greater.

(ii) EXAMPLE. The provisions of paragraph (b)(2)(i) of this section may be illustrated by the following example:

EXAMPLE. A, B,and C, unrelated individuals, are partners in the ABC partnership. The partners' interest in the capital and profits of ABC are as follows:

                            [In percent]

(3) ATTRIBUTION FROM ESTATES AND TRUSTS -- (i) IN GENERAL. An interest in an organization (hereinafter called an "organizational interest") owned, directly or indirectly, by or for an estate or trust shall be considered as owned by any beneficiary of such estate or trust who has an actuarial interest of 5 percent or more in such organization interest, 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 the organization interest to satisfy the beneficiary's rights. A beneficiary of an estate of trust who cannot under any circumstances receive any part of an organization interest held by the estate or trust, including the proceeds from the disposition thereof, or the income therefrom, does not have an actuarial interest in such organization interest. Thus, where stock owned by a decedent's estate has been specifically bequeathed to certain beneficiaries and the remainder of the estate has been specifically bequeathed to other beneficiaries, the stock is attributable only to the beneficiaries to whom it is specifically bequeathed. Similarly a remainderman of a trust who cannot under any circumstances receive any interest in the stock of a corporation which is a part of the corpus of the trust (including any accumulated income therefrom or the proceeds from a disposition thereof) does not have an actuarial interest in such stock. However, an income beneficiary of a trust does have an actuarial interest in stock if he has any right to the income from such stock even though under the terms of the trust instrument such stock can never be distributed to him. The factors and methods prescribed in section 20.2031-7 or section 20.2031-10 (Estate Tax Regulations), whichever is appropriate for use in ascertaining the value of an interest in property for estate tax purposes shall be used for purposes of this subdivision in determining a beneficiary's actuarial interest in an organization interest owned directly or indirectly by or for an estate or trust.

(ii) SPECIAL RULES FOR ESTATES. (A) For purposes of this paragraph (b)(3) with respect to an estate, property of a decedent shall be considered as owned by his or her estate if such property is subject to administration by the executor or administrator for the purposes of paying claims against the estate and expenses of administration notwithstanding that, under local law, legal title to such property vests in the decedent's heirs, legatees or devisees immediately upon death.

(B) For purposes of this paragraph (b)(3) with respect to an estate, the term "beneficiary" includes any person entitled to receive property of a decedent pursuant to a will or pursuant to laws of descent and distribution.

(C) For purposes of this paragraph (b)(3) with respect to an estate, a person shall no longer be considered a beneficiary of an estate when all the property to which he or she is entitled has been received by him or her, when he or she no longer has a claim against the estate arising out of having been a beneficiary, and when there is only a remote possibility that it will be necessary for the estate to seek the return of property from him or her or to seek payment from him or her by contribution or otherwise to satisfy claims against the estate or expenses of administration.

(iii) GRANTOR TRUST, ETC. An interest owned, directly or indirectly, by or for any portion of a trust of which a person is considered the owner under subpart E, part I, subchapter J of the Code (relating to grantors and others treated as substantial owners) is considered as owned by such person.

(4) ATTRIBUTION FROM CORPORATIONS -- (i) GENERAL. An interest owned, directly or indirectly, by or for a corporation shall be considered as owned by any person who owns (directly and, in the case of a parent-subsidiary group of trades or businesses under common control, with the application of paragraph (b)(1) of this section, or in the case of a brother-sister group of trades or business under common control, with the application of this section), 5 percent or more in value of the stock in that proportion which the value of the stock which such person owns bears to the total value of all the stock in such corporation.

(ii) EXAMPLE. The provisions of paragraph (b)(4)(i) of this section may be illustrated by the following examples:

EXAMPLE. B, an individual, owns 60 of the 100 shares of the only class of outstanding stock of corporation P. C, an individual, owns 4 shares of the P stock, and corporation X owns 36 shares of the P stock. Corporation P owns, directly and indirectly, 50 shares of the stock of corporation S. Under this subparagraph, B is considered to own 30 shares of the S stock (60/100 X 50), and X is considered to own 18 shares of S stock (36/100 X 50). Since C does not own 5 percent or more in the value of P stock, he is not considered as owning any of the S stock owned by P. If in this example, C's wife had owned directly 1 share of the P stock, C and his wife would each be considered as owning 5 shares of the P stock, and therefore C and his wife would be considered as owning 2.5 shares of the S stock (5/100 X 50).

(5) SPOUSE -- (i) GENERAL RULE. Except as provided in paragraph (b)(5)(ii) of this section, an individual shall be considered to own an interest owned, directly or indirectly, by or for his or her 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.

(ii) EXCEPTION. An individual shall not be considered to own an interest in an organization owned, directly or indirectly, by or for his or her spouse on any day of a taxable year of such organization, provided that each of the following conditions are satisfied with respect to such taxable year:

(A) Such individual does not, at any time during such taxable year, own directly or indirectly any interest in such organization;

(B) Such individual is not a member of the board of directors, a fiduciary, or an employee of such organization and does not participate in the management of such organization at any time during such taxable year;

(C) Not more than 50 percent of such organization's gross income for such taxable year was derived from royalties, rents, dividends, interest, and annuities; and

(D) Such interest in such organization 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 interest and which run in favor of the individual or the individual's children who have not attained the age of 21 years. The principles of section 1.414(c)-3(d)(6)(i) shall apply in determining whether a condition is a condition described in the preceding sentence.

(iii) DEFINITIONS. For purposes of paragraph (b)(5)(ii)(C) of this section, the gross income of an organization shall be determined under section 61 and the regulations thereunder. The terms "interest", "royalties", "rents", "dividends", and "annuities" shall have the same meaning such terms are given for purposes of section 1244(c) and section 1.1244(c)-1(e)(1).

(6) CHILDREN, GRANDCHILDREN, PARENTS, AND GRANDPARENTS -- (i) CHILDREN AND PARENTS. An individual shall be considered to own an interest owned, directly or indirectly, by or for the individual's children who have not attained the age of 21 years, and if the individual has not attained the age of 21 years, an interest owned, directly or indirectly, by or for the individual's parents.

(ii) CHILDREN, GRANDCHILDREN, PARENTS, AND GRANDPARENTS. If an individual is in effective control (within the meaning of section 1.414(c)-2(c)(2)), directly and with the application of the rules of this paragraph without regard to this subdivision, of an organization, then such individual shall be considered to own an interest in such organization owned, directly or indirectly, by or for the individual's parents, grandparents, grandchildren, and children who have attained the age of 21 years.

(iii) ADOPTED CHILDREN. For purposes of this section, a legally adopted child of an individual shall be treated as a child of such individual.

(iv) EXAMPLE. The provisions of this subparagraph (6) may be illustrated by the following example:

EXAMPLE -- (A) FACTS. Individual F owns directly 40 percent of the profits interest of the DEF Partnership. His son, M, 20 years of age, owns directly 30 percent of the profits interest of DEF, and his son. A, 30 years of age, owns directly 20 percent of the profits interest of DEF. The 10 percent remaining of the profits interest and 100 percent of the capital interest of DEF is owned by an unrelated person.

(B) F's OWNERSHIP. F owns 40 percent of the profits interest in DEF directly and is considered to own the 30 percent profits interest owned directly by M. Since, for purposes of the effective control test contained in paragraph (b)(6)(ii) of this section, F is treated as owning 70 percent of the profits interest of DEF, F is also considered as owning the 20 percent profits interest of DEF owned by his adult son, A. Accordingly, F is considered as owning a total of 90 percent of the profits interest in DEF.

(C) M's OWNERSHIP. Minor son, M, owns 30 percent of the profits interest in DEF directly, and is considered to own the 40 percent profits interest owned directly by his father, F. However, M is not considered to own the 20 percent profits interest of DEF owned directly by his brother, A, and constructively by F, because an interest constructively owned by F by reason of family attribution is not considered as owned by him for purposes of making another member of his family the constructive owner of such interest. (See paragraph (c)(2) of this section). Accordingly, M is considered as owning a total of 70 percent of the profits interests of the DEF partnership.

(D) A's OWNERSHIP. Adult son, A, owns 20 percent of the profits interest in DEF directly. Since, for purposes of determining whether A effectively controls DEF under paragraph (b)(6)(ii) of this section, A is treated as owning only the percentage of profits interest he owns directly, he does not satisfy the condition precedent for the attribution of the DEF profits interest from his father. Accordingly, A is considered as owning only the 20 percent profits interest in DEF which he owns directly.

(c) OPERATING RULES -- (1) IN GENERAL. Except as provided in paragraph (c)(2) of this section, an interest constructively owned by a person be reason of the application of paragraph (b)(1), (2), (3), (4), (5), or (6) of this section shall, for the purposes of applying such paragraph, be treated as actually owned by such person.

(2) MEMBERS OF FAMILY. An interest constructively owned by an individual by reason of the application of paragraph (b)(5) or (6) of this section shall not be treated as owned by such individual for purposes of again applying such subparagraphs in order to make another the constructive owner of such interest.

(3) PRECEDENCE OF OPTION ATTRIBUTION. For purposes of this section, if any interest may be considered as owned under paragraph (b)(1) of this section (relating to option attribution) and under any other subparagraph of paragraph (b) of this section, such interest shall be considered as owned by such person under paragraph (b)(1) of this section.

(4) EXAMPLES. The provisions of this paragraph may be illustrated by the following examples:

EXAMPLE (1). A, 30 years of age, has a 90 percent interest in the capital and profits of DEF Partnership. DEF owns all the outstanding stock of corporation X and X owns 60 shares of the 100 shares outstanding shares of corporation Y. Under paragraph (c)(1) of this section, the 60 shares of Y constructively owned by DEF by reason of paragraph (b)(4) of this section are treated as actually owned by DEF for purposes of applying paragraph (b)(2) of this section. Therefore, A is considered as owning 54 shares of the Y stock (90 percent of 60 shares)

EXAMPLE (2). Assume the same facts as in example (1). Assume further that B, who is 20 years of age and the brother of A, directly owns 40 shares of Y stock. Although the stock of Y owned by B is considered as owned by C (the father of A and B) under paragraph (b)(6)(i) of this section, under paragraph (c)(2) of this section such stock may not be treated as owned by C for purposes of applying paragraph (b)(6)(ii) of this section in order to make A the constructive owner of such stock.

EXAMPLE (3). Assume the same facts as in example (2), and further assume that C has an option to acquire the 40 shares of Y stock owned by his son, B. The rule contained in paragraph (c)(2) of this section does not prevent the reattribution of such 40 shares to A because, under paragraph (c)(3) of this section, C is considered as owning the 40 shares by reason of option attribution and not be reason of family attribution. Therefore, since A is in effective control of Y under paragraph (b)(6)(ii) of this section, the 40 shares of Y stock constructively owned by C are reattributed to A. A is considered as owning a total of 94 shares of Y stock.

SECTION 1.414(c)-5 EFFECTIVE DATE.

(a) GENERAL RULE. Except as provided in paragraph (b), (c), (e), or (f) of this section, the provisions of section 1.414(b)-1 and section 1.414(c)-1 through 1.414(c)-4 shall apply for plan years beginning after September 2, 1974.

(b) EXISTING PLANS. In the case of a plan in existence on January 1, 1974, unless paragraph (c) of this section applies, the provisions of section 1.414(b)-1 and sections 1.414(c)-1 through 1.414(c)-4 shall apply for plan years beginning after December 31, 1975. For definition of the term "existing plan", see section 1.410(a)-2(c).

(c) EXISTING PLANS ELECTING NEW PROVISIONS. In the case of a plan in existence on January 1, 1974, for which the plan administrator makes an election under section 1.410(a)-2(d), the provisions of section 1.414(b)-1 and sections 1.414(c)-1 through 1.414(c)-4 shall apply to the plan years elected under section 1.410(a)-2(d).

(d) APPLICATION. For purposes of the Employee Retirement Income Security Act of 1974, the provisions of section 1.414(b)-1 and sections 1.414(c)-1 through 1.414(c)-4 do not apply for any period of time before the plan years described in paragraph (a), (b), or (c) of this section, whichever is applicable.

(e) SPECIAL RULE. Notwithstanding paragraph (a), (b), or (c) of this section, section 1.414(c)-3(f) is effective April 1, 1988.

(f) TRANSITIONAL RULE -- (1) IN GENERAL. The amendments made by T.D. 8179 apply to the plan years or period described in paragraphs (a), (b), or (c) of this section, whichever is applicable.

(2) EXCEPTION. In the case of a plan year or period beginning before March 2, 1988, if an organization --

(i) Is a member of a brother-sister group of trades or businesses under common control under section 11.414(c)-2(c), as in effect before removal by T.D. 8179 ("old group"), for such plan year or period, and

(ii) Is not such a member for such plan year or period because of the amendments made by such Treasury decision,

such member (whether or not a corporation) nevertheless will be treated as a member of such old group for purposes of section 414(c) for that plan year or period to the extent provided in section 1.1563-1(d)(2). Also, such member will be treated as a member of an old group for all purposes of the Code for such plan year or period if all the organizations (whether or not corporations) that are members of the old group meet all the requirements of section 1.1563- 1(d)(3) with respect to such plan year or period.

Par. 4. Section 1.1563-1 is amended as follows:

1. Paragraph (a)(3)(i) is amended by deleting ", singly or in combination," and by adding a new flush paragraph at the end of (a)(3)(i)(b) as set forth below.

2. Paragraph (a)(3) is amended by revising Examples (1) and (2) and by adding new Examples (3) and (4) in paragraph (a)(3)(ii) and by adding a new paragraph (a)(3)(iii) as set forth below.

3. Paragraph (c)(2)(iv) is amended by revising the charts in Examples (1) and (2) as set forth below.

4. Paragraph (d) is added to read as set forth below.

SECTION 1.1563-1 DEFINITION OF CONTROLLED GROUP OF CORPORATIONS AND COMPONENT MEMBERS.

(a) CONTROLLED GROUP OF CORPORATIONS. * * *

(3) BROTHER-SISTER CONTROLLED GROUP. (i) * * *

The five or fewer persons whose stock ownership is considered for purposes of the 80 percent requirement must be the same persons whose stock ownership is considered for purposes of the more-than-50 percent requirement.

(ii) * * *

EXAMPLE (1). The outstanding stock of corporations, P, Q, R, S and T, which have only one class of stock outstanding, is owned by the following unrelated individuals:

                            Corporations

EXAMPLE (2). The outstanding stock of corporations U and V, which have only one class of stock outstanding, is owned by the following unrelated individuals:

                                               Corporations

EXAMPLE (3). Corporations X and Y each have two classes of stock outstanding, voting common and non-voting common. (None of this stock is excluded from the definition of stock under section 1563(c).) Unrelated individuals A and B own the following percentages of the class of stock entitled to vote (voting) and of the total value of shares of all classes of stock (value) in each of corporations X and Y:

     Individuals                     Corporations

EXAMPLE (4). Assume the same facts as in example (3) except that the value of the stock owned by A and B is not more than 80 percent of the total value of shares of all classes of stock of each corporation in identical holdings. X and Y are not a brother-sister controlled group of corporations. The group meets the more-than-80 percent ownership requirement because A owns more than 50 percent of the total combined voting power of the voting stock of each corporation. For purposes of the 80 percent requirement, B's voting stock in Y cannot be combined with A's voting stock in Y since B, who does not own any voting stock in X, is not a person whose ownership is considered for purposes of the more-than-50 percent requirement. Because no other shareholder owns stock in both X and Y, these other shareholders' stock ownership is not counted towards meeting either the more-than-50 percent ownership requirement or the 80- percent ownership requirement.

(iii) Paragraph (a)(3) of this section, as amended by T.D. 8179, applies to taxable years ending on or after December 31, 1970. See, however, the transitional rule in paragraph (d) of this section.

* * * * *

(c) OVERLAPPING GROUPS. * * *

(2) BROTHER-SISTER CONTROLLED GROUPS. * * *

(iv) * * *

EXAMPLE (1). * * *

               Individuals                   Corporations

(d) TRANSITIONAL RULES -- (1) IN GENERAL. Treasury Decision 8179 amended paragraph (a)(3) of this section to revise the definition of a brother-sister controlled group of corporations. In general, those amendments are effective for taxable years ending on or after December 31, 1970.

(2) LIMITED NONRETROACTIVITY. (i) Under the authority of section 7805(b), the Internal Revenue Service will treat an old group as a brother-sister controlled group of corporations for purposes of applying sections 401, 404(a), 408(k), 409A, 410, 411, 412, 414, 415, and 4971 of the Code and sections 202, 203, 204, and 302 of the Employment Retirement Income Security Act of 1974 (ERISA) in a plan year or taxable year beginning before March 2, 1988 to the extent necessary to prevent an adverse effect on any old member (or any other corporation), or on any plan or other entity described in such sections (including plans, etc., of corporations not part of such old group), that would result solely from the retroactive effect of the amendment to this section by T.D. 8179. An adverse effect includes the disqualification of a plan or the disallowance of a deduction or credit for a contribution to a plan. The Internal Revenue Service, however, will not treat an old member as a member of an old group to the extent that such treatment will have an adverse effect on that old member.

(ii) Section 7805(b) will not be applied pursuant to paragraph (d)(2)(i) of this section to treat an old member of an old group as a member of a brother-sister controlled group to prevent an adverse effect for a taxable year if, for that taxable year, that old member treats or has treated itself as not being a member of that old group for purposes of section 401, 404(a), 408(k), 409A, 410, 411, 412, 414, 415, and 4971 of the Code and sections 202, 203, 204, and 302 and Title IV of ERISA for such taxable year (such as by filing, with respect to such taxable year, a return, amended return, or claim for credit or refund in which the amount of any deduction, credit, limitation, or tax due is determined by treating itself as not being a member of the old group for purposes of those sections). However, the fact that one or more (but not all) of the old members do not qualify for section 7805(b) treatment because of the preceding sentence will not preclude that old member (or members) from being treated as a member of the old group under paragraph (d)(2)(i) of this section in order to prevent the disallowance of a deduction or credit of another old member (or other corporation) or to prevent the disqualification of, or other adverse effect on, another old member's plan (or other entity) described in the sections of the Code and ERISA enumerated in such paragraph.

(3) ELECTION OF GENERAL NONRETROACTIVITY. In the case of a taxable year ending on or after December 31, 1970, and before March 2, 1988, an old group will be treated as a brother-sister controlled group of corporations for all purposes of the Code for such taxable year if --

(i) Each old member files a statement consenting to such treatment for such taxable year with the District Director having audit jurisdiction over its return within six months after March 2, 1988, and

(ii) No old member (A) files or has filed, with respect to such taxable year, a return, amended return, or claim for credit or refund in which the amount of any deduction, credit, limitation, or tax due is determined by treating any old member as not a member of the old group or (B) treats the employees of all members of the old group as not being employed by a single employer for purposes of sections 401, 404(a), 408(k), 409A, 410, 411, 412, 414, 415, and 4971 of the Code and sections 202, 203, 204, and 302 of ERISA for such taxable year.

(4) DEFINITIONS. For purposes of this paragraph (d) of this section --

(i) An "old group" is a brother-sister controlled group of corporations, determined by applying paragraph (a)(3) of this section as in effect before the amendments made by Treasury decision 8179, that is not a brother-sister controlled group of corporations, determined by applying paragraph (a)(3) of this section as amended by such Treasury decision, and

(ii) An "old member" is any corporation that is a member of an old group.

(5) ELECTION TO CHOOSE BETWEEN MEMBERSHIP IN MORE THAN ONE CONTROLLED GROUP. IF --

(i) An old member has filed an election under paragraph (c)(2) of this section to be treated as a component member of an old group for a December 31 before March 2, 1988, and

(ii) That corporation would (without regard to such paragraph) be a component member of more than one brother-sister controlled group (not including an old group) on the December 31, that corporation may make an election under that paragraph by filing an amended return on or before March 2, 1988. This paragraph (d)(5) does not apply to a corporation that is treated as a member of an old group under paragraph (d)(3) of this section.

(6) REFUNDS. See section 6511(a) for period of limitation on filing claims for credit or refund.

Par. 5. Section 1.1563-3 is amended by revising Example (3) in paragraph (d)(3) as set forth below.

SECTION 1.1563-3 RULES FOR DETERMINING STOCK OWNERSHIP.

* * * * *

(d) SPECIAL RULE OF SECTION 1563(f)(3)(B) * * *

(3) EXAMPLES. * * *

EXAMPLE (3). Unrelated individuals A and B each own 49 percent of all the outstanding stock of corporation R, which in turn owns 70 percent of the only class of outstanding stock of corporation S. The remaining 30 percent of the stock of corporation S is owned by unrelated individual C. C also owns the remaining 2 percent of the stock of corporation R. Under the attribution rule of paragraph (b)(4) of this section A and B are each considered to own 34.3 percent of the stock of corporation S. Accordingly, since five or fewer persons own at least 80 percent of the stock of corporations R and S and also own more than 50 percent identically (A's and B's identical ownership each is 34.3 percent, C's identical ownership is 2 percent), on December 31, 1970, corporations R and S are treated as component members of the same brother-sister controlled group.

Par. 6. Section 1.7476-1 is amended by removing from paragraph (b)(2)(i) "Section 11.414(c)-3 of this chapter (Temporary Income Tax Regulations under the Employee Retirement Income Security Act of 1974))" and adding instead "Section 1.414(c)-3)".

PART 11 -- TEMPORARY INCOME TAX REGULATIONS UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974

Par. 7. The authority citation for Part 11 continues to read in part:

Authority: 26 U.S.C. 7805. * * *

Par. 8. Sections 11.414(c)-1 through 11.414(c)-5 are removed.

PART 13 -- TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX REFORM ACT OF 1969

Par. 9. The authority citation for Part 13 continues to read in part:

Authority: 26 U.S.C. 7805. * * *

Par. 10. Sections 13.16 and 13.16-1 are removed.

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 11. The authority citation for Part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 12. Section 602.101(c) is amended by adding the following citations to the table in the appropriate places:

     Section 1.52-1(h)                  1545-0797