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Revenue Administrative Bulletin 1989-48
Revenue Administrative Bulletin 1989-48
Approved: May 31, 1989
SINGLE BUSINESS TAX - ENTITIES UNDER COMMON CONTROL
(Replaces Single Business Tax Bulletin 1978-1)
RAB-89-48. This Bulletin is issued to define "entities under common control" for single business tax purposes.
For determining entities under common control under MCL 208.35(2) and MCL 208.36(4), the Department adopts the U.S. Department of Treasury Regulation 1.414(c) relating to two or more trades or businesses qualifying for pension, profit-sharing and stock bonus plans. Entities under common control shall include any person as defined in MCL 208.6(1) including "an individual, firm, bank, financial institution, limited partnership, copartnership, partnership, joint venture, association, corporation, receiver, estate, trust, or any other group or combination acting as a unit."
Types of Controlled Groups
Parent-Subsidiary Group of Entities Under Common Control
The parent-subsidiary group of entities 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 and the following conditions exist:
- A controlling interest in each of the organizations, except the common parent organization, is owned (directly and indirectly) by one or more of the other organizations (see page 6 for constructive ownership rules); and
- The common parent organization owns (directly and indirectly) 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 (see page 6 for constructive ownership rules.)
A controlling interest means:
- Corporations: 80 percent of total combined voting power of all classes of stock entitled to vote, OR, at least 80 percent of the total value of the shares of all classes of stock of such corporation.
- Trusts and estates: ownership of an actuarial interest of at least 80 percent of such trust or estate. [Actuarial interest defined: IRC #1.414(c)-2 (b)(2)(ii)]
- Partnerships: 80 percent of the profits or capital
- Sole proprietorships: ownership of such proprietorship.
Brother-Sister Group of Entities Under Common Control
The term "brother-sister group of entities under common control" means two or more entities engaged in a business activity, providing the following exists:
- The same five or fewer persons who are individuals, estates or trusts own (directly and indirectly) a controlling interest in each entity (see page 6 for constructive ownership rules), and
- Taking into account the ownership of each such person only to the extent such ownership is identical with respect to each such entity, such persons are in effective control of each entity. 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.
Effective Control
Persons are in "effective control" of an organization if:
- Corporations: Persons own stock greater than 50 percent of the total combined voting power of all classes of stock entitled to vote, OR, greater than 50 percent of the total value of shares of all classes of stock of such corporation;
- Trusts and estates: Persons own an aggregate actuarial interest of more than 50 percent of such trust or estate;
- Partnerships: Persons own an aggregate of more than 50 percent of the profits or capital of such partnership; and
- Sole proprietorships: Such person owns such sole proprietorship.
Combined Group of Entities Under Common Control
Combined group of entities under common control means any group of three or more entities, providing the following conditions exist:
- Each entity is a member of either a parent-subsidiary group OR a brother-sister group of entities under common control, and
- At least one entity is the common parent entity of a parent-subsidiary group of entities under common control AND is also a member of a brother-sister group of entities under common control.
Examples of Entities Under Common Control
Example 1:
|
Organization(s) Owned |
|
| Owners | S Corporation |
| ABC Partnership | 80% |
| ABC Partnership is the common parent of a parent-subsidiary group of businesses under common control consisting of the ABC Partnership and S Corporation. | |
Example 2:
|
Organization(s) Owned |
||
| Owners | S Corporation | DEF Partnership |
| ABC Partnership | 80% | -- |
| S Corporation | -- | 80% |
| Example 2 facts are the same as example 1 except that S Corporation owns 80 percent of DEF Partnership. The ABC Partnership is the common parent of S Corporation, and S Corporation is the parent of DEF Partnership. The three entities are part of a group of businesses under common control. The result would be the same if the ABC Partnership, rather than S Corporation, owned 80 percent of DEF Partnership. | ||
Example 3:
|
Organization(s) Owned |
|||
| Owners | T Corporation | GHI Partnership | N Corporation |
| L Corporation | 80% | -- | 80% |
| T Corporation | -- | 40% | N |
| Corporation | -- | 40% | -- |
| L Corporation is the common parent of a parent-subsidiary group of businesses under common control consisting of L Corporation, T Corporation, N corporation, and GHI Partnership. L Corporation is the common parent of N and T Corporations, and N and T Corporations have both controlling interest and effective control of GHI Partnership. | |||
Example 4:
|
Organization(s) Owned |
||
| Owners | X Corporation | Y Corporation |
| ABC Partnership | 75% | 75 |
| X Corporation | -- | 25% |
| Y Corporation | 25% | -- |
| 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, therefore, treated as the 100 percent stock owner of X and Y Corporations. Therefore, ABC is the common parent of a parent-subsidiary group of businesses under common control consisting of the ABC Partnership, X Corporation, and Y Corporation | ||
Example 5:
Unrelated individuals A, B, C, D and E own various interests in the following businesses: Sole proprietorship A, a capital interest in GHI Partnership, and stock of corporations M, W, X, Y and Z (one class of stock outstanding) in the following percentages:
|
Organization(s) Owned |
|||||||
| Owners | A | GHI | M | W | X | Y | Z |
| A | 100% | 50% | 100% | 60% | 40% | 20% | 60% |
| B | -- | 40% | -- | 15% | 40% | 50% | 30% |
| C | -- | -- | -- | -- | 10% | 10% | 10% |
| D | -- | -- | -- | 25% | -- | 20% | -- |
| E | -- | 105 | -- | -- | 10% | -- | -- |
| 100% | 100% | 100% | 100% | 100% | 199% | 100% | 100% |
Four brother-sister groups of businesses under common control exist:
- GHI, X and Z
- X, Y and Z
- W and Y
- A and M
In Group GHI, X and Z, for example, individuals A and B together have effective control of each organization, because their combined identical ownership of GHI, X and Z is greater than 50%. (A's identical ownership of GHI, X and Z is 40% because A owns at least a 40% interest in each organization. B's identical ownership of GHI, X and Z is 30%.)
Individuals A and B (persons whose ownership is considered for purposes of the effective control requirement) together own a controlling interest in each organization, because they own at least 80% of the capital interest of partnership GHI and at least 80% of corporations X and Z.
Y is not a member of GHI, X and Z because neither the effective control requirement nor the 80% controlling interest requirement are met. The effective control requirement is not met, because A's and B's combined identical ownership in GHI, X, Y and Z does not exceed 50% (20% for A and 30% for B). The controlling interest test is not met, because A and B together only own 70% of the Y. A and M are not members of this group, because B owns no interest in either organization and A's ownership of GHI, X and Z, considered alone, is less than 80%.
Example 6:
|
Organization(s) Owned |
||
| Shareholders | Corporation U | Corporation V |
| A | 12% | 12% |
| B | 12% | 12% |
| C | 12% | 12% |
| D | 12% | 12% |
| E | 12% | 12% |
| F | 12% | 12% |
| G | 12% | 12% |
| H | 12% | 12% |
| Any group of five of the shareholders will own more than 50% of the stock in each corporation, in identical holdings. However, U and V are not members of a brother-sister group of business under common control because at least 80% of the stock of each corporation is not owned by the same five or fewer persons. | ||
Exclusion of Certain Interests or Stock in Determining Control
The terms "interest" and "stock" do not include an interest that is treated as not outstanding. (See following discussion). Also, the term "stock" does not include treasury stock or nonvoting stock that is limited and preferred as to dividends.
If a parent organization has effective control of another subsidiary organization, then the "interest" owned by the principal owners of the parent organization and subsidiary organization shall be treated as not outstanding.. A principal owner is a person (or entity) who has an "interest" in both the parent organization and the subsidiary organization. (See the following examples and refer to IRS Reg. 1.414(c)-3 for details.)
Example 1:
|
Organization(s) Owned |
|
| Owners | DEF Partnership |
| ABC Partnership | 70% |
| Individual A | 4% |
| Individual D | 26% |
| Individuals A and D are partners in the ABC Partnership. ABC Partnership satisfies the 50% effective control requirement with respect to DEF Partnership. Since A and D are partners in ABC, their interests in DEF are treated as not outstanding for purposes of determining whether ABC and DEF are members of a parent-subsidiary group. Thus, ABC is considered to own 100 percent (70% + 70%) of DEF. ABC and DEF are members of a parent-subsidiary group. | |
Example 2:
|
Organization(s) Owned |
||
| Owners | X Corporation | Y Corporation |
| ABC Partnership | 70% | -- |
| Individual A | 4% | 15% |
| Individual D | 26% | -- |
| DEF Partnership | -- | 75% |
| Same facts as Example 1 and assume further that A owns 15% and DEF owns 75% of S Corporation. ABC satisfies the 50% effective control requirement with respect to S Corporation since ABC Partnership is considered as owning 52.5% (70% x 75%) of S Corporation. Since A is a partner of the ABC Partnership, 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. Thus, DEF Partnership is considered to own 88.2% of S Corporation (DEF's 75% ownership of S Corporation divided by total outstanding S Corporation ownership of 85%). ABC Partnership, DEF Partnership, and S Corporation are members of a parent-subsidiary group. | ||
Rules for Determining Control
The Department will follow the IRS rules on exclusion of certain interest or stock in determining control. (See IRS Regulation 1.414.(c)-3.)
Constructive Ownership
The Department will follow the IRS Rules for determining constructive ownership. This means ownership attributed from partnerships, estates, trusts, corporations, spouse, and relatives will be used in determining entities under common control. (See IRS Regulation 1.414(c)-4.)