Discussion:Brother-Sister Controlled Group - 50% Test or 80% Test

My PPC 1120 Deskbooks statest that American Jobs Creation Act of 2004 changed the definition of a Brother-Sister Controlled Group for purposes of applying Sec 1561 (which includes the allocation of the 15% & 25% tax brackets). PPC states that the 80% rule is no longer applicable when determining whether or not corporations will be considered a brother - sister controlled group.

It appears that I missed this change in the law.

If only the 50% rule applies, then me and all of you may have a lot more brother - sister controlled groups than we think.

Has anyone reviewed this and can confirm that this change was made?

PPC cites IRC 1563(f)(5). But I need the help of an EA on this, because I cannot read code.

Now, what does all that mean?

IRC Sec. 1563(a)(2) defines a brother-sister controlled group as one where 5 or fewer individuals, estates or trusts own more than 50 percent of the voting power. The 80% test went away with the 1969 tax reform act.

IRC Sec. 1563(f)(5) was added by the American Jobs Creation Act of 2004. It changes the definition of a bro-sis controlled group as described by JR. But this definition is for purposes of Code provisions "other than this part." Sec. 1561-63 constitutes Part II of Subchapter B of Chapter 6 of Subtitle A of the Code. So by my reading, (f)(5) does not apply to the allocation of the tax brackets, which is governed by Sec. 1561, which is in Part II, i.e., "this part." Therefore, the ownership requirement for a bro-sis group for purposes of Sec. 1561 is the 50% rule of Sec. 1563(a)(2), and this has been true since 1970.

Temporary Reg. Sec. 1.1563-1T(a)(3)lays out these rules in detail and gives examples.

This points up the danger of relying on tax information (textbooks, training materials, editorial explanations, form instructions, IRS publications, etc.) and not checking tax authority (Code, regs, rulings, case law) to confirm it. Information is useful, but you cannot rely on it.

In the fall of 2005 I taught the graduate tax research course at San Diego State University while the regular professor was on sabbatical. It was an educational experience for me as well as for the students, although I had been preaching to my SDSU state & local tax students and tax staff for years about the difference between information and authority. One of the students in the research class was a local practitioner who had been in the business for 25 years and never looked at anything beyond IRS publications and form instructions. At the end of the semester he thanked me and said, "I used to just look this stuff up in the IRS pubs. Now I write a memo citing authority and send the client a bill!"

I tried to create links to the code and regs, but it didn't work. Perhaps someone can do that for us.

Rev Ruls and Rev Procs are authoritative in the sense that taxpayers can rely on them. However, if they do not comport with the statute, a court (or the IRS itself, later on) may invalidate them. The same is true of administrative (as opposed to legislative) regulations. It's generally easier to overturn a ruling than a regulation, because regs go through an administrative law process (notice of intent, issuance of proposed reg, public comment period, hearings, etc.) while rulings are just administrative interpretations by the IRS.

When talking about "authority," it's also important to consider what constitutes "substantial authority" for purposes of avoiding accuracy-related penalties. Rev Ruls and Rev Procs, and congressional committee reports on legislation, for example, are "authority" for that purpose (see Reg. Sec. 1.6662-4(d)(3)(iii)).