Types of Stocks Not Included in Controlled Group Determination

Certain types of stock are excluded from the calculation when establishing whether a group is under common control. This is done so as to prevent manipulation of ownership percentages and ensure regulatory compliance.

Exempted Types of Stock

• Nonvoting Preferred Shares and Treasury Stock

• Ownership percentages are not calculated based on these shares.

• Stock in a Subsidiary

• If a parent company owns over 50% of the subsidiary’s voting power or value for all classes of stocks, the following holdings shall be disregarded:
• Shares held by a trust created for deferred compensation plans covering employees of the parent or subsidiary.
• Equity interests owned by key shareholders (as defined below) or officers of the parent corporation.
• Equity interests owned by employees of such other corporations if significant limitations are imposed on their right to dispose of.
• Shares owned by tax-exempt organizations which are controlled either directly or indirectly through ownership or management rights by said parent organization, principal shareholder(s), officer(s), etc..

• Stock in Brother-Sister Companies Under Common Control

• Where five or fewer persons who are individuals, estates, or trusts hold at least half (50%) then such interests need not be taken into account:
• Stock held by qualified retirement plan trusts for employees.
• Stock owned by employees with substantial disposal restrictions in favor of common owners.
• Stock owned by tax-exempt organizations controlled by the corporation, principal shareholders, or officers.

Significance to Business Owners

Learning these exceptions is essential for business owners to accurately determine whether or not they are part of a controlled group and comply with the rules. Failure to identify and exclude specific types of stocks can lead to disputes with tax authorities over past returns filed, as well as jeopardize employee benefit plans’ integrity.