SEC. 1562 (added 1964)-Continued

"(g) TOLLING OF STATUTE OF LIMITATIONS. In any case in which a controlled group of corporations makes an election or termination under this section, the statutory period

"(1) for assessment of any deficiency against a corporation which is a component member of such group for any taxable year, to the extent such deficiency is attributable to the application of this part, shall not expire before the expiration of one year after the date such election or termination is made; and

"(2) for allowing or making credit or refund of any overpayment of tax by a corporation which is a component member of such group for any taxable year, to the extent such credit or refund is attributable to the application of this part, shall not expire before the expiration of one year after the date such election or termination is made."

SEC. 1563. DEFINITIONS AND SPECIAL RULES (Added 1964-78 Stat. 120-125):

Added...

Feb. 26, 1964, H.R. 8363, P.L. 88-272, § 235(a), 78 Stat. 120-125: Amended Subchapter B of Chapter 6 by adding after the new section 1562 the following new section 1563:

"SEC. 1563. DEFINITIONS AND SPECIAL RULES.

"(a) CONTROLLED GROUP OF CORPORATIONS. For purposes of this part, the term 'controlled group of corporations' means any group of

"(1) PARENT-SUBSIDIARY CONTROLLED GROUP.-One or more chains of corporations connected through stock ownership with a common parent corporation if—

"(A) stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of stock of each of the corporations, except the common parent corporation, is owned (within the meaning of subsection (d)(1)) by one or more of the other corporations; and

"(B) the common parent corporation owns (within the meaning of subsection (d)(1)) stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of stock of at least one of the other corporations, excluding, in computing such voting power or value, stock owned directly by such other corporations.

"(2) BROTHER-SISTER CONTROLLED GROUP.-Two or more corporations if stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of stock of each of the corporations is owned (within the meaning of subsection (d)(2)) by one person who is an individual, estate, or

trust.

"(3) COMBINED GROUP.-Three or more corporations each of which is a member of a group of corporations described in paragraph (1) or (2), and one of which

"(A) is a common parent corporation included in a group of corporations described in paragraph (1), and also

SEC. 1563 (added 1964)-Continued

"(B) is included in a group of corporations described in paragraph (2).

"(4) CERTAIN INSURANCE COMPANIES.-Two or more insurance companies subject to taxation under section 802 which are members of a controlled group of corporations described in paragraph (1), (2), or (3). Such insurance companies shall be treated as a controlled group of corporations separate from any other corporations which are members of the controlled group of corporations described in paragraph (1), (2), or (3). "(b) COMPONENT MEMBER.

"(1) GENERAL RULE.-For purposes of this part, a corporation is a component member of a controlled group of corporations on a December 31 of any taxable year (and with respect to the taxable year which includes such December 31) if such corporation

"(A) is a member of such controlled group of corporations on the December 31 included in such year and is not treated as an excluded member under paragraph (2), or

"(B) is not a member of such controlled group of corporations on the December 31 included in such year but is treated as an additional member under paragraph (3).

"(2) EXCLUDED MEMBERS.-A Corporation which is a member of a controlled group of corporations on December 31 of any taxable year shall be treated as an excluded member of such group for the taxable year including such December 31 if such corporation

"(A) is a member of such group for less than one-half the number of days in such taxable year which precede such December 31,

"(B) is exempt from taxation under section 501 (a) (except a corporation which is subject to tax on its unrelated business taxable income under section 511) for such taxable year,

"(C) is a foreign corporation subject to tax under section 881 for such taxable year,

"(D) is an insurance company subject to taxation under section 8C2 or section 821 (other than an insurance company which is a member of a controlled group described in subsection (a) (4)), or

"(E) is a franchised corporation, as defined in subsection (f) (4).

"(3) ADDITIONAL MEMBERS.-A corporation which

"(A) was a member of a controlled group of corporations at any time during a calendar year,

"(B) is not a member of such group on December 31 of such calendar year, and

"(C) is not described, with respect to such group, in subparagraph (B), (C), (D), or (E) of paragraph (2),

shall be treated as an additional member of such group on December 31 for its taxable year including such December 31 if it was a member of such group for one-half (or more) of the number of days in such taxable year which precede such December 31.

"(4) OVERLAPPING GROUPS.-If a corporation is a component member of more than one controlled group of corporations with respect to any taxable year, such corporation shall be treated as a component member of only one controlled group. The determination as to the group of which such corporation is a component

SEC. 1563 (added 1964)-Continued

member shall be made under regulations prescribed by the Secretary or his delegate which are consistent with the purposes of this part.

(c) CERTAIN STOCK EXCLUDED.—

"(1) GENERAL RULE. For purposes of this part, the term 'stock' does not include

"(A) nonvoting stock which is limited and preferred as to dividends,

"(B) treasury stock, and

"(C) stock which is treated as 'excluded stock' under paragraph (2).

"(2) STOCK TREATED AS 'EXCLUDED STOCK'.

"(A) PARENT-SUBSIDIARY CONTROLLED GROUP.-For purposes of subsection (a) (1), if a corporation (referred to in this paragraph as 'parent corporation') owns (within the meaning of subsections (d)(1) and (e)(4)), 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 in another corporation (referred to in this paragraph as 'subsidiary corporation'), the following stock of the subsidiary corporation shall be treated as excluded stock

"(i) stock in the subsidiary corporation held by a trust which is part of a plan of deferred compensation for the benefit of the employees of the parent corporation or the subsidiary corporation,

"(ii) stock in the subsidiary corporation owned by an individual (within the meaning of subsection (d) (2)) who is a principal stockholder or officer of the parent corporation. For purposes of this clause, the term 'prinicpal stockholder' of a corporation means an individual who owns (within the meaning of subsection (d) (2)) 5 percent or more of the total combined voting power of all classes of stock entitled to vote or 5 percent or more of the total value of shares of all classes of stock in such corporation, or

"(iii) stock in the subsidiary corporation owned (within the meaning of subsection (d) (2) by an employee of the subsidiary corporation if such stock is subject to conditions which run in favor of such parent (or subsidiary) corporation and which substantially restrict or limit the employee's right (or if the employee constructively owns such stock, the direct owner's right) to dispose of such stock.

"(B) BROTHER-SISTER CONTROLLED GROUP.-For purposes of subsection (a)(2), if a person who is an individual, estate, or trust (referred to in this paragraph as 'common owner') owns (within the meaning of subsection (d)(2)), 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 in a corporation, the following stock of such corporation shall be treated as excluded stock

"(i) stock in such corporation held by an employees' trust described in section 401(a) which is exempt from tax under section 501(a), if such trust is for the benefit of the employees of such corporation, or

(ii) stock in such corporation owned (within the meaning of subsection (d)(2)) by an employee of the corporation if such stock is subject to conditions which run in favor of such

SEC. 1563 (added 1964)-Continued

common owner (or such corporation) and which substantially restrict or limit the employee's right (or if the employee constructively owns such stock, the direct owner's right) to dispose of such stock. If a condition which limits or restricts the employee's right (or the direct owner's right) to dispose of such stock also applies to the stock held by the common owner pursuant to a bona fide reciprocal stock purchase arrangement, such condition shall not be treated as one which restricts or limits the employee's right to dispose of such stock.

"(d) RULES FOR DETERMINING STOCK OWNERSHIP.

"(1) PARENT-SUBSIDIARY CONTROLLED GROUP.-For purposes of determining whether a corporation is a member of a parentsubsidiary controlled group of corporations (within the meaning of subsection (a)(1)), stock owned by a corporation means

"(A) stock owned directly by such corporation, and

"(B) stock owned with the application of subsection (e)(1). "(2) BROTHER-SISTER CONTROLLED GROUP.-For purposes of determining whether a corporation is a member of a brothersister controlled group of corporations (within the meaning of subsection (a)(2)), stock owned by a person who is an individual, estate, or trust means

"(A) stock owned directly by such person, and

"(B) stock owned with the application of subsection (e). "(e) CONSTRUCTIVE OWNERSHIP.

"(1) OPTIONS.-If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.

"(2) ATTRIBUTION FROM PARTNERSHIPS.-Stock 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 capital or profits of the partnership in proportion to his intrest in capital or profits, whichever such proportion is the greater.

"(3) ATTRIBUTION FROM ESTATES OR TRUSTS.

"(A) Stock owned, directly or indirectly, by or for an estate or trust shall be considered as owned by any beneficiary who has an actuarial interest of 5 percent or more in such stock, 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 such stock to satisfy his rights as a beneficiary.

"(B) Stock owned, directly or indirectly, by or for any portion of a trust of which a person is considered the owner under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners) shall be considered as owned by such person.

"(C) This paragraph shall not apply to stock owned by any employees' trust described in section 401(a) which is exempt from tax under section 501 (a).

"(4) ATTRIBUTION FROM CORPORATIONS.-Stock owned, directly or indirectly, by or for a corporation shall be considered as owned

SEC. 1563 (added 1964)—Continued

by any person who owns (within the meaning of subsection (d)) 5 percent or more in value of its stock in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation.

"(5) SPOUSE.-An individual shall be considered as owning stock in a corporation owned, directly or indirectly, by or for his 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), except in the case of a corporation with respect to which each of the following conditions is satisfied for its taxable year

"(A) The individual does not, at any time during such taxable year, own directly any stock in such corporation;

"(B) The individual is not a director or employee and does not participate in the management of such corporation at any time during such taxable year;

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

"(D) Such stock in such corporation 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 stock and which run in favor of the individual or his children who have not attained the age of 21 years. "(6) CHILDREN, GRANDCHILDREN, PARENTS, AND

ENTS.

GRANDPAR

"(A) MINOR CHILDREN.-An individual shall be considered as owning stock owned, directly or indirectly, by or for his children who have not attained the age of 21 years, and, if the individual has not attained the age of 21 years, the stock owned, directly or indirectly, by or for his parents. "(B) ADULT CHILDREN AND GRANDCHILDREN. An individual who owns (within the meaning of subsection (d) (2), but without regard to this subparagraph) 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 in a corporation shall be considered as owning the stock in such corporation owned, directly or indirectly, by or for his parents, grandparents, grandchildren, and children who have attained the age of 21 years.

"(C) ADOPTED CHILD. For purposes of this section, a legally adopted child of an individual shall be treated as a child of such individual by blood.

"(f) OTHER DEFINITIONS AND RULES.

"(1) EMPLOYEE DEFINED. For purposes of this section the term 'employee' has the same meaning such term is given in section 3306 (i).

"(2) OPERATING RULES.

"(A) IN GENERAL.-Except as provided in subparagraph (B), stock constructively owned by a person by reason of the application of paragraph (1), (2), (3), (4), (5), or (6) of subsection (e) shall, for purposes of applying such paragraphs, be treated as actually owned by such person.

"(B) MEMBERS OF FAMILY.-Stock constructively owned by an individual by reason of the application of paragraph (5) or (6) of subsection (e) shall not be treated as owned by him