26 U.S.C. § 1504 — Definitions

(a) Affiliated group defined. For this subtitle, an "affiliated group" is one or more chains of includible corporations connected through stock ownership to a common parent that is itself an includible corporation, but only if: (A) the common parent directly owns stock meeting paragraph (2) in at least one other includible corporation; and (B) one or more other includible corporations directly owns stock meeting paragraph (2) in each includible corporation other than the common parent. (2) 80-percent voting and value test. Stock ownership meets this paragraph if it has at least 80 percent of the corporation’s total voting power and has a value equal to at least 80 percent of the total value of the corporation’s stock. (3) 5 years before reconsolidation. (A) If a corporation was included, or was required to be included, in an affiliated group’s consolidated return and then stops being a member, neither that corporation nor its successor may be included in a consolidated return of that group, or of another group with the same common parent or its successor, before the 61st month beginning after the first taxable year in which the corporation stopped being a member. (B) The Secretary may waive this rule for a corporation for any period, subject to conditions the Secretary prescribes. (4) Stock excluded. For this subsection, "stock" does not include stock that: (A) cannot vote; (B) has limited and preferred dividends and does not participate significantly in corporate growth; (C) has redemption and liquidation rights no greater than its issue price, except for a reasonable premium; and (D) cannot be converted into another stock class. (5) Regulations. The Secretary must issue regulations needed or appropriate to carry out this subsection. The regulations may: (A) treat warrants, convertible obligations, and similar interests as stock, and stock as not stock; (B) treat options to buy or sell stock as exercised; (C) treat the paragraph (2)(B) test as met when the group relied in good faith on a value determination; (D) disregard an accidental failure of the paragraph (2)(B) test caused by changes in the relative values of stock classes; (E) disregard transfers of stock within the group when deciding whether a corporation stopped being a member; and (F) disregard voting-power changes to the extent they are disproportionate to related value changes. (b) Definition of "includible corporation". As used in this chapter, "includible corporation" means any corporation except: (1) a corporation exempt from tax under section 501; (2) an insurance company taxed under section 801; (3) a foreign corporation; (4) a regulated investment company or real estate investment trust taxed under subchapter M of chapter 1; (5) a DISC, as defined in section 992(a)(1); and (6) an S corporation. (c) Includible insurance companies. Despite subsection (b)(2): (1) two or more domestic insurance companies each taxed under section 801 are treated as includible corporations when subsection (a) is applied only to those companies; and (2)(A) if an affiliated group, determined without subsection (b)(2), includes one or more domestic insurance companies taxed under section 801, the common parent may elect under the Secretary’s regulations to treat all those companies as includible corporations for subsection (a), but a company cannot be treated that way until it has been a group member for the five taxable years immediately before the taxable year of the consolidated return. (B) If the election applies for a taxable year, section 243(b)(3) and the section 243(b)(2) exception concerning subsections (b)(2) and (c) of this section, section 542(b)(5), section 1563(a)(4) and (b)(2)(D), and the reference to section 1563(b)(2)(D) in section 1563(b)(3)(C), do not apply for that year. (d) Subsidiary formed to comply with foreign law. A domestic corporation that directly or indirectly owns or controls all the capital stock, except directors’ qualifying shares, of a corporation organized under the law of a neighboring foreign country may choose to treat that foreign corporation as domestic for this subtitle if the foreign corporation exists only to comply with that country’s laws about owning and operating property. (e) Includible tax-exempt organizations. Despite subsection (b)(1), two or more section 501 tax-exempt organizations are treated as includible corporations, for applying subsection (a) only to them, when at least one is described in section 501(c)(2) and the others receive income from those section 501(c)(2) organizations. (f) Certain amounts from a former DISC. For a taxable year beginning after December 31, 1984, when determining an affiliated group’s consolidated taxable income, a corporation that was a DISC and otherwise would be a group member is not treated as a member for: (1) a distribution, or deemed distribution, of accumulated DISC income that was not treated as previously taxed income under section 805(b)(2)(A) of the Tax Reform Act of 1984; or (2) an amount treated as received under section 805(b)(3) of that Act.