Academic journal article Journal of Accountancy

Defining an Affiliated Group

Academic journal article Journal of Accountancy

Defining an Affiliated Group

Article excerpt

An affiliated group of corporations can elect to file a consolidated tax return. One of the advantages of doing so is the ability to net a loss from one corporation against the profits of another. To be a member of an affiliated group, the group must own stock representing at least 80% of the voting power and 80% of the value of the subsidiary. A recent case explored the definition of voting power.

Amax, Inc., and a group of Japanese businesses owned the stock of Alumax, Inc., a manufacturer of aluminum products. While each owned 50% of the stock, the stock Amax owned had four votes per share, giving Amax 80% of the votes on both corporate issues and the board of directors. However, a majority of the shareholders of both groups had to approve any merger, purchase or sale of 5% of Alumax's corporate assets and any liquidation, hiring or firing of the CEO or loans to affiliated corporations.

Although the board members Amax elected had 80% of the votes, the directors elected by the Japanese businesses could veto any board action, subject to review by a panel of arbitrators. In addition, Alumax had to pay dividends equal to 35% of its income, 80% of which went to the Japanese investors. Because of these restrictions, the IRS concluded that Amax did not own stock with 80% of Alumax's voting power.

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