[Code of Federal Regulations]
[Title 26, Volume 13]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR]

[Page 55-56]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
RELATED RULES--Table of Contents
 
Sec.  1.1563-4  Franchised corporations.

    (a) In general. For purposes of paragraph (b)(2)(ii)(d) of Sec.  
1.1563-1, a member of a controlled group of corporations shall be 
considered to be a franchised corporation for a taxable year if each of 
the following conditions is satisfied for one-half (or more) of the 
number of days preceding the December 31 included within such taxable 
year (or, if such taxable year does not include a December 31, for one-
half or more of the number of days in such taxable year preceding the 
last day of such year):
    (1) Such member is franchised to sell the products of another 
member, or the common owner, of such controlled group.
    (2) More than 50 percent (determined on the basis of cost) of all 
the goods held by such member primarily for sale to its customers are 
acquired from members or the common owner of the controlled group, or 
both.
    (3) The stock of such member is to be sold to an employee (or 
employees) of such member pursuant to a bona fide plan designed to 
eliminate the stock ownership of the parent corporation (as defined in 
paragraph (b)(1) of Sec.  1.1563-2) or of the common owner (as defined 
in paragraph (b)(3) of Sec.  1.1563-2) in such member.
    (4) Such employee owns (or such employees in the aggregate own) 
directly more than 20 percent of the total value of shares of all 
classes of stock of such member. For purposes of this subparagraph, the 
determination of whether an employee (or employees) owns the requisite 
percentage of the total value of the stock of the member shall be made 
without regard to paragraph (b) of Sec.  1.1563-2, relating to certain 
stock treated as excluded stock. Furthermore, if the corporation has 
more than one class of stock outstanding, the relative voting rights as 
between each such class of stock shall be disregarded in making such 
determination.

[[Page 56]]

    (b) Plan for elimination of stock ownership. (1) A plan referred to 
in paragraph (a)(3) of this section must:
    (i) Provide a reasonable selling price for the stock of the member, 
and
    (ii) Require that a portion of the employee's compensation or 
dividends, or both, from such member be applied to the purchase of such 
stock (or to the purchase of notes, bonds, debentures, or similar 
evidences of indebtedness of such member held by the parent corporation 
or the common owner).

It is not necessary, in order to satisfy the requirements of subdivision 
(ii) of this subparagraph, that the plan require that a percentage of 
every dollar of the compensation and dividends be applied to the 
purchase of the stock (or the indebtedness). The requirements of such 
subdivision are satisfied if an otherwise qualified plan provides that 
under certain specified conditions (such as a requirement that the 
member earn a specified profit) no portion of the compensation and/or 
dividends need be applied to the purchase of the stock (or 
indebtedness), provided such conditions are reasonable.
    (2) A plan for the elimination of the stock ownership of the parent 
corporation or of the common owner will satisfy the requirements of 
paragraph (a)(3) of this section and subparagraph (1) of this paragraph 
even though it does not require that the stock of the member be sold to 
an employee (or employees) if it provides for the redemption of the 
stock of the member held by the parent or common owner and under the 
plan the amount of such stock to be redeemed during any period is 
calculated by reference to the profits of such member during such 
period.

[T.D. 6845, 30 FR 9757, Aug. 5, 1965]