[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.304-5]

[Page 22-23]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.304-5  Control.

    (a) Control requirement in general. Section 304(c)(1) provides that, 
for purposes of section 304, control means the ownership of stock 
possessing at least

[[Page 23]]

50 percent of the total combined voting power of all classes of stock 
entitled to vote or at least 50 percent of the total value of shares of 
all classes of stock. Section 304(c)(3) makes section 318(a) (relating 
to constructive ownership of stock), as modified by section 
304(c)(3)(B), applicable to section 304 for purposes of determining 
control under section 304(c)(1).
    (b) Effect of section 304(c)(2)(B)--(1) In general. In determining 
whether the control test with respect to both the issuing and acquiring 
corporations is satisfied, section 304(a)(1) considers only the person 
or persons that--
    (i) Control the issuing corporation before the transaction;
    (ii) Transfer issuing corporation stock to the acquiring corporation 
for property; and
    (iii) Control the acquiring corporation thereafter.
    (2) Application. Section 317 defines property to include money, 
securities, and any other property except stock (or stock rights) in the 
distributing corporation. However, section 304(c)(2)(B) provides a 
special rule to extend the relevant group of persons to be tested for 
control of both the issuing and acquiring corporations to include the 
person or persons that do not acquire property, but rather solely stock 
from the acquiring corporation in the transaction. Section 304(c)(2)(B) 
provides that if two or more persons in control of the issuing 
corporation transfer stock of such corporation to the acquiring 
corporation, and if the transferors are in control of the acquiring 
corporation after the transfer, the person or persons in control of each 
corporation include each of those transferors. Because the purpose of 
section 304(c)(2)(B) is to include in the relevant control group the 
person or persons that retain or acquire acquiring corporation stock in 
the transaction, only the person or persons transferring stock of the 
issuing corporation that retain or acquire any proprietary interest in 
the acquiring corporation are taken into account for purposes of 
applying section 304(c)(2)(B).
    (3) Example. This section may be illustrated by the following 
example.

    Example (a) A, the owner of 20% of T's only class of stock, 
transfers that stock to P solely in exchange for all of the P stock. 
Pursuant to the same transaction, P, solely in exchange for cash, 
acquires the remaining 80% of the T stock from T's other shareholder, B, 
who is unrelated to A and P.
    (b) Although A and B together were in control of T (the issuing 
corporation) before the transaction and A and B each transferred T stock 
to P (the acquiring corporation), sections 304(a)(1) and (c)(2)(B) do 
not apply to B because B did not retain or acquire any proprietary 
interest in P in the transaction. Section 304(a)(1) also does not apply 
to A because A (or any control group of which A was a member) did not 
control T before the transaction and P after the transaction.

    (c) Effective date. This section is effective on January 20, 1994.

[T.D. 8515, 59 FR 2960, Jan. 20, 1994]