[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: 26CFR1.318-2]

[Page 65-66]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.318-2  Application of general rules.

    (a) The application of paragraph (b) of Sec. 1.318-1 may be 
illustrated by the following examples:

    Example (1). H, an individual, owns all of the stock of corporation 
A. Corporation A is not considered to own the stock owned by H in 
corporation A.
    Example (2). H, an individual, his wife, W, and his son, S, each own 
one-third of the stock of the Green Corporation. For purposes of 
determining the amount of stock owned by H, W, or S for purposes of 
section 318(a)(2)(C) and (3)(C), the amount of stock held by the other 
members of the family shall be added pursuant to paragraph (b)(3) of 
Sec. 1.318-1 in applying the 50-percent requirement of such section. H, 
W, or S, as the case may be, is for this purpose deemed to own 100 
percent of the stock of the Green Corporation.

    (b) The application of section 318(a)(1), relating to members of a 
family, may be illustrated by the following example:

    Example An individual, H, his wife, W, his son, S, and his grandson 
(S's son), G, own the 100 outstanding shares of stock of a corporation, 
each owning 25 shares. H, W, and S are each considered as owning 100 
shares. G is

[[Page 66]]

considered as owning only 50 shares, that is, his own and his father's.

    (c) The application of section 318(a)(2) and (3), relating to 
partnerships, trusts and corporations, may be illustrated by the 
following examples:

    Example (1). A, an individual, has a 50 percent interest in a 
partnership. The partnership owns 50 of the 100 outstanding shares of 
stock of a corporation, the remaining 50 shares being owned by A. The 
partnership is considered as owning 100 shares. A is considered as 
owning 75 shares.
    Example (2). A testamentary trust owns 25 of the outstanding 100 
shares of stock of a corporation. A, an individual, who holds a vested 
remainder in the trust having a value, computed actuarially equal to 4 
percent of the value of the trust property, owns the remaining 75 
shares. Since the interest of A in the trust is a vested interest rather 
than a contingent interest (whether or not remote), the trust is 
considered as owning 100 shares. A is considered as owning 76 shares.
    Example (3). The facts are the same as in (2), above, except that 
A's interest in the trust is a contingent remainder. A is considered as 
owning 76 shares. However, since A's interest in the trust is a remote 
contingent interest, the trust is not considered as owning any of the 
shares owned by A.
    Example (4). A and B, unrelated individuals, own 70 percent and 30 
percent, respectively, in value of the stock of Corporation M. 
Corporation M owns 50 of the 100 outstanding shares of stock of 
Corporation O, the remaining 50 shares being owned by A. Corporation M 
is considered as owning 100 shares of Corporation O, and A is considered 
as owning 85 shares.
    Example (5). A and B, unrelated individuals, own 70 percent and 30 
percent, respectively, of the stock of corporation M. A, B, and 
corporation M all own stock of corporation O. Since B owns less than 50 
percent in value of the stock of corporation M, neither B nor 
corporation M constructively owns the stock of corporation O owned by 
the other. However, for purposes of certain sections of the Code, such 
as sections 304 and 856(d), the 50-percent limitation of section 
318(a)(2)(C) and (3)(C) is disregarded or is reduced to less than 30 
percent. For such purposes, B constructively owns his proportionate 
share of the stock of corporation O owned directly by corporation M, and 
corporation M constructively owns the stock of corporation O owned by B.

[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6969, 33 FR 
11999, Aug. 23, 1968]