[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: 26CFR1.318-3]

[Page 66-67]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.318-3  Estates, trusts, and options.

    (a) For the purpose of applying section 318(a), relating to estates, 
property of a decedent shall be considered as owned by his estate if 
such property is subject to administration by the executor or 
administrator for the purpose of paying claims against the estate and 
expenses of administration notwithstanding that, under local law, legal 
title to such property vests in the decedent's heirs, legatees or 
devisees immediately upon death. The term beneficiary includes any 
person entitled to receive property of a decedent pursuant to a will or 
pursuant to laws of descent and distribution. A person shall no longer 
be considered a beneficiary of an estate when all the property to which 
he is entitled has been received by him, when he no longer has a claim 
against the estate arising out of having been a beneficiary, and when 
there is only a remote possibility that it will be necessary for the 
estate to seek the return of property or to seek payment from him by 
contribution or otherwise to satisfy claims against the estate or 
expenses of administration. When, pursuant to the preceding sentence, a 
person ceases to be a beneficiary, stock owned by him shall not 
thereafter be considered owned by the estate, and stock owned by the 
estate shall not thereafter be considered owned by him. The application 
of section 318(a) relating to estates may be illustrated by the 
following examples:

    Example (1). (a) A decedent's estate owns 50 of the 100 outstanding 
shares of stock of corporation X. The remaining shares are owned by 
three unrelated individuals, A, B, and C, who together own the entire 
interest in the estate. A owns 12 shares of stock of corporation X 
directly and is entitled to 50 percent of the estate. B owns 18 shares 
directly and has a life estate in the remaining 50 percent of the 
estate. C owns 20 shares directly and also owns the remainder interest 
after B's life estate.
    (b) If section 318(a)(5)(C) applies (see paragraph (c)(3) of Sec. 
1.318-4), the stock of corporation X is considered to be owned as 
follows: the estate is considered as owning 80 shares, 50 shares 
directly, 12 shares constructively through A, and 18 shares 
constructively through B; A is considered as owning 37 shares, 12 shares 
directly, and 25 shares constructively (50 percent of the 50 shares 
owned directly by the estate); B is considered as owning 43 shares, 18 
shares directly and 25

[[Page 67]]

shares constructively (50 percent of the 50 shares owned directly by the 
estate); C is considered as owning 20 shares directly and no shares 
constructively. C is not considered a beneficiary of the estate under 
section 318(a) since he has no direct present interest in the property 
held by the estate nor in the income produced by such property.
    (c) If section 318(a)(5)(C) does not apply, A is considered as 
owning nine additional shares (50 percent of the 18 shares owned 
constructively by the estate through B), and B is considered as owning 
six additional shares (50 percent of the 12 shares owned constructively 
by the estate through A).
    Example (2). Under the will of A, Blackacre is left to B for life, 
remainder to C, an unrelated individual. The residue of the estate 
consisting of stock of a corporation is left to D. B and D are 
beneficiaries of the estate under section 318(a). C is not considered a 
beneficiary since he has no direct present interest in Blackacre nor in 
the income produced by such property. The stock owned by the estate is 
considered as owned proportionately by B and D.

    (b) For the purpose of section 318(a)(2)(B) stock owned by a trust 
will be considered as being owned by its beneficiaries only to the 
extent of the interest of such beneficiaries in the trust. Accordingly, 
the interest of income beneficiaries, remainder beneficiaries, and other 
beneficiaries will be computed on an actuarial basis. Thus, if a trust 
owns 100 percent of the stock of Corporation A, and if, on an actuarial 
basis, W's life interest in the trust is 15 percent, Y's life interest 
is 25 percent, and Z's remainder interest is 60 percent, under this 
provision W will be considered to be the owner of 15 percent of the 
stock of Corporation A, Y will be considered to be the owner of 25 
percent of such stock, and Z will be considered to be the owner of 60 
percent of such stock. The factors and methods prescribed in Sec. 
20.2031-7 of this chapter (Estate Tax Regulations) for use in 
ascertaining the value of an interest in property for estate tax 
purposes shall be used in determining a beneficiary's actuarial interest 
in a trust for purposes of this section. See Sec. 20.2031-7 of this 
chapter (Estate Tax Regulations) for examples illustrating the use of 
these factors and methods.
    (c) The application of section 318(a) relating to options may be 
illustrated by the following example:

    Example. A and B, unrelated individuals, own all of the 100 
outstanding shares of stock of a corporation, each owning 50 shares. A 
has an option to acquire 25 of B's shares and has an option to acquire a 
further option to acquire the remaining 25 of B's shares. A is 
considered as owning the entire 100 shares of stock of the corporation.

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