[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.537-3]

[Page 254-255]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.537-3  Business of the corporation.

    (a) The business of a corporation is not merely that which it has 
previously carried on but includes, in general, any line of business 
which it may undertake.
    (b) If one corporation owns the stock of another corporation and, in 
effect, operates the other corporation, the business of the latter 
corporation may be considered in substance, although not in legal form, 
the business of the first corporation. However, investment by a 
corporation of its earnings and profits in stock and securities of 
another corporation is not, of itself, to be regarded as employment of 
the earnings and profits in its business. Earnings and profits of the 
first corporation put into the second corporation through the purchase 
of stock or securities or otherwise, may, if a subsidiary relationship 
is established, constitute employment of the earnings and profits in its 
own business. Thus, the business of one corporation may be regarded as 
including the business of another corporation if such other corporation 
is a mere instrumentality of the first corporation; that may be 
established by showing that the first corporation owns at least 80 
percent of the voting stock of the second corporation. If the taxpayer's 
ownership of stock is less

[[Page 255]]

than 80 percent in the other corporation, the determination of whether 
the funds are employed in a business operated by the taxpayer will 
depend upon the particular circumstances of the case. Moreover, the 
business of one corporation does not include the business of another 
corporation if such other corporation is a personal holding company, an 
investment company, or a corporation not engaged in the active conduct 
of a trade or business.

                       Personal Holding Companies