[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: 26CFR1.542-3]

[Page 255-257]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.542-3  Stock ownership requirement.

    (a) General rule. To meet the stock ownership requirement, it is 
necessary that at some time during the last half of the taxable year 
more than 50 percent in value of the outstanding stock of the 
corporation be owned, directly or indirectly, by or for not more than 5 
individuals. Any organization or trust

[[Page 256]]

to which subparagraph (1) of this paragraph applies shall be considered 
as one individual for purposes of this stock ownership requirement 
subject, however, to the exception in subparagraph (2) of this paragraph 
which is applicable only to taxable years beginning after December 31, 
1954. Thus, if an organization or trust which is considered as an 
individual owns 51 percent in value of the outstanding stock of the 
corporation at any time during the last half of the taxable year, the 
stock ownership requirement will be met by ownership of the required 
percentage by one individual. See section 544 and Sec. Sec. 1.544-1 
through 1.544-7 for the determination of stock ownership.
    (1) An organization or trust considered as an individual. Any of the 
following organizations or trusts shall be considered as an individual:
    (i) An organization to which section 503 applies, namely, any 
organization described in section 501(c)(3) (relating to charitable, 
etc., organizations) or section 401(a) (relating to employees' pension 
trust, etc.) other than an organization excepted from the application of 
section 503 by paragraphs (1) to (5) of section 503(b). Therefore, a 
religious organization (other than a trust) excepted under section 
503(b)(1) is not considered an individual for purposes of the stock 
ownership requirement of section 542(a)(2).
    (ii) A portion of a trust permanently set aside or to be used 
exclusively for the purposes described in section 642(c), relating to 
amounts set aside for charitable purposes, or described in a 
corresponding provision of the prior income tax law (such as section 
162(a), Internal Revenue Code of 1939).
    (2) Exception. For taxable years beginning after December 31, 1954, 
an organization or trust to which subparagraph (1) of this paragraph 
applies shall not be considered an individual if all of the following 
conditions are met:
    (i) It was organized or created before July 1, 1950.
    (ii) At all times on or after July 1, 1950, and before the close of 
the taxable year, it owned all of the common stock and at least 80 
percent of the total number of shares of all other classes of stock of 
the corporation.
    (iii) For the taxable year it is not denied exemption under section 
504(a) or the unlimited charitable deduction under section 681(c). In 
determining whether, for the purpose of section 542(a)(2), exemption is 
not denied under section 504(a) or the unlimited charitable deduction is 
not denied under section 681(c) all the income of the corporation which 
is available for distribution as dividends to its shareholders shall be 
deemed to have been distributed at the close of the taxable year whether 
or not any portion of such income was in fact distributed. If the 
amounts described in section 504(a) or section 681(c), increased by the 
income of the corporation deemed distributed pursuant to the preceding 
sentence, would be sufficient to deny exemption or the unlimited 
charitable deduction, the organization or trust will be considered to be 
an individual for the purpose of section 542(a)(2). For the purpose of 
this subdivision the restrictions in sections 504(a)(1) and 681(c)(1) 
against unreasonable accumulations will not apply to income attributable 
to property of a decedent dying before January 1, 1951, which was 
transferrred during his lifetime to a trust or property that was 
transferred under his will to such trust, and
    (iv) This subparagraph is illustrated by the following example:

    Example. The X Charitable Foundation (an organization described in 
section 501(c)(3) to which section 503 is applicable) has owned all of 
the stock of the Y Corporation since Y's organization in 1949. Both X 
and Y are calendar-year corporations. At the end of the year 1955, X has 
accumulated $100,000 out of income and has actually paid out only 
$75,000 of this amount, leaving a balance of $25,000 on December 31, 
1955. X was not denied an exemption under section 504(a) for the year 
1955. Y, during the calendar year 1955, has $400,000 taxable income of 
which $200,000 is available for distribution as dividends at the end of 
the year. X will be considered to have accumulated out of income during 
the calendar year 1955 the amount of $225,000 for the purpose of 
determining whether it would have been denied an exemption under section 
504(a)(1). If X would have been denied an exemption under section 
504(a)(1) by reason of having been deemed to have accumulated $225,000, 
the stock ownership requirement of section 542(a)(2) and this section 
will have been satisfied. If Y Corporation also satisfies the gross 
income requirement of section

[[Page 257]]

542(a)(1) and Sec. 1.542-2 it will be a personal holding company.

    (b) Changes in stock outstanding. It is necessary to consider any 
change in the stock outstanding during the last half of the taxable 
year, whether in the number of shares or classes of stock, or in the 
ownership thereof. Stock subscribed and paid for will be considered as 
stock outstanding, whether or not such stock is evidenced by issued 
certificates. Treasury stock shall not be considered as stock 
outstanding.
    (c) Value of stock outstanding. The value of the stock outstanding 
shall be determined in the light of all the circumstances. The value may 
be determined upon the basis of the company's net worth, earning and 
dividend paying capacity, appreciation of assets, together with such 
other factors as have a bearing upon the value of the stock. If the 
value of the stock is greatly at variance with that reflected by the 
corporate books, the evidence of such value should be filed with the 
return. In any case where there are two or more classes of stock 
outstanding, the total value of all the stock should be allocated among 
the different classes according to the relative value of each class.

[T.D. 6500, 25 FR 11737, Nov. 26, 1960, as amended by T.D. 6739, 29 FR 
7713, June 17, 1964]