[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: 26CFR1.544-7]

[Page 267]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.544-7  Option rule in lieu of family and partnership rule.

    (a) If, in determining the ownership of stock, such stock may be 
considered as constructively owned by an individual by an application of 
either the family and partnership rule (section 544(a)(2)) or the option 
rule (section 544(a)(3)), such stock shall be considered as owned 
constructively by the individual by reason of the application of the 
option rule.
    (b) The application of this section may be illustrated by the 
following example:

    Example. Two brothers, A and B, each own 10 percent of the stock of 
the M Corporation, and A's wife, AW, also owns 10 percent of the stock 
of such corporation. AW's husband, A, has an option to acquire the stock 
owned by her at any time. It becomes necessary, for one of the purposes 
stated in section 544(a)(4), to determine the stock ownership of B in 
the M Corporation. If the family and partnership rule were the only rule 
that applied in the case, B would be considered, under that rule, as 
owning 20 percent of the stock of the M Corporation, namely, his own 
stock plus the stock owned by his brother. In that event, B could not be 
considered as owning the stock held by AW since (1) AW is not a member 
of B's family and (2) the constructive ownership of such stock by A 
through the application of the family and partnership rule in his case 
is not considered as actual ownership so as to make B the constructive 
owner by a second application of the same rule with respect to the 
ownership of the stock. However, there is more than the family and 
partnership rule involved in this example. As the holder of an option 
upon the stock, A may be considered the constructive owner of his wife's 
stock by the application of the option rule and without reference to the 
family relationship between A and AW. If A is considered as owning the 
stock of his wife by application of the option rule, then such 
constructive ownership by A is regarded as actual ownership for the 
purpose of applying the family and partnership rule so as to make 
another member of A's family, for example, B, the constructive owner of 
the stock. Hence, since A may be considered as owning his wife's stock 
by applying either the family-partnership rule or the option rule, the 
provisions of section 544(a)(6) apply and accordingly A must be 
considered the constructive owner of his wife's stock under the option 
rule rather than the family-partnership rule. B thus becomes the 
constructive owner of 30 percent of the stock of the M corporation, 
namely, his own 10 percent, A's 10 percent, and AW's 10 percent 
constructively owned by A as the holder of an option on the stock.