[Code of Federal Regulations]
[Title 26, Volume 17]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR53.4943-8]

[Page 146-149]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 53_FOUNDATION AND SIMILAR EXCISE TAXES--Table of Contents
 
               Subpart D_Taxes on Excess Business Holdings
 
Sec. 53.4943-8  Business holdings; constructive ownership.

    (a) Constructive ownership--(1) In general. For purposes of section 
4943, in computing the holdings in a business enterprise of a private 
foundation, or a disqualified person (as defined in section 4946), any 
stock or other interest owned, directly or indirectly, by or for a 
corporation, partnership, estate or trust shall be considered as being 
owned proportionately by or for its shareholders, partners, or 
beneficiaries except as otherwise provied paragraphs (b), (c) and (d) of 
this section. Any interest in a business enterprise actually or 
constructively owned by a shareholder of a corporation, a partner of a 
partnership, or beneficiary of an estate or trust shall not be 
considered as constructively held by the corporation, partnership, trust 
or estate. Further, if any corporation, partnership, estate or trust has 
a warrant or other option to acquire an interest in a business 
enterprise, such interest is not deemed to be constructively owned by 
such entity until the option is exercised. (See paragraph (b)(2) of 
Sec. 53.4943-3 for rules that options are not stock for purposes of 
determining excess business holdings.)
    (2) Powers of appointment. Any interest in business enterprise over 
which a foundation or a disqualified person has a power of appointment 
exercisable in favor of the foundation or a disqualified person shall be 
considered owned by the foundation or disqualified person holding such 
power of appointment.
    (3) Determination of extent of constructive ownership. If an 
interest in a business enterprise owned by a corporation is 
constructively owned by a shareholder, each shareholder's proportion of 
ownership is generally computed on the basis of the voting stock each 
shareholder has in the corporation. In determining holdings permitted 
under section 4943(c) (4) and (5), each shareholder's proportion of 
ownership in the business enterprise shall also be computed on the basis 
of value, taking into account both voting and nonvoting stock held by 
the shareholder.
    (4) Nonvoting stock. If a private foundation, its disqualified 
persons, or both, own (directly or constructively) nonvoting stock of a 
parent corporation, the holdings of which are treated as constructively 
owned by its shareholders by reason of section 4943(d)(1) and this 
section, such nonvoting stock

[[Page 147]]

shall be treated as nonvoting stock of any corporation in which the 
parent corporation holds an interest for purposes of the limitation on 
the holding of nonvoting stock under section 4943(c)(2)(A) and Sec. 
53.4943-3(b)(2).
    (5) Interests held by certain disqualified persons. In the case of 
an entity that is a disqualified person (other than an entity described 
in section 4946(a)(1)(H)), the holdings of which are treated as 
constructively owned by its shareholders, partners, or beneficiaries, 
for purposes of determining the total holdings of disqualified persons 
the holdings of the entity shall be considered held by a disqualified 
person only to the extent such holdings are treated as constructively 
owned by disqualified persons who are shareholders, partners, or 
beneficiaries of the entity. In the case of an entity described in 
section 4946(a)(1)(H) or an entity, the holdings of which are not 
treated as constructively owned by its shareholders, partners, or 
beneficiaries, all holdings of such entity shall be treated as held by a 
disqualified person if and only if the entity itself is a disqualified 
person.
    (b) Estates and trusts--(1) In general. Any interest actually or 
constructively owned by an estate or trust is deemed constructively 
owned, in the case of an estate, by its beneficiaries or, in the case of 
a trust, by its remainder beneficiaries except as provided in paragraphs 
(b) (2), (3) and (4) of this section (relating to certain split-interest 
trusts described in section 4947(a)(2), to trusts of qualified pension, 
profit-sharing, and stock bonus plans described in section 401(a) and to 
revocable trusts). Thus, if a trust owns 100 percent of the stock of a 
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 paragraph (b), Z will be considered 
to be the owner of 100 percent of the stock of corporation A. See Sec. 
53.4943-4, Sec. 53.4943-5 and Sec. 53.4943-6 for rules relating to 
certain actual or constructive holdings of a foundation being treated as 
held by a disqualified person. For the treatment of certain property 
acquired by an estate or trust after May 26, 1969, see paragraph (a)(2) 
of Sec. 53.4943-5.
    (2) Split-interest trusts--(i) Amounts transferred in trust after 
May 26, 1969. In the case of an interest in a business enterprise which 
was transferred to a trust described in section 4947(a)(2) after May 26, 
1969, for the benefit of a private foundation, no portion of such 
interest shall be considered as owned by the private foundation:
    (A) If the foundation holds only an income interest in the trust, or
    (B) If the foundation holds only a remainder interest in the trust 
(unless the foundation can exercise primary investment discretion with 
respect to such interest)

until such trust ceases to be so described. See section 4947(a)(2) and 
(b)(3) and the regulations thereunder for rules relating to such trusts. 
See also sections 4946(a)(1) (G) and (H) and the regulations thereunder 
for rules relating to when a trust described in this paragraph (b)(2) is 
itself a disqualified person.
    (ii) Amounts transferred in trust on or before May 26, 1969. In the 
case of an interest in a business enterprise which was transferred to a 
trust described in section 4947(a)(2) (without regard to section 
4947(a)(2)(C)) on or before May 26, 1969, for the benefit of a private 
foundation, no portion of such interest shall be considered as owned by 
the foundation until it is actually distributed to the foundation or 
until the trust ceases to be so described. See section 4943(c)(5) and 
Sec. 53.4943-5 for rules relating to certain trusts which were 
irrevocable on May 26, 1969.
    (3) Employee benefit trusts. An interest in a business enterprise 
owned by a trust described in section 401(a) (pension and profit-sharing 
plans) shall not be considered as owned by its beneficiaries, unless 
disqualified persons (within the meaning of section 4946) control the 
investment of the trust assets.
    (4) Revocable trusts. An interest in a business enterprise owned by 
a revocable trust shall be treated as owned by the grantor of such 
trust.
    (5) Estates. For purposes of applying section 4943(d)(1) to estates, 
the term ``beneficiary'' includes any person (including a private 
foundation) entitled to receive property of a decedent pursuant to a 
will or pursuant to laws of

[[Page 148]]

descent and distribution. However, 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 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 (including a private foundation) ceases to 
be a beneficiary, stock or another interest in a business enterprise 
owned by the estate shall not thereafter be considered owned by such 
person. If any person is the constructive owner of an interest in a 
business enterprise actually held by an estate, the date of death of the 
testator or decedent intestate shall be the first day on which such 
person shall be considered a constructive owner of such interest. See 
Sec. 53.4943-5 for rules relating to wills executed on or before May 
26, 1969.
    (c) Corporation actively engaged in a trade or business--(1) In 
general. Except as provided in paragraphs (c)(2) and (3) of this 
section, any interest (whether or not in a separate entity) owned by a 
corporation which is actively engaged in a trade or business shall not 
be deemed to be constructively owned by such corporation's shareholders.
    (2) Actively engaged in a trade or business. For purposes of 
paragraph (c)(1) of this section:
    (i) A corporation shall not be considerd to be actively engaged in a 
trade or business if the corporation is not a business enterprise by 
reason of section 4943(d)(3) (A) or (B) and Sec. 53.4943-10 (b) or (c);
    (ii) In the case of a corporation which owns passive holdings and is 
actively engaged in a trade or business, such corporation shall not be 
considered to be actively engaged in a trade or business if the net 
assets used in such trade or business are insubstantial when compared to 
passive holdings.
    (3) Exceptions. If a corporation has been involved in a prohibited 
transaction, any interest in a business enterprise owned by such 
corporation shall be treated as constructively owned by its 
shareholders, whether or not such corporation is actively engaged in a 
trade or business. For a definition of prohibited transaction, see Sec. 
53.4943-7 (d)(2).
    (4) Affiliated group. In applying this paragraph to the common 
parent in an affiliated group (as defined in Sec. 53.4943-10 
(c)(3)(ii)), the assets and activities of the affiliated group shall be 
treated as the assets and activities of the common parent.
    (d) Partnerships. Any interest in a business enterprise which is 
owned by a partnership shall be deemed to be constructively owned by the 
partners in such partnerships.
    (e) Examples. The provisions of this section are illustrated by the 
following examples.

    Example (1). F, a private foundation, directly owns voting stock of 
X, a holding company described in section 4943(d)(3)(B). That stock 
represents 40% of the voting power in X and 20% of the value of all 
outstanding shares of all classes of stock in X. F also owns nonvoting 
stock in X that represents 10% of the value of all outstanding shares of 
all classes of stock in X. D, a disqualified person, owns voting stock 
of X that represents 40% of the voting power in X and 20% of the value. 
D does not own any nonvoting stock in X. X corporation's only holding is 
stock of Y corporation. The Y voting stock held by X represents 50% of 
the voting power in Y and 25% of the value of all outstanding shares of 
all classes of stock in Y. X also owns nonvoting stock in Y that 
represents 25% of the value of all outstanding shares of all classes of 
stock in Y. Under paragraph (a)(3) of this section, F and D each 
constructively owns 20% of the voting power in Y through their voting 
interest in X (40% of X's 50% of Y). F also constructively owns 15% of 
the value of all outstanding shares of all classes of stock in Y through 
F's interest in X (F's 30% of the value of X multiplied by X's 50% of 
the value of Y), while D constructively owns 10% of the value of Y (D's 
20% of the value of X multiplied by X's 50% of the value of Y).
    Example (2). (i) F, a private foundation, owns 50% of the one class 
of nonvoting stock of X corporation, a corporation described in section 
4943(d)(3)(B) and paragraph (c)(2)(i) above. D, a disqualified person 
with respect to F as described in section 4946(a)(1)(A), owns 40% of the 
one class of voting stock of X. X corporation is a disqualified person 
with respect to F because D owns more than 35% of the voting of X. (See 
section 4946(a)(1)(E)). On January 1, 1980, X purchases for cash 40% of 
the only class of stock of Y

[[Page 149]]

corporation, a retail clothing store, from unrelated third parties.
    (ii) Under paragraph (a)(4) of this section, F is treated as owning 
nonvoting stock of Y. Although X is a disqualified person, its holdings 
are not treated as held by disqualified persons except as constructive 
holdings. Therefore, the ``deemed'' nonvoting stock in Y is a permitted 
holding because D, a disqualified person with respect to F, 
constructively owns only 16% of the voting stock of Y (less than 20% 
permitted under section 4943(c)(2)).
    Example (3). (i) The facts are the same as in Example (2), except 
that X purchases 100% of this stock of Y corporation. Under paragraph 
(a)(4) of this section, F is treated as owning nonvoting stock of Y. The 
``deemed'' nonvoting stock in Y is not a permitted holdings because D, a 
disqualified person with respect to F, constructively owns 40% of the 
voting stock of Y.
    Example (4). (i) D, a disqualified person with respect to F, owns 
40% of the one class of stock in X corporation, an active business. X is 
a disqualified person with respect to F. X acquires 40% of the voting 
stock in Y corporation. Under paragraph (a)(5) of this section, the 
holdings of X in Y are treated as held by a disqualified person. F 
cannot hold any Y stock, voting or nonvoting.

[T.D. 7496, 42 FR 46285, Sept. 15, 1977, as amended by T.D. 7944, 49 FR 
6484, Feb. 22, 1984]