26 U.S.C. § 318 — Constructive ownership of stock

This section explains "constructive ownership" — when the tax law treats you as owning stock you don't directly hold, for certain listed purposes. (a) The attribution rules. These rules only apply to the parts of this subchapter that expressly say they use this section. (1) Family attribution. (A) You're treated as owning stock owned, directly or indirectly, by your spouse — unless you're legally separated from that spouse under a divorce or separate maintenance decree — and by your children, grandchildren, and parents. (B) A legally adopted child counts the same as a biological child for this rule. (2) Attribution to you from entities you're part of. (A) Stock owned by a partnership or estate is treated as owned proportionately by its partners or beneficiaries. (B) Stock owned by a trust is treated as owned by its beneficiaries, in proportion to each beneficiary's actuarial interest in the trust — except this doesn't apply to certain tax-exempt employee trusts. Separately, if someone is treated as the "owner" of part of a trust under the grantor trust rules (subpart E, part I of subchapter J), that person is treated as owning the stock that part of the trust owns. (C) If a person owns 50 percent or more of the value of a corporation's stock, that person is treated as owning a proportional share of any stock the corporation itself owns — specifically, the share equal to the percentage of the corporation's stock that person owns. (3) Attribution the other way, from you to an entity. (A) Stock owned by a partner or by a beneficiary of an estate is treated as owned by the partnership or estate itself. (B) Stock owned by a trust beneficiary is treated as owned by the trust — unless the exempt employee trust exception applies, or unless the beneficiary's interest is a "remote contingent interest," meaning it's worth 5 percent or less of the trust's value even if the trustee used maximum discretion in that beneficiary's favor. Separately, stock owned by someone treated as owner of part of a trust under the grantor trust rules is treated as owned by the trust. (C) If a person owns 50 percent or more of a corporation's stock value, the corporation is treated as owning whatever stock that person owns. (4) Options. If you have an option to buy stock, you're treated as already owning it. This also covers an option to acquire an option, and each option in a chain of such options. (5) Rules for combining these. (A) Generally, stock you're treated as owning under rules (1) through (4) is then treated as stock you actually own, when applying those same rules again to attribute it further to someone else. (B) But there's a limit on family attribution: stock you're treated as owning only because of your family (rule (1)) can't then be attributed again under rule (1) to make some other family member the constructive owner. (C) Similarly, stock a partnership, estate, trust, or corporation is treated as owning only because of rule (3) can't then be attributed under rule (2) to make someone else the constructive owner. (D) If stock could be attributed to you either as family (rule (1)) or through an option (rule (4)), it's treated as attributed through the option instead. (E) For this subsection, an S corporation is treated like a partnership, and its shareholders are treated like partners — but this special treatment does not apply when the question is whether stock in the S corporation itself is constructively owned by someone. (b) Where these rules apply. This section's attribution rules apply to eight other provisions: section 302 (redeeming stock), section 304 (redemptions between related corporations), section 306(b)(1)(A) (disposing of section 306 stock), section 338(h)(3) (defining a "purchase"), section 382(l)(3) (limits on carrying over net operating losses), section 856(d) (defining rents from real property for real estate investment trusts), section 958(b) (constructive ownership rules for controlled foreign corporations), and section 6038(e)(2) (information reporting for certain foreign corporations).