§544 — Rules for determining stock ownership

22 cases·6 followed·2 distinguished·1 overruled·13 cited—27% support

Statute Text — 26 U.S.C. §544

(a)Constructive ownership

For purposes of determining whether a corporation is a personal holding company, insofar as such determination is based on stock ownership under section 542(a)(2), section 543(a)(7), section 543(a)(6), or section 543(a)(4)—

(1)Stock not owned by individual

Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries.

(2)Family and partnership ownership

An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family or by or for his partner. For purposes of this paragraph, the family of an individual includes only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.

(3)Options

If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.

(4)Application of family-partnership and option rules

Paragraphs (2) and (3) shall be applied—

(A)

for purposes of the stock ownership requirement provided in section 542(a)(2), if, but only if, the effect is to make the corporation a personal holding company;

(B)

for purposes of section 543(a)(7) (relating to personal service contracts), of section 543(a)(6) (relating to use of property by shareholders), or of section 543(a)(4) (relating to copyright royalties), if, but only if, the effect is to make the amounts therein referred to includible under such paragraph as personal holding company income.

(5)Constructive ownership as actual ownership

Stock constructively owned by a person by reason of the application of paragraph (1) or (3), shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by an individual by reason of the application of paragraph (2) shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock.

(6)Option rule in lieu of family and partnership rule

If stock may be considered as owned by an individual under either paragraph (2) or (3) it shall be considered as owned by him under paragraph (3).

(b)Convertible securities

Outstanding securities convertible into stock (whether or not convertible during the taxable year) shall be considered as outstanding stock—

(1)

for purposes of the stock ownership requirement provided in section 542(a)(2), but only if the effect of the inclusion of all such securities is to make the corporation a personal holding company;

(2)

for purposes of section 543(a)(7) (relating to personal service contracts), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such paragraph as personal holding company income;

(3)

for purposes of section 543(a)(6) (relating to the use of property by shareholders), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such paragraph as personal holding company income; and

(4)

for purposes of section 543(a)(4) (relating to copyright royalties), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such paragraph as personal holding company income.

The requirement in paragraphs (1), (2), (3), and (4) that all convertible securities must be included if any are to be included shall be subject to the exception that, where some of the outstanding securities are convertible only after a later date than in the case of others, the class having the earlier conversion date may be included although the others are not included, but no convertible securities shall be included unless all outstanding securities having a prior conversion date are also included.

Treasury Regulations

Treas. Reg. §Treas. Reg. §1.544-1 Constructive ownership
Treas. Reg. §Treas. Reg. §1.544-1(a) §1.544-1(a)
Treas. Reg. §Treas. Reg. §1.544-1(b) Section 544 provides four general rules with respect to constructive ownership.
Treas. Reg. §Treas. Reg. §1.544-1(c) All forms and classes of stock, however denominated, which represent the interests of shareholders, members, or beneficiaries in the corporation shall be taken into consideration in applying the constructive ownership rules of section 544.
Treas. Reg. §Treas. Reg. §1.544-1(d) For rules applicable in treating constructive ownership, determined by one application of section 544, as actual ownership for purposes of a second application of section 544, see section 544(a)(5) and § 1.
Treas. Reg. §Treas. Reg. §1.544-2 Constructive ownership by reason of indirect ownership
Treas. Reg. §Treas. Reg. §1.544-3 Constructive ownership by reason of family and partnership ownership
Treas. Reg. §Treas. Reg. §1.544-3(a) The following example illustrates the application of section 544(a)(2), relating to constructive ownership by reason of family and partnership ownership.
Treas. Reg. §Treas. Reg. §1.544-3(b) For the restriction on the applicability of the family and partnership ownership rules of this section, see paragraph (b) of § 1.
Treas. Reg. §Treas. Reg. §1.544-4 Options
Treas. Reg. §Treas. Reg. §1.544-5 Convertible securities
Treas. Reg. §Treas. Reg. §1.544-6 Constructive ownership as actual ownership
Treas. Reg. §Treas. Reg. §1.544-6(a) General rules.
Treas. Reg. §Treas. Reg. §1.544-6(b) Examples.
Treas. Reg. §Treas. Reg. §1.544-7 Option rule in lieu of family and partnership rule
Treas. Reg. §Treas. Reg. §1.544-7(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.
Treas. Reg. §Treas. Reg. §1.544-7(b) §1.544-7(b)

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