Section 318(a)(1) provides that an individual is considered to own the stock owned by his or her spouse, children, grandchildren, and parents. The rule reaches down two generations, to grandchildren, and up one generation, to parents, but a grandchild is not treated as owning the stock of a grandparent.
H, his wife W, his son S, and his grandson G (S’s son) own the 100 outstanding shares of a corporation, each owning 25 shares. H, W, and S are each considered to own 100 shares: their own plus the shares of the other family members within reach. G, however, is considered to own only 50 shares, his own 25 and his father S’s 25. G is not attributed the 25 shares of his grandfather H. Treas. Reg. § 1.318-2(b), Example.
The asymmetry follows from the statutory list: a grandparent is deemed to own a grandchild’s stock, but a grandchild is not deemed to own a grandparent’s stock. Mapping each family member’s deemed ownership is essential before applying section 318 to a redemption or other operative provision.
Section 318(a)(1) attributes stock among an individual and his or her spouse, children, grandchildren, and parents.
Attribution reaches down to grandchildren and up to parents, but it does not run from a grandchild up to a grandparent.
G owns his own 25 shares plus his father S’s 25 shares. He is not attributed his grandfather H’s shares, so he is deemed to own 50.
Treas. Reg. § 1.318-2(b), Example illustrates family attribution under section 318(a)(1).
