Some of the section 318 entity attribution rules apply only when a person owns at least 50 percent of a corporation. Under section 318(a)(2)(C), stock owned by a 50-percent-or-more shareholder is attributed to the corporation, and under section 318(a)(3)(C), stock owned by the corporation is attributed to a 50-percent-or-more shareholder. The question this example answers is how the 50 percent threshold itself is measured.
H, his wife W, and his son S each own one-third of the stock of Green Corporation. Standing alone, none of them owns 50 percent. But in applying the 50 percent requirement, the family attribution rules of section 318(a)(1) are taken into account pursuant to paragraph (b)(3) of section 1.318-1. With family attribution, H, W, or S is each deemed to own 100 percent of Green Corporation. Treas. Reg. § 1.318-2(a), Example 2.
The practical point is that attributed ownership counts when testing whether the 50 percent floor for the corporate attribution rules is met. A shareholder who would not independently reach 50 percent can cross the threshold once family-owned shares are added.
Sections 318(a)(2)(C) and (3)(C) attribute stock to or from a corporation only when the shareholder owns 50 percent or more of that corporation.
In measuring the 50 percent threshold, stock owned by other family members is added under section 318(a)(1) pursuant to section 1.318-1(b)(3).
Here H, W, and S each own a third directly, but with family attribution each is deemed to own 100 percent of Green Corporation.
Treas. Reg. § 1.318-2(a), Example 2 illustrates the interaction of family and entity attribution under section 318.
