Title 26, Internal Revenue CodeRelease 119-110
§318 Constructive Ownership of Stock
Title 26 › Subtitle A — Income Taxes › CHAPTER 1 — NORMAL TAXES AND SURTAXES › Subchapter C — Corporate Distributions and Adjustments › PART I — DISTRIBUTIONS BY CORPORATIONS › Subpart C — Definitions; Constructive Ownership of Stock › § 318
Summary
Treat stock as owned by other people when applying certain tax rules. A person is treated as owning stock held by their spouse (unless legally separated), their children, grandchildren, and parents. A legally adopted child counts the same as a biological child. Stock owned by a partnership or estate is treated as owned by its partners or beneficiaries in proportion to their shares. Stock held in a trust is treated as owned by the beneficiaries based on their actuarial interest, and if someone is treated as the owner of trust property under grantor rules, that person is treated as the owner. If a person owns 50 percent or more of a corporation’s stock by value, that person is treated as owning the corporation’s stock in the same proportion. An option to buy stock is treated as ownership, and an option on an option also counts. These treated-ownership rules generally stack so one rule can lead to another. But family-based treatment cannot be used again to make a different family member an owner, and when an entity is treated as owning stock, that treated ownership cannot be passed on again through other entity rules. If both family and option rules could apply, use the option rule. For many purposes an S corporation is treated like a partnership and its shareholders like partners, except that this does not apply when deciding whether someone is treated as owning stock in the S corporation. These rules apply to specific tax provisions, including sections 302, 304, 306(b)(1)(A), 338(h)(3), 382(l)(3), 856(d), 958(b), and 6038(e)(2).
Full Legal Text
Title 26, §318
Internal Revenue Code, Source: USLM XML via OLRC
(a)General rule
For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable—
(1)Members of family
(A)In general
An individual shall be considered as owning the stock owned, directly or indirectly, by or for— (i)
(ii)his children, grandchildren, and parents.
(B)Effect of adoption
For purposes of subparagraph (A)(ii), a legally adopted child of an individual shall be treated as a child of such individual by blood.
(2)Attribution from partnerships, estates, trusts, and corporations
(A)From partnerships and estates
Stock owned, directly or indirectly, by or for a partnership or estate shall be considered as owned proportionately by its partners or beneficiaries.
(B)From trusts
(i)Stock owned, directly or indirectly, by or for a trust (other than an employees’ trust described in section 401(a) which is exempt from tax under section 501(a)) shall be considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries in such trust.
(ii)Stock owned, directly or indirectly, by or for any portion of a trust of which a person is considered the owner under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners) shall be considered as owned by such person.
(C)From corporations
If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation, in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation.
(3)Attribution to partnerships, estates, trusts, and corporations
(A)To partnerships and estates
Stock owned, directly or indirectly, by or for a partner or a beneficiary of an estate shall be considered as owned by the partnership or estate.
(B)To trusts
(i)Stock owned, directly or indirectly, by or for a beneficiary of a trust (other than an employees’ trust described in section 401(a) which is exempt from tax under section 501(a)) shall be considered as owned by the trust, unless such beneficiary’s interest in the trust is a remote contingent interest. For purposes of this clause, a contingent interest of a beneficiary in a trust shall be considered remote if, under the maximum exercise of discretion by the trustee in favor of such beneficiary, the value of such interest, computed actuarially, is 5 percent or less of the value of the trust property.
(ii)Stock owned, directly or indirectly, by or for a person who is considered the owner of any portion of a trust under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners) shall be considered as owned by the trust.
(C)To corporations
If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such corporation shall be considered as owning the stock owned, directly or indirectly, by or for such person.
(4)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.
(5)Operating rules
(A)In general
Except as provided in subparagraphs (B) and (C), stock constructively owned by a person by reason of the application of paragraph (1), (2), (3), or (4), shall, for purposes of applying paragraphs (1), (2), (3), and (4), be considered as actually owned by such person.
(B)Members of family
Stock constructively owned by an individual by reason of the application of paragraph (1) shall not be considered as owned by him for purposes of again applying paragraph (1) in order to make another the constructive owner of such stock.
(C)Partnerships, estates, trusts, and corporations
Stock constructively owned by a partnership, estate, trust, or corporation by reason of the application of paragraph (3) shall not be considered as owned by it for purposes of applying paragraph (2) in order to make another the constructive owner of such stock.
(D)Option rule in lieu of family rule
For purposes of this paragraph, if stock may be considered as owned by an individual under paragraph (1) or (4), it shall be considered as owned by him under paragraph (4).
(E)S corporation treated as partnership
For purposes of this subsection
(i)
(ii)any shareholder of the S corporation shall be treated as a partner of such partnership.
The preceding sentence shall not apply for purposes of determining whether stock in the S corporation is constructively owned by any person.
(b)Cross references
For provisions to which the rules contained in subsection (a) apply, see—
(1)section 302 (relating to redemption of stock);
(2)section 304 (relating to redemption by related corporations);
(3)section 306(b)(1)(A) (relating to disposition of section 306 stock);
(4)section 338(h)(3) (defining purchase);
(5)section 382(l)(3) (relating to special limitations on net operating loss carryovers);
(6)section 856(d) (relating to definition of rents from real property in the case of real estate investment trusts);
(7)section 958(b) (relating to constructive ownership rules with respect to controlled foreign corporations); and
(8)section 6038(e)(2) (relating to information with respect to certain foreign corporations).
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2005—Subsec. (b)(8). Pub. L. 109–135 substituted “section 6038(e)(2)” for “section 6038(d)(2)”. 1997—Subsec. (b)(8). Pub. L. 105–34 substituted “6038(d)(2)” for “6038(d)(1)”. 1986—Subsec. (b)(5). Pub. L. 99–514 substituted “382(l)(3)” for “382(a)(3)”. 1984—Subsec. (a)(5)(E). Pub. L. 98–369, § 721(j), added subpar. (E). Subsec. (b)(4). Pub. L. 98–369, § 712(k)(5)(E), substituted “section 338(h)(3) (defining purchase)” for “section 338(h)(3)(B) (relating to purchase of stock from subsidiaries, etc.)”. 1982—Subsec. (b)(4). Pub. L. 97–248 substituted “section 338(h)(3)(B) (relating to purchase of stock from subsidiaries, etc.)” for “section 334(b)(3)(C) (relating to basis of property received in certain liquidations of subsidiaries)”. 1964—Subsec. (a). Pub. L. 88–554, § 4(a), struck out sidewise attribution by providing that when stock is attributed to a partnership, estate, trust, or corporation from a partner, shareholder, or beneficiary, this stock is not to be attributed again to another partner, beneficiary, or shareholder. Subsec. (b)(7), (8). Pub. L. 88–554, § 4(b)(2), added par. (7) and redesignated former par. (7) as (8). 1962—Subsec. (b)(7). Pub. L. 87–834 added par. (7). 1960—Subsec. (b)(6). Pub. L. 86–779 added par. (6).
Statutory Notes and Related Subsidiaries
Effective Date
of 1997 Amendment Pub. L. 105–34, title XI, § 1142(f), Aug. 5, 1997, 111 Stat. 983, provided that: “The
Amendments
made by this section [amending this section and section 901 and 6038 of this title] shall apply to annual accounting periods beginning after the date of the enactment of this Act [Aug. 5, 1997].”
Effective Date
of 1986 AmendmentAmendment by Pub. L. 99–514 applicable to any ownership change after Dec. 31, 1986, except as otherwise provided, see section 621(f) of Pub. L. 99–514, as amended, set out as a note under section 382 of this title.
Effective Date
of 1984 AmendmentAmendment by section 712(k)(5)(E) of Pub. L. 98–369 not applicable to any qualified stock purchase where the acquisition date is before Sept. 1, 1982, see section 712(k)(9)(A) of Pub. L. 98–369, set out as a note under section 338 of this title. Amendment by section 712(k)(5)(E) of Pub. L. 98–369 effective as if included in the provision of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97–248, to which such amendment relates, see section 715 of Pub. L. 98–369, set out as a note under section 31 of this title. Amendment by section 721(j) of Pub. L. 98–369 effective as if included in the Subchapter S Revision Act of 1982, Pub. L. 97–354, see section 721(y)(1) of Pub. L. 98–369, set out as a note under section 1361 of this title.
Effective Date
of 1982 AmendmentAmendment by Pub. L. 97–248 applicable to any target corporation with respect to which the acquisition date occurs after Aug. 31, 1982, with special rules for certain acquisitions before Sept. 1, 1982, and certain acquisitions of financial institutions in which there was a binding contract on July 22, 1982, to acquire control, see section 224(d) of Pub. L. 97–248, set out as an
Effective Date
note under section 338 of this title.
Effective Date
of 1964 Amendment Pub. L. 88–554, § 4(c), Aug. 31, 1964, 78 Stat. 764, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “The
Amendments
made by this section [amending this section and section 304, 382, 856, 958, and 6038 of this title] shall take effect on the date of the enactment of this Act, [Aug. 31, 1964], except that, for purposes of section 302 and 304 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], such
Amendments
shall not apply with respect to distributions in payment for stock acquisitions or redemptions, if such acquisitions or redemptions occurred before the date of the enactment of this Act.”
Effective Date
of 1960 AmendmentAmendment by Pub. L. 86–779 applicable with respect to taxable years of real estate investment trusts beginning after Dec. 31, 1960, see section 10(k) of Pub. L. 86–779, set out as an
Effective Date
note under section 856 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 318
Title 26, Internal Revenue Code
Last Updated
Sep 22, 2026
Release point: 119-110