IRC 318 Constructive Ownership Attribution Rules: Practitioner Guide

Why IRC 318 Constructive Ownership Attribution Rules Matter

IRC 318 constructive ownership attribution rules sit at the center of nearly every corporate transaction, international tax determination, and retirement plan compliance analysis that turns on who owns what percentage of a corporation. The rules operate as a legal overlay: they treat a taxpayer as owning stock that someone else holds in fact, based on the taxpayer's relationship to that other person or entity. The result is that economic reality and tax ownership can diverge significantly, and the divergence is not optional. When IRC 318 applies, its attribution rules are mandatory, not elective -- the taxpayer cannot ignore them.

Understanding IRC 318 constructive ownership is the prerequisite for competent advice on stock redemptions (IRC 302), related-corporation redemptions (IRC 304), corporate divisions (IRC 355), deemed asset sales (IRC 338), controlled foreign corporation determinations under Subpart F (IRC 951 and 958), related-party loss disallowance (IRC 267), ownership change computations for net operating losses (IRC 382), and the controlled group and affiliated group tests under IRC 1563. Each of those sections cross-references IRC 318 with specific modifications; the attribution rules are the foundation on which those frameworks are built.

The enactment of the One Big Beautiful Bill Act (OBBBA) in 2025 revived one of the most significant modifications to IRC 318 in recent memory: the restoration of IRC 958(b)(4), which re-blocks the downward attribution chain under IRC 318(a)(3)(C) for purposes of CFC determinations under Subpart F. The OBBBA change applies to foreign corporation tax years beginning after December 31, 2025, and materially affects how many multinational structures are classified. Practitioners who analyzed CFC status after the Tax Cuts and Jobs Act of 2017 must re-examine those determinations under the restored rule.

This guide is structured to address each IRC 318 attribution category in practitioner depth, followed by the OBBBA CFC impact, the application of attribution in redemptions under IRC 302, and a survey of how IRC 318 operates across other frequently encountered Code sections.

Where IRC 318 Applies: Cross-Referencing Code Sections

IRC 318 is not a free-standing, universal look-through rule. Its attribution framework applies only where the operative Code section expressly incorporates it by cross-reference or adopts its standards by specific reference. Before applying IRC 318 in any transaction or compliance context, the first question is whether the governing provision actually invokes it.

The primary Code sections that cross-reference IRC 318, each with its own modifications or limitations, include the following. Practitioners should read each section's specific invocation language rather than assuming the standard IRC 318 rules apply without modification.

• IRC 302: Stock redemptions. IRC 318 applies in determining whether a redemption qualifies for exchange treatment under the substantially disproportionate test (IRC 302(b)(2)), the complete termination test (IRC 302(b)(3), with a limited waiver for family attribution under IRC 302(c)(2)), and the not-essentially-equivalent test (IRC 302(b)(1)). See our IRC 302 stock redemption and dividend vs. exchange analysis for full detail on how attribution affects each 302(b) test.
• IRC 304: Related corporation redemptions. IRC 318 governs the control determination under IRC 304(c) (the 50% test for related corporation status). See our IRC 304 related corporation redemption guide for attribution mechanics in the cross-purchase-as-redemption context.
• IRC 355: Corporate spin-offs and split-offs. IRC 318 is applied in determining whether a distributing or controlled corporation is a disqualified investment company and in testing for device and active business qualification. See our IRC 355 spin-off and split-off practitioner guide for coverage of attribution in the divisive reorganization context.
• IRC 338: Deemed asset sale elections. Attribution rules affect the definition of a qualified stock purchase (QSP) and the affiliated group determinations relevant to IRC 338(h)(10) elections. See our IRC 338 deemed asset sale and qualified stock purchase guide.
• IRC 951 and IRC 958: Subpart F income and CFC determinations. IRC 958(b) incorporates IRC 318 with significant modifications for the upward and downward attribution of stock in the CFC context. The OBBBA's restoration of IRC 958(b)(4) is the most consequential recent change. See our IRC 951 Subpart F and US shareholder CFC guide.
• IRC 267: Related-party loss disallowance. IRC 267(b) defines "related persons" using constructive ownership rules drawn from IRC 267(c), which applies rules similar to (and in some respects different from) IRC 318.
• IRC 382: Ownership change and net operating loss carryforward limitations. The 5% shareholder testing rules for ownership changes under IRC 382 incorporate IRC 318 with modifications under Treas. Reg. 1.382-2T.
• IRC 1563: Controlled group and affiliated group definitions. IRC 1563(e) incorporates constructive ownership rules that parallel IRC 318 but with specific modifications for the controlled group context, including different percentage thresholds and different entity attribution mechanics.
• IRC 4975: Prohibited transactions in qualified plans. Constructive ownership under IRC 318 (as incorporated by IRC 4975) determines disqualified person status.
• IRC 409A: Deferred compensation. IRC 318 is used in certain related-party and specified employee determinations.

Each of these sections may expand, contract, or otherwise modify the standard IRC 318 rules. In particular, the 50% thresholds under IRC 318(a)(2)(C) and (a)(3)(C) are frequently varied in other provisions. Verify the specific invocation language and applicable modifications in each governing Code section before applying a stock attribution conclusion from one context to another.

IRC 318(a)(1): Family Attribution

The most commonly encountered IRC 318 constructive ownership rule in closely held corporate transactions is family attribution. Under IRC 318(a)(1)(A), an individual is treated as owning stock owned (directly, indirectly, or constructively) by their spouse, children (including legally adopted children), grandchildren, and parents. This is a bidirectional rule within each family-member category: a parent's shares are attributed to a child, and a child's shares are attributed to a parent. A grandchild's shares are attributed to a grandparent, and a grandparent's shares are attributed to a grandchild.

Who Is (and Is Not) in the Family Attribution Group

The family attribution group under IRC 318(a)(1)(A) is deliberately narrow. Siblings are not included. In-laws are not included. Grandparents are included (a grandparent's shares are attributed to a grandchild and vice versa). Aunts, uncles, cousins, nieces, and nephews are not included. The exclusion of siblings is a meaningful planning consideration in two-sibling family corporations: one sibling's shares are not attributed to the other solely by reason of the sibling relationship, which means a complete redemption of one sibling's interest can satisfy IRC 302(b)(3) without requiring the IRC 302(c)(2) family attribution waiver -- provided no entity or option attribution would otherwise cause deemed ownership. Confirm the exact family members before applying attribution in any specific fact pattern, and verify the current IRC 318(a)(1) list at IRS.gov.

No Minimum Threshold; No Election to Opt Out

Family attribution under IRC 318(a)(1) has no minimum ownership threshold. Regardless of whether the attributed family member holds 0.1% or 99% of the corporation's shares, the entire position is attributed. The rule is also mandatory: there is no election or agreement available that allows a taxpayer to simply opt out of family attribution. The only mechanism to disregard family attribution is the IRC 302(c)(2) waiver, which is available only in the context of a complete termination of a shareholder's interest under IRC 302(b)(3), and only for family attribution specifically (entity attribution cannot be waived under IRC 302(c)(2)).

Legally Separated Spouses

The treatment of legally separated spouses under IRC 318(a)(1) warrants attention in dissolution contexts. The general rule attributes a spouse's shares to the other spouse, but the statute provides relief when spouses are legally separated under a decree of divorce or separate maintenance. The details of when and how that exception applies -- and whether a legal separation short of a final decree suffices -- require verification against the current text of IRC 318(a)(1) and applicable Treasury guidance at IRS.gov. Do not assume the exception applies without confirming the status of the decree and the current regulatory position.

IRC 318(a)(2): Entity-to-Owner Attribution (Downward)

IRC 318(a)(2) governs the attribution of stock from an entity to the persons who own interests in that entity. This is sometimes called "downward" attribution because it flows from the entity level down to the owner level. It operates in three sub-categories based on entity type.

IRC 318(a)(2)(A): Estates and Trusts to Beneficiaries

Stock owned by an estate or trust is attributed to each beneficiary in proportion to the beneficiary's actuarial interest in the entity. Under IRC 318(a)(2)(A), attribution runs only to beneficiaries who have a present interest in the estate or trust; a beneficiary whose interest is entirely contingent and has not yet vested does not receive attributed stock under this provision. The proportionate share is determined by actuarial calculation based on the nature and duration of the beneficiary's interest, not merely by the nominal percentage stated in the trust instrument. Practitioners should confirm the current treatment of grantor trusts and revocable trusts in this context at IRS.gov, as the interaction of grantor trust rules and IRC 318(a)(2)(A) attribution can produce results that differ from the entity's legal form.

IRC 318(a)(2)(B): Partnerships to Partners

Stock owned by a partnership is attributed to each partner proportionately, based on that partner's interest in the partnership. There is no minimum ownership threshold in the partnership context: a 1% limited partner receives attribution of 1% of the partnership's corporate stock holdings. The proportionate share follows the partner's interest in the partnership, which may be based on capital, profits, or loss -- confirm the appropriate measurement under the current regulatory position at IRS.gov. In tiered partnership structures, this attribution can cascade through multiple partnership tiers, as attributed stock may then be further attributed under the re-attribution rules of IRC 318(a)(5).

IRC 318(a)(2)(C): Corporations to Shareholders

Stock owned by a corporation is attributed to a shareholder of that corporation only if the shareholder owns (directly or constructively) 50% or more of the value of the corporation's outstanding stock. Where the 50% threshold is satisfied, the corporation's stock holdings are attributed to the qualifying shareholder in proportion to their ownership of the corporation's value. The threshold is a value-based test, not a voting-power test: a shareholder who owns 50% or more of the economic value of the corporation's stock -- but less than 50% of the voting power -- may still trigger attribution downward. Conversely, a shareholder who has majority voting control but less than 50% of the value may not meet the threshold. Verify the current statutory standard and any applicable Treasury guidance on the value measurement at IRS.gov before applying this rule.

The 50% threshold under IRC 318(a)(2)(C) means that minority shareholders of an entity (those with less than 50% value) do not receive downward attribution of the entity's stock holdings to them. This is a significant difference from the partnership rule, where there is no threshold. A 40% corporate shareholder is not attributed any of the corporation's stock holdings under IRC 318(a)(2)(C); a 40% partner is attributed 40% of the partnership's stock holdings under IRC 318(a)(2)(B).

IRC 318(a)(3): Owner-to-Entity Attribution (Upward)

IRC 318(a)(3) governs the attribution of stock from owners and beneficiaries up to the entities they own or benefit from. This is the mirror image of the IRC 318(a)(2) downward attribution, and it operates in the same three entity-type sub-categories.

IRC 318(a)(3)(A): Beneficiaries to Estates and Trusts

Stock owned (directly or constructively) by a beneficiary of an estate or trust is attributed to the estate or trust in proportion to that beneficiary's actuarial interest. This upward attribution means that an estate or trust can be treated as constructively owning stock through its beneficiaries, which matters when the estate or trust itself is a shareholder being tested for control or constructive ownership under a cross-referencing Code section. The re-attribution limitation under IRC 318(a)(5) restricts further downstream attribution of stock that has been attributed upward under (a)(3)(A).

IRC 318(a)(3)(B): Partners to Partnerships

Stock owned (directly or constructively) by a partner is attributed to the partnership proportionately, based on the partner's interest. There is no minimum threshold: even a small-percentage partner attributes their entire personally held stock position up to the partnership. In a partnership that is itself a shareholder of a corporation, this upward attribution can significantly increase the partnership's constructive ownership of that corporation, which in turn may trigger additional downward attribution under (a)(2)(B) to other partners in the partnership. The interplay between upward and downward attribution in partnerships makes tiered structures particularly complex to analyze.

IRC 318(a)(3)(C): Shareholders to Corporations

Stock owned (directly or constructively) by a shareholder is attributed to the corporation in which that shareholder holds an interest, but only if the shareholder owns (directly or constructively) 50% or more of the value of the corporation's outstanding stock -- the same 50% value threshold that governs downward attribution under (a)(2)(C). The upward attribution under (a)(3)(C) means that a 50%-or-more value shareholder's personally held stock is attributed to the corporation, which may affect the corporation's own constructive ownership calculations in contexts where those matter (such as controlled group testing and certain cross-referencing provisions).

The CFC context imposes a critical overlay on (a)(3)(C). Under IRC 958(b), which incorporates IRC 318 for Subpart F purposes with modifications, the upward and downward attribution rules under (a)(2)(C) and (a)(3)(C) can cause a foreign corporation to be treated as a CFC when it otherwise would not be. The OBBBA's restoration of IRC 958(b)(4) changes the analysis for foreign corporation tax years beginning after December 31, 2025. See the dedicated section below on the OBBBA and IRC 958(b)(4).

IRC 318(a)(4): Option Attribution

IRC 318(a)(4) provides that a person who holds an option to purchase stock is treated as owning that stock. The deemed ownership is immediate and complete: the option holder is treated as the owner of the underlying shares, not merely as someone with a contingent right to acquire them in the future. The rule applies regardless of whether the option is currently in-the-money, whether it is currently exercisable, or whether it is subject to conditions that may or may not occur.

What Counts as an Option

The term "option" for purposes of IRC 318(a)(4) extends well beyond formal listed call options. Treasury Regulation 1.318-3(b) treats the following as options: warrants; calls; rights of first refusal or first offer under buy-sell agreements where the right is triggered at the current price or a formula price; convertible debt instruments (the holder of a convertible note is treated as owning the shares into which the note could be converted); convertible preferred stock (if the conversion right relates to common or other stock); and any other contractual right to acquire shares. In closely held corporate transactions, the buy-sell agreement or shareholder agreement is the most common source of unrecognized option attribution. A cross-purchase right that allows one shareholder to purchase another's shares upon certain trigger events (death, disability, termination of employment) may constitute an option for IRC 318(a)(4) purposes, even if that right has not been triggered and the underlying shares are not currently available for purchase.

Option Attribution and the Re-Attribution Limit

Under IRC 318(a)(5)(D), stock that is treated as owned by a person solely by reason of option attribution under (a)(4) cannot be further attributed to another person under the family or entity attribution rules. This prevents an option holder's deemed ownership from cascading through family attribution or entity attribution chains to create deemed ownership in third parties. However, the option holder's own constructive position (derived from the option) is used for purposes of the 50% thresholds under (a)(2)(C) and (a)(3)(C): if the option makes the holder a 50%-or-more constructive owner, the entity attribution rules may then apply to further attribute the corporation's own holdings downward to the option holder. Trace the attribution chain step by step.

IRC 318(a)(5): Re-Attribution Limitation and Exceptions

IRC 318(a)(5) governs how attributed stock can be further attributed through additional steps. The general rule allows attributed stock to be treated as actually owned for purposes of applying another attribution rule, which means attribution chains can extend across multiple steps and multiple persons. This "reattribution" capacity makes it essential to trace each step in the chain rather than assuming attribution terminates at the first level.

The General Re-Attribution Rule

If stock is attributed from Person A to Person B under one rule, and Person B's constructive ownership then satisfies the threshold for attribution to Entity C under another rule, the chain may continue: the stock that started with Person A may end up being attributed to Entity C. Family attribution can chain in this way: a grandchild's shares are attributed to the grandchild's parent (IRC 318(a)(1)), and those same shares, now constructively owned by the parent, may then be attributed from the parent to a partnership in which the parent holds an interest (IRC 318(a)(3)(B)). The chain crosses from family attribution to entity attribution through the parent as an intermediate step.

Blocking Rule 1: Entity-to-Owner-to-Entity Is Blocked

Under IRC 318(a)(5)(B), stock attributed from an entity to a person under IRC 318(a)(2) cannot be re-attributed from that person to another entity under IRC 318(a)(3). If a partnership owns shares of Corporation A, and those shares are attributed downward to Partner X under (a)(2)(B), those shares cannot then be attributed upward from Partner X to Corporation B (in which X is a 50%-or-more shareholder) under (a)(3)(C). The chain stops with X; the stock does not carry into Corporation B through this particular path. Without this blocking rule, every entity attribution could cascade indefinitely through multi-entity structures.

Blocking Rule 2: Owner-to-Entity-to-Owner Is Blocked

Under IRC 318(a)(5)(C), stock attributed from an owner to an entity under IRC 318(a)(3) cannot be re-attributed from that entity to another owner under IRC 318(a)(2). If Shareholder Y attributes her shares to Corporation P under (a)(3)(C) (because she owns 50% or more of P), those same shares cannot then be attributed from Corporation P to another shareholder of P under (a)(2)(C) unless that other shareholder independently attributes the stock from Y. The chain from Y to P to another shareholder of P is blocked.

Blocking Rule 3: Option Attribution Does Not Re-Attribute

Under IRC 318(a)(5)(D), stock attributed from an optionee's option under (a)(4) cannot be re-attributed by family or entity attribution to a third party. The option holder's deemed ownership stays with the option holder for purposes of testing their own constructive ownership, but it does not travel through subsequent family or entity attribution steps. This prevents the combination of an unexercised option and family attribution from producing unrealistic attribution outcomes in third parties.

Downward Attribution, CFC Status, and the OBBBA Restoration of IRC 958(b)(4)

The application of IRC 318 to CFC determinations under IRC 951 and IRC 958 is one of the most complex and consequential areas of constructive ownership analysis in international tax. Understanding the trajectory -- from the pre-2017 rule through the TCJA repeal and the OBBBA restoration -- is essential for any practitioner advising on multinational structures.

The Pre-TCJA Framework: IRC 958(b) and the Original IRC 958(b)(4) Block

IRC 958(b) incorporates IRC 318 (with modifications) for purposes of determining whether a foreign corporation is a controlled foreign corporation under IRC 951. Before the Tax Cuts and Jobs Act of 2017, IRC 958(b)(4) specifically blocked the application of IRC 318(a)(3)(C) downward attribution -- the upward attribution rule that would attribute a U.S. shareholder's stock down to a foreign corporation -- when the result would be to treat a foreign corporation as owning shares of another foreign corporation for CFC purposes. Without the (b)(4) block, a U.S. parent corporation's ownership of a domestic subsidiary could, through the upward-then-downward attribution chain, cause a foreign sister corporation to be treated as a CFC even though no U.S. person owned it directly or through an entity that would naturally be tested for CFC status.

The 2017 TCJA Repeal and the Proliferation of "Phantom CFCs"

The TCJA repealed IRC 958(b)(4), effective for the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent year. The repeal enabled the full downward attribution chain under IRC 318(a)(3)(C) to operate: a U.S. shareholder's stock in a domestic entity could be attributed upward to the domestic entity under (a)(3)(C) and then attributed downward to a foreign corporation controlled by that domestic entity under (a)(2)(C), making the foreign corporation a CFC even if no U.S. person had ever directly owned it and even if no U.S. shareholder of the foreign corporation existed in the traditional sense. The practical result was that many foreign subsidiaries of foreign multinationals with U.S. domestic subsidiaries became CFCs solely through this attribution chain -- generating Subpart F income inclusions for U.S. shareholders of the domestic entities without the underlying policy rationale for Subpart F (that U.S. shareholders were deferring U.S. tax by accumulating earnings in foreign subsidiaries).

What the OBBBA Restoration Means in Practice

The OBBBA restoration of IRC 958(b)(4) does not simply reverse the 2017 repeal as if it never happened: it applies prospectively to foreign corporation tax years beginning after December 31, 2025. For foreign corporation tax years that began before January 1, 2026, the TCJA's repeal of (b)(4) continues to apply, and CFC determinations for those years remain subject to the full downward attribution chain. Practitioners advising on transition-year Subpart F inclusions, GILTI calculations, and disclosure obligations under IRC 6038 should be particularly careful to identify which tax year the relevant analysis concerns.

In structures where a foreign parent owns a U.S. subsidiary and also owns foreign subsidiaries that were classified as CFCs solely because of the TCJA repeal, the OBBBA restoration means those foreign subsidiaries may cease to be CFCs for their tax years beginning after December 31, 2025. That change has downstream consequences: Subpart F income inclusions that arose from those formerly-CFC foreign subsidiaries should not arise for the restored-rule years, previously applicable Form 5471 filing obligations may be eliminated or modified, and PTEP (previously taxed earnings and profits) accounting must be updated for amounts included under the pre-restoration regime. Confirm the effective date in IRC 958(b)(4) as enacted, and verify the OBBBA's specific transition and effective date provisions at IRS.gov.

For practitioners who rely on the IRC 951 Subpart F and US shareholder CFC guide for detailed Subpart F analysis, the OBBBA's IRC 958(b)(4) restoration is the single most important legislative development for CFC attribution since the TCJA itself.

Applying IRC 318 in Stock Redemptions Under IRC 302

The IRC 318 constructive ownership attribution rules are applied in full to every IRC 302(b) test for exchange treatment in a stock redemption (with the narrow exception of the family attribution waiver available under IRC 302(c)(2) for the complete termination test). The practical consequence in closely held and family corporate transactions is that attribution frequently determines whether any of the four IRC 302(b) tests can be satisfied.

Attribution in the Substantially Disproportionate Test (IRC 302(b)(2))

Under IRC 302(b)(2), the shareholder's pre-redemption and post-redemption ownership percentages for the 80% relative reduction test and the 50% absolute post-redemption threshold are both computed using IRC 318 constructive ownership. A shareholder who reduces direct holdings to below both percentages may still fail both tests if a spouse, child, parent, or entity in which the shareholder holds a 50%-or-more interest brings the post-redemption constructive percentage back above the required levels. In a two-parent, two-child family corporation where the four family members own shares in equal proportions, no individual family member can satisfy the 302(b)(2) test in isolation because 100% of all other family members' shares are attributed to each individual. Confirm the threshold percentages in IRC 302(b)(2) at IRS.gov before advising on whether this test can be satisfied in any specific transaction structure.

Attribution in the Complete Termination Test (IRC 302(b)(3))

IRC 302(b)(3) requires that all direct and constructive stock ownership be eliminated by the redemption. Family attribution is the most common obstacle: a shareholder who redeems all directly held shares but whose spouse retains shares is treated as still owning the spouse's shares, preventing the complete termination. The IRC 302(c)(2) waiver mechanism allows the redeemed shareholder to waive family attribution under IRC 318(a)(1) if three conditions are satisfied: (1) no interest is retained other than as a pure creditor; (2) no interest is acquired within the following ten years (except by bequest or inheritance); and (3) a written notification agreement is filed with the tax return for the year of redemption. Entity attribution under IRC 318(a)(2) and (a)(3) cannot be waived under IRC 302(c)(2); if entity attribution causes deemed ownership after the redemption, the entity's structure must be addressed directly (dissolution, transfer, or redemption of the entity's interest) before the 302(b)(3) test can be satisfied.

The complete termination analysis in a family corporation frequently requires both applying the IRC 302(c)(2) waiver for family attribution and separately unwinding any entity attribution that would otherwise cause the redeemed shareholder to be treated as constructively owning shares through a partnership, trust, or controlled corporation. Practitioners should map the full attribution chain before confirming that a complete termination is achievable. For detailed coverage of the complete termination test and the IRC 302(c)(2) waiver, see our IRC 302 stock redemption and dividend vs. exchange analysis.

Attribution in the Not-Essentially-Equivalent Test (IRC 302(b)(1))

The facts-and-circumstances "meaningful reduction" test under IRC 302(b)(1) is also computed using full IRC 318 constructive ownership. The three dimensions of corporate interest identified by the Supreme Court in United States v. Davis -- voting control, right to participate in earnings, and right to share in assets on liquidation -- are all measured on a constructive ownership basis before and after the redemption. A shareholder who has no direct shares remaining but retains constructive ownership through attribution will be treated as having those constructive shares for purposes of the post-redemption percentage, reducing or eliminating any meaningful reduction argument.

IRC 318 in Other Transaction Contexts: IRC 304, 355, 338, 267, 382, and 1563

Beyond stock redemptions and CFC determinations, IRC 318 constructive ownership attribution rules operate across a broad range of corporate transactions and compliance determinations. Each context has its own invocation language and modifications.

IRC 304: Related Corporation Redemptions

IRC 304 treats certain acquisitions of stock by a corporation from a person who controls both the acquiring and acquired corporations as a redemption subject to IRC 302 analysis. The control test under IRC 304(c) requires ownership of at least 50% of the voting power or 50% of the total value of all classes of stock, and this threshold is measured using IRC 318 constructive ownership. Attribution under IRC 318 therefore determines whether two corporations are "related" for IRC 304 purposes -- meaning that a taxpayer's constructive ownership across two separate corporate structures can trigger the IRC 304 overlay even in a transaction structured as a direct purchase between unrelated entities. See our IRC 304 related corporation redemption guide for the attribution mechanics in the related corporation context.

IRC 355: Corporate Divisions

In a corporate spin-off, split-off, or split-up under IRC 355, IRC 318 attribution rules apply in testing whether the distributing corporation and the controlled corporation satisfy the various ownership and control requirements for tax-free treatment. The five-year active business test, the device prohibition analysis, and the continuity of interest requirements in the context of potential acquisitions following a distribution each involve ownership measurements that incorporate IRC 318. For full coverage of how attribution functions in divisive transactions, see our IRC 355 spin-off and split-off practitioner guide.

IRC 338: Deemed Asset Sales

The definition of a "qualified stock purchase" (QSP) under IRC 338(d)(3) requires that the acquiring corporation purchase at least 80% of the total voting power and total value of the target corporation's stock within a 12-month acquisition period. For purposes of the QSP definition and the affiliated group determinations relevant to the IRC 338(h)(10) election, ownership is measured using IRC 318 constructive ownership with applicable modifications. Constructive ownership through entities and options can affect whether shares are counted toward the 80% threshold, whether members of the same affiliated group can make a valid IRC 338(h)(10) election, and whether the target's ownership structure creates obstacles to a QSP. See our IRC 338 deemed asset sale and qualified stock purchase guide for the QSP attribution analysis.

IRC 267: Related-Party Loss Disallowance

IRC 267(b) defines "related persons" for purposes of the loss disallowance rules, using constructive ownership rules that are stated in IRC 267(c). IRC 267(c) applies rules generally similar to IRC 318, but it is a distinct provision with its own enumerated family members, entity attribution rules, and re-attribution principles. Practitioners should not assume that a constructive ownership conclusion from an IRC 318 analysis translates directly into an IRC 267(c) conclusion without verifying the specific language of IRC 267(c) and its differences from IRC 318.

IRC 382: Ownership Change and NOL Limitations

The ownership change calculations under IRC 382, which determine whether a corporation's net operating loss carryforwards are subject to an annual limitation, incorporate IRC 318 with significant modifications set out in Treas. Reg. 1.382-2T. The five-percent shareholder identification and aggregation rules under IRC 382 determine which shareholders are tested for ownership changes, and constructive ownership through entities and options plays a major role in identifying 5%-or-more shareholders and measuring the percentage point change in their ownership over the testing period. The IRC 382 attribution framework diverges from standard IRC 318 in several important respects; verify the specific rules under Treas. Reg. 1.382-2T at IRS.gov before conducting an ownership change analysis.

IRC 1563: Controlled Groups and Affiliated Groups

IRC 1563 defines "controlled groups of corporations" (parent-subsidiary, brother-sister, and combined) and "affiliated service groups" for purposes of various employee benefit and tax rules. The constructive ownership rules of IRC 1563(e) parallel IRC 318 in structure but differ in important respects, including different percentage thresholds for entity-to-owner attribution and specific rules for option attribution in the controlled group context. An attribution conclusion from an IRC 318 analysis should not be imported directly into an IRC 1563 controlled group analysis without verifying the applicable differences in IRC 1563(e). The controlled group analysis determines whether the employer is tested as a single entity for IRC 415 limitations, minimum coverage requirements, and other benefit plan rules -- meaning errors in the attribution analysis have significant employee benefit consequences.

IRC 318 Attribution Rules Summary Table