Reg. § 1.304-5 Control.
(a) Control requirement in general Section provides that, for purposes of section , control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock. Section makes section (relating to constructive ownership of stock), as modified by section , applicable to section for purposes of determining control under section .
(b) Effect of section 304(c)(2)(B)
(1) In general In determining whether the control test with respect to both the issuing and acquiring corporations is satisfied, section considers only the person or persons that—
(i) Control the issuing corporation before the transaction;
(ii) Transfer issuing corporation stock to the acquiring corporation for property; and
(iii) Control the acquiring corporation thereafter.
(2) Application Section defines property to include money, securities, and any other property except stock (or stock rights) in the distributing corporation. However, section provides a special rule to extend the relevant group of persons to be tested for control of both the issuing and acquiring corporations to include the person or persons that do not acquire property, but rather solely stock from the acquiring corporation in the transaction. Section provides that if two or more persons in control of the issuing corporation transfer stock of such corporation to the acquiring corporation, and if the transferors are in control of the acquiring corporation after the transfer, the person or persons in control of each corporation include each of those transferors. Because the purpose of section is to include in the relevant control group the person or persons that retain or acquire acquiring corporation stock in the transaction, only the person or persons transferring stock of the issuing corporation that retain or acquire any proprietary interest in the acquiring corporation are taken into account for purposes of applying section .
(3) Example This section may be illustrated by the following example.
Example.
(a) A, the owner of 20% of T's only class of stock, transfers that stock to P solely in exchange for all of the P stock. Pursuant to the same transaction, P, solely in exchange for cash, acquires the remaining 80% of the T stock from T's other shareholder, B, who is unrelated to A and P.
(b) Although A and B together were in control of T (the issuing corporation) before the transaction and A and B each transferred T stock to P (the acquiring corporation), sections and (c)(2)(B) do not apply to B because B did not retain or acquire any proprietary interest in P in the transaction. Section also does not apply to A because A (or any control group of which A was a member) did not control T before the transaction and P after the transaction.
(c) Effective date This section is effective on January 20, 1994.
[T.D. 8515, 59 FR 2960, Jan. 20, 1994]