[Title 26 CFR 1.958-1]
[Code of Federal Regulations (annual edition) - April 1, 2002 Edition]
[Title 26 - INTERNAL REVENUE]
[Chapter I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY]
[Subchapter A - INCOME TAX (CONTINUED)]
[Part 1 - INCOME TAXES]
[Sec. 1.958-1 - Direct and indirect ownership of stock.]
[From the U.S. Government Printing Office]


26INTERNAL REVENUE102002-04-012002-04-01false1.958-1Sec. 1.958-1INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.958-1  Direct and indirect ownership of stock.

    (a) In general. Section 958(a) provides that, for purposes of 
sections 951 to 964 (other than sections 955(b)(1)(A) and (B) and 
955(c)(2)(A)(ii) (as in effect before the enactment of the Tax Reduction 
Act of 1975), and 960(a)(1)), stock owned means--
    (1) Stock owned directly; and
    (2) Stock owned with the application of paragraph (b) of this 
section.

The rules of section 958(a) and this section provide a limited form of 
stock attribution primarily for use in determining the amount taxable to 
a United States shareholder under section 951(a). These rules also apply 
for purposes of other provisions of the Code and regulations which make 
express reference to section 958(a).
    (b) Stock ownership through foreign entities. For purposes of 
paragraph (a)(2) of this section, stock owned, directly or indirectly, 
by or for a foreign corporation, foreign partnership, foreign trust 
(within the meaning of section 7701(a)(31)) described in sections 671 
through 679, or other foreign trust or foreign estate (within the 
meaning of section 7701(a)(31)) shall be considered as being owned 
proportionately by its shareholders, partners, grantors or other persons 
treated as owners under sections 671 through 679 of any portion of the 
trust that includes the stock, or beneficiaries, respectively. Stock 
considered to be owned by reason of the application of this paragraph 
shall, for purposes of reapplying this paragraph, be treated as actually 
owned by such person. Thus, this rule creates a chain of ownership; 
however, since the rule applies only to stock owned by a foreign entity, 
attribution under the rule stops with the first United States person in 
the chain of ownership running from the foreign entity. The application 
of this paragraph may be illustrated by the following example:
    Example. Domestic corporation M owns 75 percent of the one class of 
stock in foreign corporation R, which in turn owns 80 percent of the one 
class of stock in foreign corporation S, which in turn owns 90 percent 
of the one class of stock in foreign corporation T. Under this 
paragraph, R Corporation is considered as owning 80 percent of the 90 
percent of the stock which S Corporation owns in T Corporation, or 72 
percent. Corporation M is considered as owning 75 percent of such 72 
percent of the stock in T Corporation, or 54 percent. Since M 
Corporation is a domestic corporation, the attribution under this 
paragraph stops with M Corporation, even though, illustratively, such 
corporation is wholly owned by domestic corporation N.

    (c) Rules of application--(1) Special rule for mutual insurance 
companies. For purposes of applying paragraph (a) of this section in the 
case of a foreign mutual insurance company, the term ``stock'' shall 
include any certificate entitling the holder to voting power in the 
corporation.
    (2) Amount of interest in foreign corporation, foreign partnership, 
foreign trust, or foreign estate. The determination of a person's 
proportionate interest in a foreign corporation, foreign partnership, 
foreign trust, or foreign estate will be made on the basis of all the 
facts and circumstances in each case. Generally, in determining a 
person's proportionate interest in a foreign corporation, the purpose 
for which the rules of section 958(a) and this section are being applied 
will be taken into account. Thus, if the rules of section 958(a) are 
being applied to determine the amount of stock owned for purposes of 
section 951(a), a person's proportionate interest in a foreign 
corporation will generally be determined with reference to such person's 
interest in the income of such corporation. If

[[Page 364]]

the rules of section 958(a) are being applied to determine the amount of 
voting power owned for purposes of section 951(b) or 957, a person's 
proportionate interest in a foreign corporation will generally be 
determined with reference to the amount of voting power in such 
corporation owned by such person. However, any arrangement which 
artificially decreases a United States person's proportionate interest 
will not be recognized. See Secs. 1.951-1 and 1.957-1.
    (d) Illustration. The application of this section may be illustrated 
by the following examples:

    Example 1. United States persons A and B own 25 percent and 50 
percent, respectively, of the one class of stock in foreign corporation 
M. Corporation M owns 80 percent of the one class of stock in foreign 
corporation N, and N Corporation owns 60 percent of the one class of 
stock in foreign corporation P. Under paragraph (b) of this section, M 
Corporation is considered to own 48 percent (80 percent of 60 percent) 
of the stock in P Corporation; such 48 percent is treated as actually 
owned by M Corporation for the purpose of again applying paragraph (b) 
of this section. Thus, A and B are considered to own 12 percent (25 
percent of 48 percent) and 24 percent (50 percent of 48 percent), 
respectively, of the stock in P Corporation.
    Example 2. United States person C is a 60-percent partner in foreign 
partnership X. Partnership X owns 40 percent of the one class of stock 
in foreign corporation Q. Corporation Q is a 50-percent partner in 
foreign partnership Y, and partnership Y owns 100 percent of the one 
class of stock in foreign corporation R. By the application of paragraph 
(b) of this section, C is considered to own 12 percent (60 percent of 40 
percent of 50 percent of 100 percent) of the stock in R Corporation.
    Example 3. Foreign trust Z was created for the benefit of United 
States persons D, E, and F. Under the terms of the trust instrument, the 
trust income is required to be divided into three equal shares. Each 
beneficiary's share of the income may either be accumulated for him or 
distributed to him in the discretion of the trustee. In 1970, the trust 
is to terminate and there is to be paid over to each beneficiary the 
accumulated income applicable to his share and one-third of the corpus. 
The corpus of trust Z is composed of 90 percent of the one class of 
stock in foreign corporation S. By the application of this section, each 
of D, E, and F is considered to own 30 percent (\1/3\ of 90 percent) of 
the stock in S Corporation.
    Example 4. Among the assets of foreign estate W are Blackacre and a 
block of stock, consisting of 75 percent of the one class of stock of 
foreign corporation T. Under the terms of the will governing estate W, 
Blackacre is left to G, a nonresident alien, for life, remainder to H, a 
nonresident alien, and the block of stock is left to United States 
person K. By the application of this section, K is considered to own the 
75 percent of the stock of T Corporation, and G and H are not considered 
to own any of such stock.

[T.D. 6889, 31 FR 9455, July 12, 1966, as amended by T.D. 7893, 48 FR 
22509, May 19, 1983; T.D. 8955, 66 FR 37897, July 20, 2001]