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26 CFR §1.7874-1 — -1 Disregard of affiliate-owned stock.

Verified against eCFR.gov as of June 20, 2026View official text on eCFR.gov ↗
  1. (a)Scope. Section 7874(c)(2)(A) provides that stock of the foreign acquiring corporation held by members of the expanded affiliated group shall not be taken into account in determining ownership for purposes of section 7874(a)(2)(B)(ii). This section provides rules under section 7874(c)(2)(A). The rules provided in this section are also subject to section 7874(c)(4). For definitions that apply for purposes of this section, see 1.7874-12.
  2. (b)General rule. Except as provided in paragraph (c) of this section, for purposes of determining the ownership percentage described in section 7874(a)(2)(B)(ii), stock held by one or more members of the EAG is not included in either the numerator or the denominator of the ownership fraction.
  3. (c)Exceptions to general rule
    1. (1)Overview. Stock held by one or more members of the EAG shall be included in the denominator, but not in the numerator, of the ownership fraction, if the domestic entity acquisition qualifies as an internal group restructuring or results in a loss of control, as described in paragraph (c)(2) and (c)(3) of this section. For rules addressing the interaction of this section and other rules, see paragraph (d) of this section.
    2. (2)Internal group restructuring. For purposes of paragraph (c)(1) of this section, a domestic entity acquisition qualifies as an internal group restructuring if:
      1. (i)Before the domestic entity acquisition, 80 percent or more of the stock (by vote and value) or the capital and profits interest, as applicable, of the domestic entity was held directly or indirectly by the corporation that is the common parent of the EAG after the acquisition; and
      2. (ii)After the domestic entity acquisition, 80 percent or more of the stock (by vote and value) of the foreign acquiring corporation is held directly or indirectly by such common parent.
      3. (iii)Special rule. If § 1.7874-6(c)(2) applies for purposes of applying section 7874(c)(2)(A) and this section, then, for purposes of paragraph (c)(2) of this section (and so much of paragraph (c)(1) of this section as relates to paragraph (c)(2) of this section), the determination of the EAG after the domestic entity acquisition, as well as the determination of stock held by one or more members of the EAG after the domestic entity acquisition, is made without regard to one or more transfers (other than by issuance), in a transaction (or series of transactions) after and related to the acquisition, of stock of the acquiring foreign corporation by one or more members of the foreign-parented group described in § 1.7874-6(c)(2)(i).
    3. (3)Loss of control. For purposes of paragraph (c)(1) of this section, the domestic entity acquisition results in a loss of control if after the acquisition, the former domestic entity shareholders or former domestic entity partners do not hold, in the aggregate, directly or indirectly, more than 50 percent of the stock (by vote or value) of any member of the EAG.
  4. (d)Interaction of expanded affiliated group rules with other rules
    1. (1)Exclusion rules. Stock that is excluded from the denominator of the ownership fraction pursuant to § 1.7874-4(b), 1.7874-7(b), 1.7874-8(b), 1.7874-9(b), or section 7874(c)(4) is taken into account for purposes of determining whether an entity is a member of the expanded affiliated group for purposes of applying section 7874(c)(2)(A) and paragraph (b) of this section and determining whether a domestic entity acquisition qualifies as an internal group restructuring or results in a loss of control, as described in paragraphs (c)(2) and (3) of this section, respectively. However, such stock is excluded from the denominator of the ownership fraction regardless of whether it otherwise would be included in the denominator of the ownership fraction as a result of the application of paragraph (c) of this section. See Example 8 and Example 9 of § 1.7874-4(i) for illustrations of the application of this paragraph (d)(1).
    2. (2)NOCD rule. Stock of the foreign acquiring corporation treated as received by former domestic entity shareholders or former domestic entity partners, as applicable, under § 1.7874-10(b) is not taken into account for purposes of determining whether an entity is a member of the expanded affiliated group for purposes of applying section 7874(c)(2)(A) and paragraph (b) of this section and determining whether a domestic entity acquisition qualifies as an internal group restructuring or results in a loss of control, as described in paragraphs (c)(2) and (3) of this section, respectively. However, such stock is included in the numerator and denominator of the ownership fraction, except to the extent that it is treated as held by a member of the EAG and is excluded from the numerator or both the numerator and the denominator, as applicable, under section 7874(c)(2)(A) or paragraphs (b) or (c) of this section.
  5. (e)Treatment of certain hook stock. This paragraph applies to stock of a corporation that is held by an entity in which at least 50 percent of the stock (by vote or value) or at least 50 percent of the capital or profits interest, as applicable, in such entity, is held directly or indirectly by the corporation. The stock to which this paragraph applies shall not be included in either the numerator or denominator of any fraction for the following purposes:
    1. (1)For applying paragraph (c)(1) of this section; and
    2. (2)For determining whether the domestic entity acquisition qualifies as an internal group restructuring (described in paragraph (c)(2) of this section) or results in a loss of control (described in paragraph (c)(3) of this section).
  6. (f)Stock held by a partnership. For purposes of this section, each partner in a partnership shall be treated as holding its proportionate share of stock held by the partnership, as determined under the rules and principles of sections 701 through 777.
  7. (g)Treatment of transactions related to the acquisition. Except as provided in paragraph (c)(2)(iii) of this section, all transactions that are related to an acquisition are taken into account in applying this section.
  8. (h)Examples. The application of this section is illustrated by the following examples. It is assumed that all transactions in the examples occur after March 4, 2003. In all the examples, if an entity or other person is not described as either domestic or foreign, it may be either domestic or foreign. In addition, each entity has only a single class of equity outstanding. Finally, the analysis of the following examples is limited to a discussion of issues under section 7874, even though the examples may raise other issues (for example, under section 367).
  9. (i)Applicability dates
    1. (1)In general. Except as otherwise provided, this section shall apply to domestic entity acquisitions completed on or after May 20, 2008. This section shall not, however, apply to a domestic entity acquisition that was completed on or after May 20, 2008, provided such acquisition was entered into pursuant to a written agreement which was (subject to customary conditions) binding prior to May 20, 2008, and at all times thereafter (binding commitment). For purposes of the preceding sentence, a binding commitment shall include entering into options and similar interests in connection with one or more written agreements described in the preceding sentence. Notwithstanding the general application of this paragraph, taxpayers may elect to apply this section to domestic entity acquisitions completed before May 20, 2008, but must apply it consistently to all acquisitions within its scope. Paragraph (f) of this section shall apply to domestic entity acquisitions completed on or after June 7, 2012. See § 1.7874-1T(e), as contained in 26 CFR part 1 revised as of April 1, 2012, for completed before June 7, 2012.
    2. (2)Applicability date of certain provisions of this section. Except as provided in this paragraph (i)(2), paragraph (c)(2)(iii) of this section applies to domestic entity acquisitions completed on or after April 4, 2016. Except as provided in this paragraph (i)(2), paragraph (d) of this section (interaction of EAG rules with other rules) applies to domestic entity acquisitions completed on or after July 12, 2018. See §§ 1.7874-4(h) and 1.7874-7T(e), as contained in 26 CFR part 1 revised as of April 1, 2017, for certain coordination rules for domestic entity acquisitions completed before July 12, 2018. Except as provided in this paragraph (i)(2), paragraph (g) of this section applies to domestic entity acquisitions completed on or after September 22, 2014. For domestic entity acquisitions completed before April 4, 2016, however, taxpayers may elect to consistently apply paragraphs (c)(2)(iii) and (g) of this section, and § 1.7874-6(c)(2), (d)(2), and (f)(2)(ii). In addition, for domestic entity acquisitions completed before July 12, 2018, taxpayers may elect to consistently apply paragraph (d) of this section.