Question 39: Your Q&As regarding options make an assumption that options to purchase stock directly from the corporation (i.e., the corporation issues stock if the option is exercised) are taken into account under attribution for controlled group purposes. Have you considered whether the exclusion of treasury stock (see IRC 1563(c)(1)(B)) mean that the shares subject to this type of option might not be counted? If you do believe such shares are counted, do you assume that all individuals would exercise their option in determining whether a controlled group relationship exists after option attribution is taken into account?
Answer: The attribution rules treat the holder of an option as though he were the owner of the underlying stock. So, suppose X Corporation gives Jill an option to buy 5000 shares of X stock. Jill is deemed to own those 5,000 shares. Now if Jill owns those 5,000 shares, the corporation doesn't, so under attribution they are not treasury stock. So, yes, those shares are counted.
The second question is a little more complex. The purpose of the attribution rules for controlled groups is to create groups that otherwise would not exist. In effect, you make whatever assumptions will create the group. Usually, that means you assume that simply the optionholder or optionholders in question will exercise their options.
For example, suppose X has two shareholders: Jack, with 6,000 shares and Jill with 4,000 shares. Jack owns 100% of another corporation and is unrelated to Jill (although they have been known to walk uphill together). Assume further that the corporation has given Jack an option to buy 10,000 shares and Jill an option to buy 8,000 shares. If Jack exercises his option, he will own 16,000 of the 20,000 shares, or 80%. Thus a controlled group would be created. (The way to get around the controlled group status in this case is to have Jill actually exercise all or part of her option, so Jack has less than 80%, even considering his option.)