-CITE-
26 USC Subchapter G - Corporations Used to Avoid Income
Tax on Shareholders 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter G - Corporations Used to Avoid Income Tax on Shareholders
-HEAD-
SUBCHAPTER G - CORPORATIONS USED TO AVOID INCOME TAX ON
SHAREHOLDERS
-MISC1-
Part
I. Corporations improperly accumulating surplus.
II. Personal holding companies.
III. Foreign personal holding companies.
IV. Deduction for dividends paid.
-SECREF-
SUBCHAPTER REFERRED TO IN OTHER SECTIONS
This subchapter is referred to in section 280H of this title.
-End-
-CITE-
26 USC PART I - CORPORATIONS IMPROPERLY ACCUMULATING
SURPLUS 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter G - Corporations Used to Avoid Income Tax on Shareholders
PART I - CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS
-HEAD-
PART I - CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS
-MISC1-
Sec.
531. Imposition of accumulated earnings tax.
532. Corporations subject to accumulated earnings tax.
533. Evidence of purpose to avoid income tax.
534. Burden of proof.
535. Accumulated taxable income.
536. Income not placed on annual basis.
537. Reasonable needs of the business.
-SECREF-
PART REFERRED TO IN OTHER SECTIONS
This part is referred to in section 12 of this title.
-End-
-CITE-
26 USC Sec. 531 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter G - Corporations Used to Avoid Income Tax on Shareholders
PART I - CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS
-HEAD-
Sec. 531. Imposition of accumulated earnings tax
-STATUTE-
In addition to other taxes imposed by this chapter, there is
hereby imposed for each taxable year on the accumulated taxable
income (as defined in section 535) of each corporation described in
section 532, an accumulated earnings tax equal to 15 percent of the
accumulated taxable income.
-SOURCE-
(Aug. 16, 1954, ch. 736, 68A Stat. 179; Pub. L. 100-647, title I,
Sec. 1001(a)(2)(A), Nov. 10, 1988, 102 Stat. 3349; Pub. L. 103-66,
title XIII, Secs. 13201(b)(1), 13202(b), Aug. 10, 1993, 107 Stat.
459, 461; Pub. L. 107-16, title I, Sec. 101(c)(4), June 7, 2001,
115 Stat. 43; Pub. L. 108-27, title III, Sec. 302(e)(5), May 28,
2003, 117 Stat. 764.)
-STATAMEND-
AMENDMENT OF SECTION
For termination of amendment by section 303 of Pub. L. 108-27,
see Effective and Termination Dates of 2003 Amendment note below.
For termination of amendment by section 901 of Pub. L. 107-16,
see Effective and Termination Dates of 2001 Amendment note below.
-MISC1-
AMENDMENTS
2003 - Pub. L. 108-27, Secs. 302(e)(5), 303, temporarily
substituted "equal to 15 percent of the accumulated taxable
income." for "equal to the product of the highest rate of tax under
section 1(c) and the accumulated taxable income." See Effective and
Termination Dates of 2003 Amendment note below.
2001 - Pub. L. 107-16, Secs. 101(c)(4), 901, temporarily
substituted "equal to the product of the highest rate of tax under
section 1(c) and the accumulated taxable income." for "equal to
39.6 percent of the accumulated taxable income." See Effective and
Termination Dates of 2001 Amendment note below.
1993 - Pub. L. 103-66, Sec. 13202(b), substituted "39.6 percent"
for "36 percent".
Pub. L. 103-66, Sec. 13201(b)(1), substituted "36 percent" for
"28 percent".
1988 - Pub. L. 100-647 amended section generally. Prior to
amendment, section read as follows: "In addition to other taxes
imposed by this chapter, there is hereby imposed for each taxable
year on the accumulated taxable income (as defined in section 535)
of every corporation described in section 532, an accumulated
earnings tax equal to the sum of -
"(1) 27 1/2 percent of the accumulated taxable income not in
excess of $100,000, plus
"(2) 38 1/2 percent of the accumulated taxable income in
excess of $100,000."
EFFECTIVE AND TERMINATION DATES OF 2003 AMENDMENT
Amendment by Pub. L. 108-27 applicable, except as otherwise
provided, to taxable years beginning after Dec. 31, 2002, see
section 302(f) of Pub. L. 108-27, set out as a note under section 1
of this title.
Amendment by Pub. L. 108-27 inapplicable to taxable years
beginning after Dec. 31, 2008, and the Internal Revenue Code of
1986 to be applied and administered to such years as if such
amendment had never been enacted, see section 303 of Pub. L.
108-27, set out as a note under section 1 of this title.
EFFECTIVE AND TERMINATION DATES OF 2001 AMENDMENT
Amendment by Pub. L. 107-16 applicable to taxable years beginning
after Dec. 31, 2000, see section 101(d)(1) of Pub. L. 107-16, set
out as a note under section 1 of this title.
Amendment by Pub. L. 107-16 inapplicable to taxable, plan, or
limitation years beginning after Dec. 31, 2010, and the Internal
Revenue Code of 1986 to be applied and administered to such years
as if such amendment had never been enacted, see section 901 of
Pub. L. 107-16, set out as a note under section 1 of this title.
EFFECTIVE DATE OF 1993 AMENDMENT
Amendment by Pub. L. 103-66 applicable to taxable years beginning
after Dec. 31, 1992, see sections 13201(c) and 13202(c) of Pub. L.
103-66, set out as notes under section 1 of this title.
EFFECTIVE DATE OF 1988 AMENDMENT
Section 1001(a)(2)(B) of Pub. L. 100-647 provided that: "The
amendment made by subparagraph (A) [amending this section] shall
apply to taxable years beginning after December 31, 1987. Such
amendment shall not be treated as a change in a rate of tax for
purposes of section 15 of the 1986 Code."
-SECREF-
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 12, 26, 30A, 111, 532,
534, 535, 536, 545, 556, 563, 936, 1298, 6601, 7518 of this title;
title 46 App. section 1177.
-End-
-CITE-
26 USC Sec. 532 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter G - Corporations Used to Avoid Income Tax on Shareholders
PART I - CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS
-HEAD-
Sec. 532. Corporations subject to accumulated earnings tax
-STATUTE-
(a) General rule
The accumulated earnings tax imposed by section 531 shall apply
to every corporation (other than those described in subsection (b))
formed or availed of for the purpose of avoiding the income tax
with respect to its shareholders or the shareholders of any other
corporation, by permitting earnings and profits to accumulate
instead of being divided or distributed.
(b) Exceptions
The accumulated earnings tax imposed by section 531 shall not
apply to -
(1) a personal holding company (as defined in section 542),
(2) a foreign personal holding company (as defined in section
552),
(3) a corporation exempt from tax under subchapter F (section
501 and following), or
(4) a passive foreign investment company (as defined in section
1297).
(c) Application determined without regard to number of shareholders
The application of this part to a corporation shall be determined
without regard to the number of shareholders of such corporation.
-SOURCE-
(Aug. 16, 1954, ch. 736, 68A Stat. 179; Pub. L. 98-369, div. A,
title I, Sec. 58(a), July 18, 1984, 98 Stat. 574; Pub. L. 99-514,
title XII, Sec. 1235(f)(1), Oct. 22, 1986, 100 Stat. 2575; Pub. L.
105-34, title XI, Sec. 1122(d)(1), Aug. 5, 1997, 111 Stat. 977.)
-MISC1-
AMENDMENTS
1997 - Subsec. (b)(4). Pub. L. 105-34 substituted "section 1297"
for "section 1296".
1986 - Subsec. (b)(4). Pub. L. 99-514 added par. (4).
1984 - Subsec. (c). Pub. L. 98-369 added subsec. (c).
EFFECTIVE DATE OF 1997 AMENDMENT
Section 1124 of Pub. L. 105-34 provided that: "The amendments
made by this subtitle [subtitle C (Secs. 1121-1124) of title XI of
Pub. L. 105-34, enacting section 1296 of this title, amending this
section and sections 542, 551, 852, 1291, 1293, 1296 to 1298, and
4982 of this title, redesignating subpart C of part VI of
subchapter P of this chapter as subpart D of part VI of subchapter
P of this chapter, and renumbering sections 1296 and 1297 of this
title as sections 1297 and 1298, respectively, of this title] shall
apply to -
"(1) taxable years of United States persons beginning after
December 31, 1997, and
"(2) taxable years of foreign corporations ending with or
within such taxable years of United States persons."
EFFECTIVE DATE OF 1986 AMENDMENT
Amendment by Pub. L. 99-514 applicable to taxable years of
foreign corporations beginning after Dec. 31, 1986, see section
1235(h) of Pub. L. 99-514, set out as an Effective Date note under
section 1291 of this title.
EFFECTIVE DATE OF 1984 AMENDMENT
Section 58(c) of Pub. L. 98-369 provided that: "The amendments
made by this section [amending this section and section 535 of this
title] shall apply to taxable years beginning after the date of the
enactment of this Act [July 18, 1984]."
-SECREF-
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 531, 533 of this title.
-End-
-CITE-
26 USC Sec. 533 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter G - Corporations Used to Avoid Income Tax on Shareholders
PART I - CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS
-HEAD-
Sec. 533. Evidence of purpose to avoid income tax
-STATUTE-
(a) Unreasonable accumulation determinative of purpose
For purposes of section 532, the fact that the earnings and
profits of a corporation are permitted to accumulate beyond the
reasonable needs of the business shall be determinative of the
purpose to avoid the income tax with respect to shareholders,
unless the corporation by the preponderance of the evidence shall
prove to the contrary.
(b) Holding or investment company
The fact that any corporation is a mere holding or investment
company shall be prima facie evidence of the purpose to avoid the
income tax with respect to shareholders.
-SOURCE-
(Aug. 16, 1954, ch. 736, 68A Stat. 179.)
-End-
-CITE-
26 USC Sec. 534 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter G - Corporations Used to Avoid Income Tax on Shareholders
PART I - CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS
-HEAD-
Sec. 534. Burden of proof
-STATUTE-
(a) General rule
In any proceeding before the Tax Court involving a notice of
deficiency based in whole or in part on the allegation that all or
any part of the earnings and profits have been permitted to
accumulate beyond the reasonable needs of the business, the burden
of proof with respect to such allegation shall -
(1) if notification has not been sent in accordance with
subsection (b), be on the Secretary, or
(2) if the taxpayer has submitted the statement described in
subsection (c), be on the Secretary with respect to the grounds
set forth in such statement in accordance with the provisions of
such subsection.
(b) Notification by Secretary
Before mailing the notice of deficiency referred to in subsection
(a), the Secretary may send by certified mail or registered mail a
notification informing the taxpayer that the proposed notice of
deficiency includes an amount with respect to the accumulated
earnings tax imposed by section 531.
(c) Statement by taxpayer
Within such time (but not less than 30 days) after the mailing of
the notification described in subsection (b) as the Secretary may
prescribe by regulations, the taxpayer may submit a statement on
the grounds (together with facts sufficient to show the basis
thereof) on which the taxpayer relies to establish that all or any
part of the earnings and profits have not been permitted to
accumulate beyond the reasonable needs of the business.
(d) Jeopardy assessment
If pursuant to section 6861(a) a jeopardy assessment is made
before the mailing of the notice of deficiency referred to in
subsection (a), for purposes of this section such notice of
deficiency shall, to the extent that it informs the taxpayer that
such deficiency includes the accumulated earnings tax imposed by
section 531, constitute the notification described in subsection
(b), and in that event the statement described in subsection (c)
may be included in the taxpayer's petition to the Tax Court.
-SOURCE-
(Aug. 16, 1954, ch. 736, 68A Stat. 180; Aug. 11, 1955, ch. 805,
Secs. 4, 5, 69 Stat. 690, 691; Pub. L. 85-866, title I, Sec. 89(b),
Sept. 2, 1958, 72 Stat. 1665; Pub. L. 94-455, title XIX, Secs.
1901(a)(73), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1776, 1834.)
-MISC1-
AMENDMENTS
1976 - Subsec. (a)(1), (2). Pub. L. 94-455, Sec. 1906(b)(13)(A),
struck out "or his delegate" after "Secretary".
Subsec. (b). Pub. L. 94-455, Secs. 1901(a)(73)(A),
1906(b)(13)(A), struck out "In the case of a notice of deficiency
to which subsection (e)(2) applies and which is mailed on or before
the 30th day after the date of enactment of this sentence, the
notification referred to in the preceding sentence may be mailed at
any time on or before such 30th day" after "section 531", and "or
his delegate" after "Secretary".
Subsec. (c). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out "or
his delegate" after "Secretary".
Subsec. (e). Pub. L. 94-455, Sec. 1901(a)(73)(B), struck out
subsec. (e) relating to application of provisions of section.
1958 - Subsec. (b). Pub. L. 85-866 inserted "certified mail or"
before "registered mail".
1955 - Subsec. (b). Act Aug. 11, 1955, Sec. 5, inserted second
sentence relating to notice of deficiency to which subsec. (e)(2)
applies.
Subsec. (e). Act Aug. 11, 1955, Sec. 4, permitted, in certain
instances, application of this section to cases involving taxable
years to which prior revenue laws apply.
EFFECTIVE DATE OF 1976 AMENDMENT
Amendment by section 1901(a)(73) of Pub. L. 94-455 applicable
with respect to taxable years beginning after Dec. 31, 1976, see
section 1901(d) of Pub. L. 94-455, set out as a note under section
2 of this title.
EFFECTIVE DATE OF 1958 AMENDMENT
Amendment by Pub. L. 85-866 applicable only if mailing occurred
after Sept. 2, 1958, see section 89(d) of Pub. L. 85-866, set out
as a note under section 7502 of this title.
-End-
-CITE-
26 USC Sec. 535 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter G - Corporations Used to Avoid Income Tax on Shareholders
PART I - CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS
-HEAD-
Sec. 535. Accumulated taxable income
-STATUTE-
(a) Definition
For purposes of this subtitle, the term "accumulated taxable
income" means the taxable income, adjusted in the manner provided
in subsection (b), minus the sum of the dividends paid deduction
(as defined in section 561) and the accumulated earnings credit (as
defined in subsection (c)).
(b) Adjustments to taxable income
For purposes of subsection (a), taxable income shall be adjusted
as follows:
(1) Taxes
There shall be allowed as a deduction Federal income and excess
profits taxes and income, war profits, and excess profits taxes
of foreign countries and possessions of the United States (to the
extent not allowable as a deduction under section 275(a)(4)),
accrued during the taxable year or deemed to be paid by a
domestic corporation under section 902(a) or 960(a)(1) for the
taxable year, but not including the accumulated earnings tax
imposed by section 531, the personal holding company tax imposed
by section 541, or the taxes imposed by corresponding sections of
a prior income tax law.
(2) Charitable contributions
The deduction for charitable contributions provided under
section 170 shall be allowed without regard to section 170(b)(2).
(3) Special deductions disallowed
The special deductions for corporations provided in part VIII
(except section 248) of subchapter B (section 241 and following,
relating to the deduction for dividends received by corporations,
etc.) shall not be allowed.
(4) Net operating loss
The net operating loss deduction provided in section 172 shall
not be allowed.
(5) Capital losses
(A) In general
Except as provided in subparagraph (B), there shall be
allowed as a deduction an amount equal to the net capital loss
for the taxable year (determined without regard to paragraph
(7)(A)).
(B) Recapture of previous deductions for capital gains
The aggregate amount allowable as a deduction under
subparagraph (A) for any taxable year shall be reduced by the
lesser of -
(i) the nonrecaptured capital gains deductions, or
(ii) the amount of the accumulated earnings and profits of
the corporation as of the close of the preceding taxable
year.
(C) Nonrecaptured capital gains deductions
For purposes of subparagraph (B), the term "nonrecaptured
capital gains deductions" means the excess of -
(i) the aggregate amount allowable as a deduction under
paragraph (6) for preceding taxable years beginning after
July 18, 1984, over
(ii) the aggregate of the reductions under subparagraph (B)
for preceding taxable years.
(6) Net capital gains
(A) In general
There shall be allowed as a deduction -
(i) the net capital gain for the taxable year (determined
with the application of paragraph (7)), reduced by
(ii) the taxes attributable to such net capital gain.
(B) Attributable taxes
For purposes of subparagraph (A), the taxes attributable to
the net capital gain shall be an amount equal to the difference
between -
(i) the taxes imposed by this subtitle (except the tax
imposed by this part) for the taxable year, and
(ii) such taxes computed for such year without including in
taxable income the net capital gain for the taxable year
(determined without the application of paragraph (7)).
(7) Capital loss carryovers
(A) Unlimited carryforward
The net capital loss for any taxable year shall be treated as
a short-term capital loss in the next taxable year.
(B) Section 1212 inapplicable
No allowance shall be made for the capital loss carryback or
carryforward provided in section 1212.
(8) Special rules for mere holding or investment companies
In the case of a mere holding or investment company -
(A) Capital loss deduction, etc., not allowed
Paragraphs (5) and (7)(A) shall not apply.
(B) Deduction for certain offsets
There shall be allowed as a deduction the net short-term
capital gain for the taxable year to the extent such gain does
not exceed the amount of any capital loss carryover to such
taxable year under section 1212 (determined without regard to
paragraph (7)(B)).
(C) Earnings and profits
For purposes of subchapter C, the accumulated earnings and
profits at any time shall not be less than they would be if
this subsection had applied to the computation of earnings and
profits for all taxable years beginning after July 18, 1984.
(9) Special rule for capital gains and losses of foreign
corporations
In the case of a foreign corporation, paragraph (6) shall be
applied by taking into account only gains and losses which are
effectively connected with the conduct of a trade or business
within the United States and are not exempt from tax under
treaty.
(c) Accumulated earnings credit
(1) General rule
For purposes of subsection (a), in the case of a corporation
other than a mere holding or investment company the accumulated
earnings credit is (A) an amount equal to such part of the
earnings and profits for the taxable year as are retained for the
reasonable needs of the business, minus (B) the deduction allowed
by subsection (b)(6). For purposes of this paragraph, the amount
of the earnings and profits for the taxable year which are
retained is the amount by which the earnings and profits for the
taxable year exceed the dividends paid deduction (as defined in
section 561) for such year.
(2) Minimum credit
(A) In general
The credit allowable under paragraph (1) shall in no case be
less than the amount by which $250,000 exceeds the accumulated
earnings and profits of the corporation at the close of the
preceding taxable year.
(B) Certain service corporations
In the case of a corporation the principal function of which
is the performance of services in the field of health, law,
engineering, architecture, accounting, actuarial science,
performing arts, or consulting, subparagraph (A) shall be
applied by substituting "$150,000" for "$250,000".
(3) Holding and investment companies
In the case of a corporation which is a mere holding or
investment company, the accumulated earnings credit is the amount
(if any) by which $250,000 exceeds the accumulated earnings and
profits of the corporation at the close of the preceding taxable
year.
(4) Accumulated earnings and profits
For purposes of paragraphs (2) and (3), the accumulated
earnings and profits at the close of the preceding taxable year
shall be reduced by the dividends which under section 563(a)
(relating to dividends paid after the close of the taxable year)
are considered as paid during such taxable year.
(5) Cross reference
For denial of credit provided in paragraph (2) or (3) where
multiple corporations are formed to avoid tax, see section
1551, and for limitation on such credit in the case of certain
controlled corporations, see section 1561.
(d) Income distributed to United States-owned foreign corporation
retains United States connection
(1) In general
For purposes of this part, if 10 percent or more of the
earnings and profits of any foreign corporation for any taxable
year -
(A) is derived from sources within the United States, or
(B) is effectively connected with the conduct of a trade or
business within the United States,
any distribution out of such earnings and profits (and any
interest payment) received (directly or through 1 or more other
entities) by a United States-owned foreign corporation shall be
treated as derived by such corporation from sources within the
United States.
(2) United States-owned foreign corporation
The term "United States-owned foreign corporation" has the
meaning given to such term by section 904(g)(6).
-SOURCE-
(Aug. 16, 1954, ch. 736, 68A Stat. 180; Pub. L. 85-866, title I,
Sec. 31, title II, Sec. 205(a), Sept. 2, 1958, 72 Stat. 1631, 1680;
Pub. L. 87-403, Sec. 3(b), Feb. 2, 1962, 76 Stat. 6; Pub. L.
87-834, Sec. 9(d)(2), Oct. 16, 1962, 76 Stat. 1001; Pub. L. 88-272,
title II, Sec. 207(b)(4), Feb. 26, 1964, 78 Stat. 42; Pub. L.
91-172, title IV, Sec. 401(b)(2)(C), title V, Sec. 512(f)(5), (6),
Dec. 30, 1969, 83 Stat. 602, 641; Pub. L. 94-12, title III, Sec.
304(a), Mar. 29, 1975, 89 Stat. 45; Pub. L. 94-455, title X, Sec.
1033(b)(3), title XIX, Secs. 1901(a)(74), (b)(20)(A), (32)(C),
(33)(D), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1628, 1777, 1797,
1800, 1801, 1834; Pub. L. 97-34, title II, Sec. 232(a), (b)(1),
Aug. 13, 1981, 95 Stat. 250; Pub. L. 98-369, div. A, title I, Secs.
58(b), 125(a), July 18, 1984, 98 Stat. 575, 647; Pub. L. 99-514,
title XII, Sec. 1225(a), title XVIII, Sec. 1899A(17), Oct. 22,
1986, 100 Stat. 2558, 2959; Pub. L. 101-508, title XI, Sec.
11801(c)(18), Nov. 5, 1990, 104 Stat. 1388-528.)
-MISC1-
AMENDMENTS
1990 - Subsec. (c)(5). Pub. L. 101-508 substituted "section 1561"
for "sections 1561 and 1564".
1986 - Subsec. (b)(5)(C)(i), (8)(C). Pub. L. 99-514, Sec.
1899A(17), substituted "July 18, 1984" for "the date of the
enactment of the Tax Reform Act of 1984".
Subsec. (b)(9). Pub. L. 99-514, Sec. 1225(a), added par. (9).
1984 - Subsec. (b)(5). Pub. L. 98-369, Sec. 58(b), designated
existing provisions as subpar. (A), substituted "Except as provided
in subparagraph (B), there shall be allowed as a deduction an
amount equal to the net capital loss for the taxable year
(determined without regard to paragraph (7)(A)" for "There shall be
allowed as deductions losses from sales or exchanges of capital
assets during the taxable year which are disallowed as deductions
under section 1211(a) in subpar. (A) as so redesignated, and added
subpars. (B) and (C).
Subsec. (b)(6). Pub. L. 98-369, Sec. 58(b), divided existing par.
(6) into subpars. (A) and (B) and substituted references to the
application of paragraph (7) for references to capital loss
carryback and carryover provided in section 1212.
Subsec. (b)(7). Pub. L. 98-369, Sec. 58(b), substituted "Capital
loss carryovers" for "Capital loss" in heading, redesignated
existing provisions as subpar. (B), and added subpar. (A).
Subsec. (b)(8). Pub. L. 98-369, Sec. 58(b), added par. (8).
Subsec. (d). Pub. L. 98-369, Sec. 125(a), added subsec. (d).
1981 - Subsec. (c)(2). Pub. L. 97-34, Sec. 232(a), designated
existing provisions as subpar. (A), substituted "$250,000" for
"$150,000", and added subpar. (B).
Subsec. (c)(3). Pub. L. 97-34, Sec. 232(b)(1), substituted
"$250,000" for "$150,000".
1976 - Subsec. (b)(1). Pub. L. 94-455, Secs. 1033(b)(3),
1901(a)(74), struck out "(other than the excess profits tax imposed
by subchapter E of chapter 2 of the Internal Revenue Code of 1939
for taxable years beginning after December 31, 1940)" after "income
and excess profits taxes", and substituted "section 902(a) or
960(a)(1)" for "section 902(a)(1) or 960(a)(1)(C)" after "domestic
corporation under".
Subsec. (b)(6). Pub. L. 94-455, Sec. 1901(b)(33)(D), substituted
"Net" for "Long-term" after "(6)".
Subsec. (b)(8). Pub. L. 94-455, Sec. 1901(b)(20)(A), struck out
par. (8) relating to allowance of deduction by bank affiliates.
Subsec. (b)(9), (10). Pub. L. 94-455, Sec. 1901(b)(32)(C), struck
out par. (9) relating to allowance of deduction for distributions
of divested stock, and struck out par. (10) relating to special
adjustment on disposition of antitrust stock received as a
dividend.
1975 - Subsec. (c)(2), (3). Pub. L. 94-12 substituted "$150,000"
for "$100,000".
1969 - Subsec. (b)(6). Pub. L. 91-172, Sec. 512(f)(5),
substituted "capital loss carryback or carryover" for "capital loss
carryover" and "capital loss carryback and carryover" for "capital
loss carryover" in subpar. (B).
Subsec. (b)(7). Pub. L. 91-172, Sec. 512(f)(6), substituted
"Capital loss" for "Capital loss carryover" in heading and "capital
loss carryback or carryover" for "capital loss carryover" in text.
Subsec. (c)(5). Pub. L. 91-172, Sec. 401(b)(2)(C), substituted
"section 1551, and for limitation on such credit in the case of
certain controlled corporations, see sections 1561 and 1564" for
"section 1551".
1964 - Subsec. (b)(1). Pub. L. 88-272 substituted "section
275(a)(4)" for "section 164(b)(6)".
1962 - Subsec. (b)(1). Pub. L. 87-834 substituted "accrued during
the taxable year or deemed to be paid by a domestic corporation
under section 902(a)(1) or 960(a)(1)(C) for the taxable year" for
"accrued during the taxable year".
Subsec. (b)(9), (10). Pub. L. 87-403 added pars. (9) and (10).
1958 - Subsec. (b)(2). Pub. L. 85-866, Sec. 31(a), struck out
"the limitation in" after "without regard to".
Subsec. (b)(6)(B). Pub. L. 85-866, Sec. 31(a), substituted "in
taxable income the excess of the net long-term capital gain for the
taxable year over the net short-term capital loss for such year
(determined without regard to the capital loss carryover provided
in section 1212)" for "such excess in taxable income".
Subsec. (c)(2), (3). Pub. L. 85-866, Sec. 205(a), substituted
"$100,000" for "$60,000".
EFFECTIVE DATE OF 1986 AMENDMENT
Section 1225(c) of Pub. L. 99-514, as amended by Pub. L. 100-647,
title I, Sec. 1012(k), Nov. 10, 1988, 102 Stat. 3513, provided
that: "The amendments made by this section [amending this section
and section 545 of this title] shall apply to gains and losses
realized on or after January 1, 1986."
EFFECTIVE DATE OF 1984 AMENDMENT
Amendment by section 58(b) of Pub. L. 98-369 applicable to
taxable years beginning after July 18, 1984, see section 58(c) of
Pub. L. 98-369, set out as a note under section 532 of this title.
Section 125(b) of Pub. L. 98-369, as amended by Pub. L. 99-514,
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
"(1) In general. - Except as provided in paragraph (2), the
amendment made by subsection (a) [amending this section] shall
apply to distributions and interest payments received by a United
States-owned foreign corporation (within the meaning of section
535(d) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954])
on or after May 23, 1983, in taxable years ending on or after such
date.
"(2) Corporations in existence on may 23, 1983. - In the case of
a United States-owned foreign corporation (as so defined) in
existence on May 23, 1983, the amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 1984."
EFFECTIVE DATE OF 1981 AMENDMENT
Section 232(c) of Pub. L. 97-34 provided that: "The amendments
made by this section [amending this section and sections 243, 1551,
and 1561 of this title] shall apply to taxable years beginning
after December 31, 1981."
EFFECTIVE DATE OF 1976 AMENDMENT
For effective date of amendment by section 1033(b)(3) of Pub. L.
94-455, see section 1033(c) of Pub. L. 94-455, set out as a note
under section 902 of this title.
Amendment by section 1901(a)(74), (b)(20)(A), (32)(C), (33)(D) of
Pub. L. 94-455 applicable with respect to taxable years beginning
after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out
as a note under section 2 of this title.
EFFECTIVE DATE OF 1975 AMENDMENT
Section 305(c) of Pub. L. 94-12 provided that: "The amendments
made by section 304 [amending this section and sections 243, 1551,
and 1561 of this title] apply to taxable years beginning after
December 31, 1974."
EFFECTIVE DATE OF 1969 AMENDMENT
Amendment by section 401(b)(2)(C) of Pub. L. 91-172 applicable
with respect to taxable years beginning after Dec. 31, 1969, see
section 401(h)(2) of Pub. L. 91-172, set out as a note under
section 1561 of this title.
Amendment by section 512(f)(5), (6) of Pub. L. 91-172 applicable
with respect to net capital losses sustained in taxable years
beginning after Dec. 31, 1969, see section 512(g) of Pub. L.
91-172, set out as a note under section 1212 of this title.
EFFECTIVE DATE OF 1964 AMENDMENT
Amendment by Pub. L. 88-272 applicable to taxable years beginning
after Dec. 31, 1963, see section 207(c) of Pub. L. 88-272, set out
as a note under section 164 of this title.
EFFECTIVE DATE OF 1962 AMENDMENTS
Amendment by Pub. L. 87-834 applicable in respect of any
distribution received by a domestic corporation after Dec. 31,
1964, and in respect of any distribution received by a domestic
corporation before Jan. 1, 1965, in a taxable year of such
corporation beginning after Dec. 31, 1962, but only to the extent
that such distribution is made out of the accumulated profits of a
foreign corporation for a taxable year (of such foreign
corporation) beginning after Dec. 31, 1962, see section 9(e) of
Pub. L. 87-834, set out as a note under section 902 of this title.
Amendment by Pub. L. 87-403 applicable only with respect to
distributions made after Feb. 2, 1962, see section 3(g) of Pub. L.
87-403, set out as a note under section 312 of this title.
EFFECTIVE DATE OF 1958 AMENDMENT
Amendment by section 31 of Pub. L. 85-866 applicable to taxable
years beginning after Dec. 31, 1953, and ending after Aug. 16,
1954, see section 1(c)(1) of Pub. L. 85-866, set out as a note
under section 165 of this title.
Section 205(b) of Pub. L. 85-866 provided that: "The amendments
made by subsection (a) [amending this section and section 1551 of
this title] shall apply with respect to taxable years beginning
after December 31, 1957."
SAVINGS PROVISION
For provisions that nothing in amendment by Pub. L. 101-508 be
construed to affect treatment of certain transactions occurring,
property acquired, or items of income, loss, deduction, or credit
taken into account prior to Nov. 5, 1990, for purposes of
determining liability for tax for periods ending after Nov. 5,
1990, see section 11821(b) of Pub. L. 101-508, set out as a note
under section 29 of this title.
PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989
For provisions directing that if any amendments made by subtitle
A or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or
title XVIII [Secs. 1800-1899A] of Pub. L. 99-514 require an
amendment to any plan, such plan amendment shall not be required to
be made before the first plan year beginning on or after Jan. 1,
1989, see section 1140 of Pub. L. 99-514, as amended, set out as a
note under section 401 of this title.
-SECREF-
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 531, 631, 1551, 1561 of
this title.
-End-
-CITE-
26 USC Sec. 536 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter G - Corporations Used to Avoid Income Tax on Shareholders
PART I - CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS
-HEAD-
Sec. 536. Income not placed on annual basis
-STATUTE-
Section 443(b) (relating to computation of tax on change of
annual accounting period) shall not apply in the computation of the
accumulated earnings tax imposed by section 531.
-SOURCE-
(Aug. 16, 1954, ch. 736, 68A Stat. 182.)
-SECREF-
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 443, 512 of this title.
-End-
-CITE-
26 USC Sec. 537 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter G - Corporations Used to Avoid Income Tax on Shareholders
PART I - CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS
-HEAD-
Sec. 537. Reasonable needs of the business
-STATUTE-
(a) General rule
For purposes of this part, the term "reasonable needs of the
business" includes -
(1) the reasonably anticipated needs of the business,
(2) the section 303 redemption needs of the business, and
(3) the excess business holdings redemption needs of the
business.
(b) Special rules
For purposes of subsection (a) -
(1) Section 303 redemption needs
The term "section 303 redemption needs" means, with respect to
the taxable year of the corporation in which a shareholder of the
corporation died or any taxable year thereafter, the amount
needed (or reasonably anticipated to be needed) to make a
redemption of stock included in the gross estate of the decedent
(but not in excess of the maximum amount of stock to which
section 303(a) may apply).
(2) Excess business holdings redemption needs
The term "excess business holdings redemption needs" means the
amount needed (or reasonably anticipated to be needed) to redeem
from a private foundation stock which -
(A) such foundation held on May 26, 1969 (or which was
received by such foundation pursuant to a will or irrevocable
trust to which section 4943(c)(5) applies), and
(B) constituted excess business holdings on May 26, 1969, or
would have constituted excess business holdings as of such date
if there were taken into account (i) stock received pursuant to
a will or trust described in subparagraph (A), and (ii) the
reduction in the total outstanding stock of the corporation
which would have resulted solely from the redemption of stock
held by the private foundation.
(3) Obligations incurred to make redemptions
In applying paragraphs (1) and (2), the discharge of any
obligation incurred to make a redemption described in such
paragraphs shall be treated as the making of such redemption.
(4) Product liability loss reserves
The accumulation of reasonable amounts for the payment of
reasonably anticipated product liability losses (as defined in
section 172(f)), as determined under regulations prescribed by
the Secretary, shall be treated as accumulated for the reasonably
anticipated needs of the business.
(5) No inference as to prior taxable years
The application of this part to any taxable year before the
first taxable year specified in paragraph (1) shall be made
without regard to the fact that distributions in redemption
coming within the terms of such paragraphs were subsequently
made.
-SOURCE-
(Aug. 16, 1954, ch. 736, 68A Stat. 182; Pub. L. 91-172, title IX,
Sec. 906(a), Dec. 30, 1969, 83 Stat. 714; Pub. L. 94-455, title
XIX, Sec. 1901(a)(75), Oct. 4, 1976, 90 Stat. 1777; Pub. L. 95-600,
title III, Sec. 371(c), Nov. 6, 1978, 92 Stat. 2859; Pub. L.
104-188, title I, Sec. 1704(t)(33), Aug. 20, 1996, 110 Stat. 1889.)
-MISC1-
AMENDMENTS
1996 - Subsec. (b)(4). Pub. L. 104-188 substituted "section
172(f)" for "section 172(i)".
1978 - Subsec. (b)(4), (5). Pub. L. 95-600 added par. (4) and
redesignated former par. (4) as (5).
1976 - Subsec. (b)(2). Pub. L. 94-455, Sec. 1901(a)(75)(A),
struck out "with respect to taxable years of the corporation ending
after May 26, 1969" after " 'redemption needs' means".
Subsec. (b)(4). Pub. L. 94-455, Sec. 1901(a)(75)(B), struck out
"or (2)" after "paragraph (1)".
1969 - Pub. L. 91-172 designated existing provisions as subsec.
(a)(1) and added subsecs. (a)(2), (3) and (b).
EFFECTIVE DATE OF 1978 AMENDMENT
Amendment by Pub. L. 95-600 applicable with respect to taxable
years beginning after Sept. 30, 1979, see section 371(d) of Pub. L.
95-600, set out as a note under section 172 of this title.
EFFECTIVE DATE OF 1976 AMENDMENT
Amendment by Pub. L. 94-455 applicable with respect to taxable
years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L.
94-455, set out as a note under section 2 of this title.
EFFECTIVE DATE OF 1969 AMENDMENT
Section 906(b) of Pub. L. 91-172, as amended by Pub. L. 99-514,
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that: "The
amendment made by subsection (a) [amending this section] shall
apply to the tax imposed under section 531 of the Internal Revenue
Code of 1986 [formerly I.R.C. 1954] with respect to taxable years
ending after May 26, 1969."
-End-
-CITE-
26 USC PART II - PERSONAL HOLDING COMPANIES 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter G - Corporations Used to Avoid Income Tax on Shareholders
PART II - PERSONAL HOLDING COMPANIES
-HEAD-
PART II - PERSONAL HOLDING COMPANIES
-MISC1-
Sec.
541. Imposition of personal holding company tax.
542. Definition of personal holding company.
543. Personal holding company income.
544. Rules for determining stock ownership.
545. Undistributed personal holding company income.
546. Income not placed on annual basis.
547. Deduction for deficiency dividends.
-SECREF-
PART REFERRED TO IN OTHER SECTIONS
This part is referred to in sections 12, 856 of this title.
-End-
-CITE-
26 USC Sec. 541 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter G - Corporations Used to Avoid Income Tax on Shareholders
PART II - PERSONAL HOLDING COMPANIES
-HEAD-
Sec. 541. Imposition of personal holding company tax
-STATUTE-
In addition to other taxes imposed by this chapter, there is
hereby imposed for each taxable year on the undistributed personal
holding company income (as defined in section 545) of every
personal holding company (as defined in section 542) a personal
holding company tax equal to 15 percent of the undistributed
personal holding company income.
-SOURCE-
(Aug. 16, 1954, ch. 736, 68A Stat. 182; Pub. L. 88-272, title II,
Sec. 225(a), Feb. 26, 1964, 78 Stat. 79; Pub. L. 97-34, title I,
Sec. 101(d)(2), Aug. 13, 1981, 95 Stat. 184; Pub. L. 99-514, title
I, Sec. 104(b)(8), Oct. 22, 1986, 100 Stat. 2105; Pub. L. 101-508,
title XI, Sec. 11802(f)(1), Nov. 5, 1990, 104 Stat. 1388-530; Pub.
L. 103-66, title XIII, Secs. 13201(b)(2), 13202(b), Aug. 10, 1993,
107 Stat. 459, 461; Pub. L. 107-16, title I, Sec. 101(c)(5), June
7, 2001, 115 Stat. 43; Pub. L. 108-27, title III, Sec. 302(e)(6),
May 28, 2003, 117 Stat. 764.)
-STATAMEND-
AMENDMENT OF SECTION
For termination of amendment by section 303 of Pub. L. 108-27,
see Effective and Termination Dates of 2003 Amendment note below.
For termination of amendment by section 901 of Pub. L. 107-16,
see Effective and Termination Dates of 2001 Amendment note below.
-MISC1-
AMENDMENTS
2003 - Pub. L. 108-27, Secs. 302(e)(6), 303, temporarily
substituted "equal to 15 percent of the undistributed personal
holding company income." for "equal to the product of the highest
rate of tax under section 1(c) and the undistributed personal
holding company income." See Effective and Termination Dates of
2003 Amendment note below.
2001 - Pub. L. 107-16, Secs. 101(c)(5), 901, temporarily
substituted "equal to the product of the highest rate of tax under
section 1(c) and the undistributed personal holding company
income." for "equal to 39.6 percent of the undistributed personal
holding company income." See Effective and Termination Dates of
2001 Amendment note below.
1993 - Pub. L. 103-66, Sec. 13202(b), substituted "39.6 percent"
for "36 percent".
Pub. L. 103-66, Sec. 13201(b)(2), substituted "36 percent" for
"28 percent".
1990 - Pub. L. 101-508 struck out "(38.5 percent in the case of
taxable years beginning in 1987)" after "28 percent".
1986 - Pub. L. 99-514 substituted "28 percent (38.5 percent in
the case of taxable years beginning in 1987)" for "50 percent".
1981 - Pub. L. 97-34 substituted "50 percent" for "70 percent".
1964 - Pub. L. 88-272 reduced the tax from 75 percent of
undistributed income not in excess of $2,000, and 85 percent when
in excess of $2,000, to 70 percent.
EFFECTIVE AND TERMINATION DATES OF 2003 AMENDMENT
Amendment by Pub. L. 108-27 applicable, except as otherwise
provided, to taxable years beginning after Dec. 31, 2002, see
section 302(f) of Pub. L. 108-27, set out as a note under section 1
of this title.
Amendment by Pub. L. 108-27 inapplicable to taxable years
beginning after Dec. 31, 2008, and the Internal Revenue Code of
1986 to be applied and administered to such years as if such
amendment had never been enacted, see section 303 of Pub. L.
108-27, set out as a note under section 1 of this title.
EFFECTIVE AND TERMINATION DATES OF 2001 AMENDMENT
Amendment by Pub. L. 107-16 applicable to payments made in
taxable years beginning after Dec. 31, 2000, see section 431(d) of
Pub. L. 107-16, set out as a note under section 62 of this title.
Amendment by Pub. L. 107-16 inapplicable to taxable, plan, or
limitation years beginning after Dec. 31, 2010, and the Internal
Revenue Code of 1986 to be applied and administered to such years
as if such amendment had never been enacted, see section 901 of
Pub. L. 107-16, set out as a note under section 1 of this title.
EFFECTIVE DATE OF 1993 AMENDMENT
Amendment by Pub. L. 103-66 applicable to taxable years beginning
after Dec. 31, 1992, see sections 13201(c) and 13202(c) of Pub. L.
103-66, set out as notes under section 1 of this title.
EFFECTIVE DATE OF 1986 AMENDMENT
Amendment by Pub. L. 99-514 applicable to taxable years beginning
after Dec. 31, 1986, see section 151(a) of Pub. L. 99-514, set out
as a note under section 1 of this title.
EFFECTIVE DATE OF 1981 AMENDMENT
Amendment by Pub. L. 97-34 applicable to taxable years beginning
after Dec. 31, 1981, see section 101(f)(1) of Pub. L. 97-34, set
out as a note under section 1 of this title.
EFFECTIVE DATE OF 1964 AMENDMENT
Amendment by Pub. L. 88-272 applicable to taxable years beginning
after Dec. 31, 1963, see section 225(l) of Pub. L. 88-272 set out
as a note under section 316 of this title.
SAVINGS PROVISION
For provisions that nothing in amendment by Pub. L. 101-508 be
construed to affect treatment of certain transactions occurring,
property acquired, or items of income, loss, deduction, or credit
taken into account prior to Nov. 5, 1990, for purposes of
determining liability for tax for periods ending after Nov. 5,
1990, see section 11821(b) of Pub. L. 101-508, set out as a note
under section 29 of this title.
-SECREF-
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 26, 30A, 111, 535, 542,
545, 546, 547, 556, 563, 882, 936, 992, 6683 of this title.
-End-
-CITE-
26 USC Sec. 542 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter G - Corporations Used to Avoid Income Tax on Shareholders
PART II - PERSONAL HOLDING COMPANIES
-HEAD-
Sec. 542. Definition of personal holding company
-STATUTE-
(a) General rule
For purposes of this subtitle, the term "personal holding
company" means any corporation (other than a corporation described
in subsection (c)) if -
(1) Adjusted ordinary gross income requirement
At least 60 percent of its adjusted ordinary gross income (as
defined in section 543(b)(2)) for the taxable year is personal
holding company income (as defined in section 543(a)), and
(2) Stock ownership requirement
At any time during the last half of the taxable year more than
50 percent in value of its outstanding stock is owned, directly
or indirectly, by or for not more than 5 individuals. For
purposes of this paragraph, an organization described in section
401(a), 501(c)(17), or 509(a) or a portion of a trust permanently
set aside or to be used exclusively for the purposes described in
section 642(c) or a corresponding provision of a prior income tax
law shall be considered an individual.
(b) Corporations filing consolidated returns
(1) General rule
In the case of an affiliated group of corporations filing or
required to file a consolidated return under section 1501 for any
taxable year, the adjusted ordinary gross income requirement of
subsection (a)(1) of this section shall, except as provided in
paragraphs (2) and (3), be applied for such year with respect to
the consolidated adjusted ordinary gross income and the
consolidated personal holding company income of the affiliated
group. No member of such an affiliated group shall be considered
to meet such adjusted ordinary gross income requirement unless
the affiliated group meets such requirement.
(2) Ineligible affiliated group
Paragraph (1) shall not apply to an affiliated group of
corporations if -
(A) any member of the affiliated group of corporations
(including the common parent corporation) derived 10 percent or
more of its adjusted ordinary gross income for the taxable year
from sources outside the affiliated group, and
(B) 80 percent or more of the amount described in
subparagraph (A) consists of personal holding company income
(as defined in section 543).
For purposes of this paragraph, section 543 shall be applied as
if the amount described in subparagraph (A) were the adjusted
ordinary gross income of the corporation.
(3) Excluded corporations
Paragraph (1) shall not apply to an affiliated group of
corporations if any member of the affiliated group (including the
common parent corporation) is a corporation excluded from the
definition of personal holding company under subsection (c).
(4) Certain dividend income received by a common parent
In applying paragraph (2) (A) and (B), personal holding company
income and adjusted ordinary gross income shall not include
dividends received by a common parent corporation from another
corporation if -
(A) the common parent corporation owns, directly or
indirectly, more than 50 percent of the outstanding voting
stock of such other corporation, and
(B) such other corporation is not a personal holding company
for the taxable year in which the dividends are paid.
(5) Certain dividend income received from a nonincludible life
insurance company
In the case of an affiliated group of corporations filing or
required to file a consolidated return under section 1501 for any
taxable year, there shall be excluded from consolidated personal
holding company income and consolidated adjusted ordinary gross
income for purposes of this part dividends received by a member
of the affiliated group from a life insurance company taxable
under section 801 that is not a member of the affiliated group
solely by reason of the application of paragraph (2) of
subsection (b) of section 1504.
(c) Exceptions
The term "personal holding company" as defined in subsection (a)
does not include -
(1) a corporation exempt from tax under subchapter F (sec. 501
and following);
(2) a bank as defined in section 581, or a domestic building
and loan association within the meaning of section 7701(a)(19);
(3) a life insurance company;
(4) a surety company;
(5) a foreign personal holding company as defined in section
552;
(6) a lending or finance company if -
(A) 60 percent or more of its ordinary gross income (as
defined in section 543(b)(1)) is derived directly from the
active and regular conduct of a lending or finance business;
(B) the personal holding company income for the taxable year
(computed without regard to income described in subsection
(d)(3) and income derived directly from the active and regular
conduct of a lending or finance business, and computed by
including as personal holding company income the entire amount
of the gross income from rents, royalties, produced film rents,
and compensation for use of corporate property by shareholders)
is not more than 20 percent of the ordinary gross income;
(C) the sum of the deductions which are directly allocable to
the active and regular conduct of its lending or finance
business equals or exceeds the sum of -
(i) 15 percent of so much of the ordinary gross income
derived therefrom as does not exceed $500,000, plus
(ii) 5 percent of so much of the ordinary gross income
derived therefrom as exceeds $500,000; and
(D) the loans to a person who is a shareholder in such
company during the taxable year by or for whom 10 percent or
more in value of its outstanding stock is owned directly or
indirectly (including, in the case of an individual, stock
owned by members of his family as defined in section
544(a)(2)), outstanding at any time during such year do not
exceed $5,000 in principal amount;
(7) a foreign corporation (other than a corporation which has
income to which section 543(a)(7) applies for the taxable year),
if all of its stock outstanding during the last half of the
taxable year is owned by nonresident alien individuals, whether
directly or indirectly through foreign estates, foreign trusts,
foreign partnerships, or other foreign corporations;
(8) A (!1) small business investment company which is licensed
by the Small Business Administration and operating under the
Small Business Investment Act of 1958 (15 U.S.C. 661 and
following) and which is actively engaged in the business of
providing funds to small business concerns under that Act. This
paragraph shall not apply if any shareholder of the small
business investment company owns at any time during the taxable
year directly or indirectly (including, in the case of an
individual, ownership by the members of his family as defined in
section 544(a)(2)) a 5 per centum or more proprietary interest in
a small business concern to which funds are provided by the
investment company or 5 per centum or more in value of the
outstanding stock of such concern;
(9) a corporation which is subject to the jurisdiction of the
court in a title 11 or similar case (within the meaning of
section 368(a)(3)(A)) unless a major purpose of instituting or
continuing such case is the avoidance of the tax imposed by
section 541; and
(10) a passive foreign investment company (as defined in
section 1297).
(d) Special rules for applying subsection (c)(6)
(1) Lending or finance business defined
(A) In general
Except as provided in subparagraph (B), for purposes of
subsection (c)(6), the term "lending or finance business" means
a business of -
(i) making loans,
(ii) purchasing or discounting accounts receivable, notes,
or installment obligations,
(iii) rendering services or making facilities available in
connection with activities described in clauses (i) and (ii)
carried on by the corporation rendering services or making
facilities available, or
(iv) rendering services or making facilities available to
another corporation which is engaged in the lending or
finance business (within the meaning of this paragraph), if
such services or facilities are related to the lending or
finance business (within such meaning) of such other
corporation and such other corporation and the corporation
rendering services or making facilities available are members
of the same affiliated group (as defined in section 1504).
(B) Exceptions
For purposes of subparagraph (A), the term "lending or
finance business" does not include the business of -
(i) making loans, or purchasing or discounting accounts
receivable, notes, or installment obligations, if (at the
time of the loan, purchase, or discount) the remaining
maturity exceeds 144 months; unless -
(I) the loans, notes, or installment obligations are
evidenced or secured by contracts of conditional sale,
chattel mortgages, or chattel lease agreements arising out
of the sale of goods or services in the course of the
borrower's or transferor's trade or business, or
(II) the loans, notes, or installment obligations are
made or acquired by the taxpayer and meet the requirements
of subparagraph (C), or
(ii) making loans evidenced by, or purchasing, certificates
of indebtedness issued in a series, under a trust indenture,
and in registered form or with interest coupons attached.
For purposes of clause (i), the remaining maturity shall be
treated as including any period for which there may be a
renewal or extension under the terms of an option exercisable
by the borrower.
(C) Indefinite maturity credit transactions
For purposes of subparagraph (B)(i), a loan, note, or
installment obligation meets the requirements of this
subparagraph if it is made under an agreement -
(i) under which the creditor agrees to make loans or
advances (not in excess of an agreed upon maximum amount)
from time to time to or for the account of the debtor upon
request, and
(ii) under which the debtor may repay the loan or advance
in full or in installments.
(2) Business deductions
For purposes of subsection (c)(6)(C), the deductions which may
be taken into account shall include only -
(A) deductions which are allowable only by reason of section
162 or section 404, except there shall not be included any such
deduction in respect of compensation for personal services
rendered by shareholders (including members of the
shareholder's family as described in section 544(a)(2)), and
(B) deductions allowable under section 167, and deductions
allowable under section 164 for real property taxes, but in
either case only to the extent that the property with respect
to which such deductions are allowable is used directly in the
active and regular conduct of the lending or finance business.
(3) Income received from certain affiliated corporations
For purposes of subsection (c)(6)(B), in the case of a lending
or finance company which meets the requirements of subsection
(c)(6)(A), there shall not be treated as personal holding company
income the lawful income received from a corporation which meets
the requirements of subsection (c)(6) and which is a member of
the same affiliated group (as defined in section 1504) of which
such company is a member.
-SOURCE-
(Aug. 16, 1954, ch. 736, 68A Stat. 182; ch. 871, Sec. 3, Aug. 12,
1955, 69 Stat. 718; Pub. L. 86-376, Sec. 3(a), Sept. 23, 1959, 73
Stat. 700; Pub. L. 87-768, Sec. 1, Oct. 9, 1962, 76 Stat. 766; Pub.
L. 88-272, title II, Sec. 225(b), (c), (k)(1), Feb. 26, 1964, 78
Stat. 79, 93; Pub. L. 89-809, title I, Sec. 104(h)(1), Nov. 13,
1966, 80 Stat. 1559; Pub. L. 91-172, title I, Sec. 101(j)(16), Dec.
30, 1969, 83 Stat. 528; Pub. L. 93-480, Sec. 3(a), Oct. 26, 1974,
88 Stat. 1454; Pub. L. 94-455, title XIX, Sec. 1901(a)(76), Oct. 4,
1976, 90 Stat. 1777; Pub. L. 96-589, Sec. 5(a), Dec. 24, 1980, 94
Stat. 3405; Pub. L. 97-248, title II, Sec. 293(a)-(c), Sept. 3,
1982, 96 Stat. 575; Pub. L. 98-369, div. A, title II, Sec.
211(b)(7), July 18, 1984, 98 Stat. 755; Pub. L. 99-514, title XII,
Sec. 1235(f)(2), Oct. 22, 1986, 100 Stat. 2575; Pub. L. 105-34,
title XI, Sec. 1122(d)(1), Aug. 5, 1997, 111 Stat. 977.)
-REFTEXT-
REFERENCES IN TEXT
The Small Business Investment Act of 1958, referred to in subsec.
(c)(8), is Pub. L. 85-699, Aug. 21, 1958, 72 Stat. 689, as amended,
which is classified principally to chapter 14B (Sec. 661 et seq.)
of Title 15, Commerce and Trade. For complete classification of
this Act to this Code, see Short Title note set out under section
661 of Title 15 and Tables.
-MISC1-
AMENDMENTS
1997 - Subsec. (c)(10). Pub. L. 105-34 substituted "section 1297"
for "section 1296".
1986 - Subsec. (c)(10). Pub. L. 99-514 added par. (10).
1984 - Subsec. (b)(5). Pub. L. 98-369 substituted "section 801"
for "section 802".
1982 - Subsec. (c)(6)(C)(ii). Pub. L. 97-248, Sec. 293(a), struck
out "but not $1,000,000" after "exceeds $500,000".
Subsec. (d)(1)(B)(i). Pub. L. 97-248, Sec. 293(b), substituted
"144 months" for "60 months" after "remaining maturity exceeds",
designated existing provisions from "the loans" through
"transferor's trade or business, or" as subcl. (I), and added
subcl. (II).
Subsec. (d)(1)(C). Pub. L. 97-248, Sec. 293(c), added subpar.
(C).
1980 - Subsec. (c)(9). Pub. L. 96-589, added par. (9).
1976 - Subsec. (a)(2). Pub. L. 94-455, Sec. 1901(a)(76)(A),
struck out last sentence providing that the preceding sentence
shall not apply in the case of an organization or trust organized
or created before July 1, 1950, if at all times on or after July 1,
1950, and before the close of the taxable year such organization or
trust has owned all of the common stock and at least 80 percent of
the total number of shares of all other classes of stock of the
corporation.
Subsec. (b)(2). Pub. L. 94-455, Sec. 1901(a)(76)(B), struck out
"other than an affiliated group of railroad corporations the common
parent of which would be eligible to file a consolidated return
under section 141 of the Internal Revenue Act of 1942" after "group
of corporations".
Subsec. (c)(2). Pub. L. 94-455, Sec. 1901(a)(76)(C), struck out
"without regard to subparagraphs (D) and (E) thereof" after
"meaning of section 7701(a)(19)".
Subsec. (c)(8). Pub. L. 94-455, Sec. 1901(a)(76)(D), inserted
"(15 U.S.C. 661 and following)" after "Small Business Investment
Act of 1958".
1974 - Subsec. (b)(5). Pub. L. 93-480 added par. (5).
1969 - Subsec. (a)(2). Pub. L. 91-172 substituted "section
401(a), 501(c)(17), or 509(a)" for "section 503(b)" in the list of
sections that contain the description of organizations that may be
considered as individuals for the purpose of establishing stock
ownership, and struck out provisions which would have kept an
organization or trust created before July 1, 1950, from being so
designated if it had been denied exemption under section 504 or an
unlimited charitable deduction under section 681(c) of this title.
1966 - Subsec. (c)(7). Pub. L. 89-809 substituted requirement
that the foreign corporation be other than a corporation which has
income to which section 543(a)(7) applies for the taxable year for
requirement that the foreign corporation's gross income from
sources within the United States for the period specified in
section 861(a)(2)(B) be less than 50 percent of its total gross
income from all sources, and expanded the devices included in
methods of indirect ownership to encompass foreign estates, foreign
trusts, and foreign partnerships.
1964 - Subsec. (a)(1). Pub. L. 88-272, Sec. 225(b), substituted
"60 percent of its adjusted ordinary gross income (as defined in
section 543(b)(2)) for the taxable year is personal holding company
income (as defined in section 543(a))" for "80 percent of its gross
income for the taxable year is personal holding company income as
defined in section 543".
Subsec. (b). Pub. L. 88-272, Sec. 225(k)(1), substituted
"adjusted ordinary gross income" for "gross income", wherever
appearing.
Subsec. (c)(2), (6) to (11). Pub. L. 88-272, Sec. 225(c)(1), (2),
inserted among the exceptions, domestic building and loan
associations within section 7701(a)(19) without regard to subpars.
(D) and (E) thereof, added par. (6), redesignated former pars. (10)
and (11) as (7) and (8), respectively, and omitted former pars. (6)
to (9) which related to licensed personal finance companies,
lending companies, loan or investment corporations, and finance
companies, respectively.
Subsec. (d). Pub. L. 88-272, Sec. 225(c)(3), added subsec. (d).
1962 - Subsec. (c)(7). Pub. L. 87-768 substituted "authorized to
engage in and actively and regularly engaged in the small loan
business (consumer finance business)" for "authorized to engage in
the small loan business", inserted provisions excepting from the
definition of "personal holding company" a lending company that
received 80 percent or more of its gross income from lawful income
from domestic subsidiary corporations (of which stock possessing at
least 80 percent of the voting power of all classes of stock and of
which at least 80 percent of each class of the nonvoting stock is
owned directly by such lending company), which are themselves
excepted under pars. (6), (7), (8), or (9) of this subsection,
increased the maximum amount of the loan where no limit is
prescribed from $500 to $1,500, and eliminated provisions which
required loans to mature in not more than 36 months, and which
limited interest, discount and other charges to not more than an
amount equal to simple interest at 3 percent per month payable in
advance and computed only on unpaid balances.
1959 - Subsec. (c)(11). Pub. L. 86-376 added par. (11).
1955 - Subsec. (a)(2). Act Aug. 12, 1955, Sec. 3, inserted
sentence at end excepting from consideration as "individuals"
certain charitable foundations created before July 1, 1950.
EFFECTIVE DATE OF 1997 AMENDMENT
Amendment by Pub. L. 105-34 applicable to taxable years of United
States persons beginning after Dec. 31, 1997, and to taxable years
of foreign corporations ending with or within such taxable years of
United States persons, see section 1124 of Pub. L. 105-34, set out
as a note under section 532 of this title.
EFFECTIVE DATE OF 1986 AMENDMENT
Amendment by Pub. L. 99-514 applicable to taxable years of
foreign corporations beginning after Dec. 31, 1986, see section
1235(h) of Pub. L. 99-514, set out as an Effective Date note under
section 1291 of this title.
EFFECTIVE DATE OF 1984 AMENDMENT
Amendment by Pub. L. 98-369 applicable to taxable years beginning
after Dec. 31, 1983, see section 215 of Pub. L. 98-369, set out as
an Effective Date note under section 801 of this title.
EFFECTIVE DATE OF 1982 AMENDMENT
Section 293(d) of Pub. L. 97-248 provided that:
"(1) Subsection (a). - The amendment made by subsection (a)
[amending this section] shall apply to taxable years beginning
after December 31, 1981.
"(2) Subsections (b) and (c). - The amendments made by
subsections (b) and (c) [amending this section] shall apply to
taxable years beginning after December 31, 1980."
EFFECTIVE DATE OF 1980 AMENDMENT
Amendment by Pub. L. 96-589 applicable to bankruptcy cases or
similar judicial proceedings commenced after Dec. 31, 1980, with
exception permitting the debtor to make the amendment applicable to
such cases or judicial proceedings commenced after Sept. 30, 1979,
see section 7(d)(1), (f) of Pub. L. 96-589, set out as a note under
section 108 of this title.
EFFECTIVE DATE OF 1976 AMENDMENT
Amendment by Pub. L. 94-455 applicable with respect to taxable
years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L.
94-455, set out as a note under section 2 of this title.
EFFECTIVE DATE OF 1974 AMENDMENT
Section 3(b) of Pub. L. 93-480 provided that: "The amendment made
by this section [amending this section] shall apply to taxable
years beginning after December 31, 1973."
EFFECTIVE DATE OF 1969 AMENDMENT
Amendment by Pub. L. 91-172 applicable to taxable years beginning
after Dec. 31, 1969, see section 101(k)(2)(B) of Pub. L. 91-172,
set out as a note under section 4940 of this title.
EFFECTIVE DATE OF 1966 AMENDMENT
Amendment by Pub. L. 89-809 with respect to taxable years
beginning after Dec. 31, 1966, see section 104(n) of Pub. L.
89-809, set out as a note under section 11 of this title.
EFFECTIVE DATE OF 1964 AMENDMENT
Amendment by section 225(b), (c)(2), (3), (k)(1) of Pub. L.
88-272 applicable to taxable years beginning after Dec. 31, 1963,
and amendment by section 225(c)(1) of Pub. L. 88-272 applicable to
taxable years beginning after Oct. 16, 1962, see section 225(l) of
Pub. L. 88-272, set out as a note under section 316 of this title.
EFFECTIVE DATE OF 1962 AMENDMENT
Section 2 of Pub. L. 87-768 provided that: "The amendment made by
the first section of this Act [amending this section] shall apply
with respect to taxable years beginning after December 31, 1961."
EFFECTIVE DATE OF 1959 AMENDMENT
Section 3(b) of Pub. L. 86-376 provided that: "The amendment made
by this section [amending this section] shall apply to taxable
years beginning after December 31, 1958."
EFFECTIVE DATE OF 1955 AMENDMENT
Section 4 of act Aug. 12, 1955, provided that: "The amendment
made by section 3 of this Act [amending this section] shall apply
only with respect to taxable years beginning after December 31,
1954."
STOCK OWNERSHIP REQUIREMENT; ORGANIZATION OR TRUST ORGANIZED OR
CREATED BEFORE JULY 1, 1950
Pub. L. 95-600, title VII, Sec. 701(o), Nov. 6, 1978, 92 Stat.
2907, as amended by Pub. L. 99-514, Sec. 2, Oct. 22, 1986, 100
Stat. 2095, provided that:
"(1) In general. - The last sentence of section 542(a)(2) of the
Internal Revenue Code of 1986 [formerly I.R.C. 1954] (relating to
stock ownership requirement) shall not apply in the case of an
organization or trust organized or created before July 1, 1950, if
at all times on or after July 1, 1950, and before the close of the
taxable year such organization or trust has owned all of the common
stock and at least 80 percent of the total number of shares of all
other classes of stock of the corporation.
"(2) Effective date. - The provisions of paragraph (1) shall
apply with respect to taxable years beginning after December 31,
1976."
-SECREF-
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 41, 56, 170, 316, 447,
465, 532, 541, 544, 562, 852, 856, 992, 1362, 1504, 2057, 6662 of
this title; title 43 section 1620.
-FOOTNOTE-
(!1) So in original. Probably should not be capitalized.
-End-
-CITE-
26 USC Sec. 543 01/19/04
-EXPCITE-
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter G - Corporations Used to Avoid Income Tax on Shareholders
PART II - PERSONAL HOLDING COMPANIES
-HEAD-
Sec. 543. Personal holding company income
-STATUTE-
(a) General rule
For purposes of this subtitle, the term "personal holding company
income" means the portion of the adjusted ordinary gross income
which consists of:
(1) Dividends, etc.
Dividends, interest, royalties (other than mineral, oil, or gas
royalties or copyright royalties), and annuities. This paragraph
shall not apply to -
(A) interest constituting rent (as defined in subsection
(b)(3)),
(B) interest on amounts set aside in a reserve fund under
section 511 or 607 of the Merchant Marine Act, 1936 (46 U.S.C.
App. 1161 or 1177),
(C) active business computer software royalties (within the
meaning of subsection (d)), and
(D) interest received by a broker or dealer (within the
meaning of section 3(a)(4) or (5) of the Securities and
Exchange Act of 1934) in connection with -
(i) any securities or money market instruments held as
property described in section 1221(a)(1),
(ii) margin accounts, or
(iii) any financing for a customer secured by securities or
money market instruments.
(2) Rents
The adjusted income from rents; except that such adjusted
income shall not be included if -
(A) such adjusted income constitutes 50 percent or more of
the adjusted ordinary gross income, and
(B) the sum of -
(i) the dividends paid during the taxable year (determined
under section 562),
(ii) the dividends considered as paid on the last day of
the taxable year under section 563(d) (as limited by the
second sentence of section 563(b)), and
(iii) the consent dividends for the taxable year
(determined under section 565),
equals or exceeds the amount, if any, by which the personal
holding company income for the taxable year (computed without
regard to this paragraph and paragraph (6), and computed by
including as personal holding company income copyright royalties
and the adjusted income from mineral, oil, and gas royalties)
exceeds 10 percent of the ordinary gross income.
(3) Mineral, oil, and gas royalties
The adjusted income from mineral, oil, and gas royalties;
except that such adjusted income shall not be included if -
(A) such adjusted income constitutes 50 percent or more of
the adjusted ordinary gross income,
(B) the personal holding company income for the taxable year
(computed without regard to this paragraph, and computed by
including as personal holding company income copyright
royalties and the adjusted income from rents) is not more than
10 percent of the ordinary gross income, and
(C) the sum of the deductions which are allowable under
section 162 (relating to trade or business expenses) other than
-
(i) deductions for compensation for personal services
rendered by the shareholders, and
(ii) deductions which are specifically allowable under
sections other than section 162,
equals or exceeds 15 percent of the adjusted ordinary gross
income.
(4) Copyright royalties
Copyright royalties; except that copyright royalties shall not
be included if -
(A) such royalties (exclusive of royalties received for the
use of, or right to use, copyrights or interests in copyrights
on works created in whole, or in part, by any shareholder)
constitute 50 percent or more of the ordinary gross income,
(B) the personal holding company income for the taxable year
computed -
(i) without regard to copyright royalties, other than
royalties received for the use of, or right to use,
copyrights or interests in copyrights in works created in
whole, or in part, by any shareholder owning more than 10
percent of the total outstanding capital stock of the
corporation,
(ii) without regard to dividends from any corporation in
which the taxpayer owns at least 50 percent of all classes of
stock entitled to vote and at least 50 percent of the total
value of all classes of stock and which corporation meets the
requirements of this subparagraph and subparagraphs (A) and
(C), and
(iii) by including as personal holding company income the
adjusted income from rents and the adjusted income from
mineral, oil, and gas royalties,
is not more than 10 percent of the ordinary gross income, and
(C) the sum of the deductions which are properly allocable to
such royalties and which are allowable under section 162, other
than -
(i) deductions for compensation for personal services
rendered by the shareholders,
(ii) deductions for royalties paid or accrued, and
(iii) deductions which are specifically allowable under
sections other than section 162,
equals or exceeds 25 percent of the amount by which the
ordinary gross income exceeds the sum of the royalties paid or
accrued and the amounts allowable as deductions under section
167 (relating to depreciation) with respect to copyright
royalties.
For purposes of this subsection, the term "copyright royalties"
means compensation, however designated, for the use of, or the
right to use, copyrights in works protected by copyright issued
under title 17 of the United States Code and to which copyright
protection is also extended by the laws of any country other than
the United States of America by virtue of any international
treaty, convention, or agreement, or interests in any such
copyrighted works, and includes payments from any person for
performing rights in any such copyrighted work and payments
(other than produced film rents as defined in paragraph (5)(B))
received for the use of, or right to use, films. For purposes of
this paragraph, the term "shareholder" shall include any person
who owns stock within the meaning of section 544. This paragraph
shall not apply to active business computer software royalties.
(5) Produced film rents
(A) Produced film rents; except that such rents shall not be
included if such rents constitute 50 percent or more of the
ordinary gross income.
(B) For purposes of this section, the term "produced film
rents" means payments received with respect to an interest in a
film for the use of, or right to use, such film, but only to
the extent that such interest was acquired before substantial
completion of production of such film. In the case of a
producer who actively participates in the production of the
film, such term includes an interest in the proceeds or profits
from the film, but only to the extent such interest is
attributable to such active participation.
(6) Use of corporate property by shareholder
(A) Amounts received as compensation (however designated and
from whomever received) for the use of, or the right to use,
tangible property of the corporation in any case where, at any
time during the taxable year, 25 percent or more in value of
the outstanding stock of the corporation is owned, directly or
indirectly, by or for an individual entitled to the use of the
property (whether such right is obtained directly from the
corporation or by means of a sublease or other arrangement).
(B) Subparagraph (A) shall apply only to a corporation which
has personal holding company income in excess of 10 percent of
its ordinary gross income.
(C) For purposes of the limitation in subparagraph (B),
personal holding company income shall be computed -
(i) without regard to subparagraph (A) or paragraph (2),
(ii) by excluding amounts received as compensation for the
use of (or right to use) intangible property (other than
mineral, oil, or gas royalties or copyright royalties) if a
substantial part of the tangible property used in connection
with such intangible property is owned by the corporation and
all such tangible and intangible property is used in the
active conduct of a trade or business by an individual or
individuals described in subparagraph (A), and
(iii) by including copyright royalties and adjusted income
from mineral, oil, and gas royalties.
(7) Personal service contracts
(A) Amounts received under a contract under which the
corporation is to furnish personal services; if some person
other than the corporation has the right to designate (by name
or by description) the individual who is to perform the
services, or if the individual who is to perform the services
is designated (by name or by description) in the contract; and
(B) amounts received from the sale or other disposition of
such a contract.
This paragraph shall apply with respect to amounts received for
services under a particular contract only if at some time during
the taxable year 25 percent or more in value of the outstanding
stock of the corporation is owned, directly or indirectly, by or
for the individual who has performed, is to perform, or may be
designated (by name or by description) as the one to perform,
such services.
(8) Estates and trusts
Amounts includible in computing the taxable income of the
corporation under part I of subchapter J (sec. 641 and following,
relating to estates, trusts, and beneficiaries).
(b) Definitions
For purposes of this part -
(1) Ordinary gross income
The term "ordinary gross income" means the gross income
determined by excluding -
(A) all gains from the sale or other disposition of capital
assets,
(B) all gains (other than those referred to in subparagraph
(A)) from the sale or other disposition of property described
in section 1231(b), and
(C) in the case of a foreign corporation all of the
outstanding stock of which during the last half of the taxable
year is owned by nonresident alien individuals (whether
directly or indirectly through foreign estates, foreign trusts,
foreign partnerships, or other foreign corporations), all items
of income which would, but for this subparagraph, constitute
personal holding company income under any paragraph of
subsection (a) other than paragraph (7) thereof: (!1)
(2) Adjusted ordinary gross income
The term "adjusted ordinary gross income" means the ordinary
gross income adjusted as follows:
(A) Rents
From the gross income from rents (as defined in the second
sentence of paragraph (3) of this subsection) subtract the
amount allowable as deductions for -
(i) exhaustion, wear and tear, obsolescence, and
amortization of property other than tangible personal
property which is not customarily retained by any one lessee
for more than three years,
(ii) property taxes,
(iii) interest, and
(iv) rent,
to the extent allocable, under regulations prescribed by the
Secretary, to such gross income from rents. The amount
subtracted under this subparagraph shall not exceed such gross
income from rents.
(B) Mineral royalties, etc.
From the gross income from mineral, oil, and gas royalties
described in paragraph (4), and from the gross income from
working interests in an oil or gas well, subtract the amount
allowable as deductions for -
(i) exhaustion, wear and tear, obsolescence, amortization,
and depletion,
(ii) property and severance taxes,
(iii) interest, and
(iv) rent,
to the extent allocable, under regulations prescribed by the
Secretary, to such gross income from royalties or such gross
income from working interests in oil or gas wells. The amount
subtracted under this subparagraph with respect to royalties
shall not exceed the gross income from such royalties, and the
amount subtracted under this subparagraph with respect to
working interests shall not exceed the gross income from such
working interests.
(C) Interest
There shall be excluded -
(i) interest received on a direct obligation of the United
States held for sale to customers in the ordinary course of
trade or business by a regular dealer who is making a primary
market in such obligations, and
(ii) interest on a condemnation award, a judgment, and a
tax refund.
(D) Certain excluded rents
From the gross income consisting of compensation described in
subparagraph (D) of paragraph (3) subtract the amount allowable
as deductions for the items described in clauses (i), (ii),
(iii), and (iv) of subparagraph (A) to the extent allocable,
under regulations prescribed by the Secretary, to such gross
income. The amount subtracted under this subparagraph shall not
exceed such gross income.
(3) Adjusted income from rents
The term "adjusted income from rents" means the gross income
from rents, reduced by the amount subtracted under paragraph
(2)(A) of this subsection. For purposes of the preceding
sentence, the term "rents" means compensation, however
designated, for the use of, or right to use, property, and the
interest on debts owed to the corporation, to the extent such
debts represent the price for which real property held primarily
for sale to customers in the ordinary course of its trade or
business was sold or exchanged by the corporation; but such term
does not include -
(A) amounts constituting personal holding company income
under subsection (a)(6),
(B) copyright royalties (as defined in subsection (a)(4)),
(C) produced film rents (as defined in subsection (a)(5)(B)),
(D) compensation, however designated, for the use of, or the
right to use, any tangible personal property manufactured or
produced by the taxpayer, if during the taxable year the
taxpayer is engaged in substantial manufacturing or production
of tangible personal property of the same type, or
(E) active business computer software royalties (as defined
in subsection (d)).
(4) Adjusted income from mineral, oil, and gas royalties
The term "adjusted income from mineral, oil, and gas royalties"
means the gross income from mineral, oil, and gas royalties
(including production payments and overriding royalties), reduced
by the amount subtracted under paragraph (2)(B) of this
subsection in respect of such royalties.
(c) Gross income of insurance companies other than life insurance
companies
In the case of an insurance company other than a life insurance
company, the term "gross income" as used in this part means the
gross income, as defined in section 832(b)(1), increased by the
amount of losses incurred, as defined in section 832(b)(5), and the
amount of expenses incurred, as defined in section 832(b)(6), and
decreased by the amount deductible under section 832(c)(7)
(relating to tax-free interest).
(d) Active business computer software royalties
(1) In general
For purposes of this section, the term "active business
computer software royalties" means any royalties -
(A) received by any corporation during the taxable year in
connection with the licensing of computer software, and
(B) with respect to which the requirements of paragraphs (2),
(3), (4), and (5) are met.
(2) Royalties must be received by corporation actively engaged in
computer software business
The requirements of this paragraph are met if the royalties
described in paragraph (1) -
(A) are received by a corporation engaged in the active
conduct of the trade or business of developing, manufacturing,
or producing computer software, and
(B) are attributable to computer software which -
(i) is developed, manufactured, or produced by such
corporation (or its predecessor) in connection with the trade
or business described in subparagraph (A), or
(ii) is directly related to such trade or business.
(3) Royalties must constitute at least 50 percent of income
The requirements of this paragraph are met if the royalties
described in paragraph (1) constitute at least 50 percent of the
ordinary gross income of the corporation for the taxable year.
(4) Deductions under sections 162 and 174 relating to royalties
must equal or exceed 25 percent of ordinary gross income
(A) In general
The requirements of this paragraph are met if -
(i) the sum of the deductions allowable to the corporation
under sections 162, 174, and 195 for the taxable year which
are properly allocable to the trade or business described in
paragraph (2) equals or exceeds 25 percent of the ordinary
gross income of such corporation for such taxable year, or
(ii) the average of such deductions for the 5-taxable year
period ending with such taxable year equals or exceeds 25
percent of the average ordinary gross income of such
corporation for such period.
If a corporation has not been in existence during the 5-taxable
year period described in clause (ii), then the period of
existence of such corporation shall be substituted for such
5-taxable year period.
(B) Deductions allowable under section 162
For purposes of subparagraph (A), a deduction shall not be
treated as allowable under section 162 if it is specifically
allowable under another section.
(C) Limitation on allowable deductions
For purposes of subparagraph (A), no deduction shall be taken
into account with respect to compensation for personal services
rendered by the 5 individual shareholders holding the largest
percentage (by value) of the outstanding stock of the
corporation. For purposes of the preceding sentence -
(i) individuals holding less than 5 percent (by value) of
the stock of such corporation shall not be taken into
account, and
(ii) stock deemed to be owned by a shareholder solely by
attribution from a partner under section 544(a)(2) shall be
disregarded.
(5) Dividends must equal or exceed excess of personal holding
company income over 10 percent of ordinary gross income
(A) In general
The requirements of this paragraph are met if the sum of -
(i) the dividends paid during the taxable year (determined
under section 562),
(ii) the dividends considered as paid on the last day of
the taxable year under section 563(d) (as limited by the
second sentence of section 563(b)), and
(iii) the consent dividends for the taxable year
(determined under section 565),
equals or exceeds the amount, if any, by which the personal
holding company income for the taxable year exceeds 10 percent
of the ordinary gross income of such corporation for such
taxable year.
(B) Computation of personal holding company income
For purposes of this paragraph, personal holding company
income shall be computed -
(i) without regard to amounts described in subsection
(a)(1)(C),
(ii) without regard to interest income during any taxable
year -
(I) which is in the 5-taxable year period beginning with
the later of the 1st taxable year of the corporation or the
1st taxable year in which the corporation conducted the
trade or business described in paragraph (2)(A), and
(II) during which the corporation meets the requirements
of paragraphs (2), (3), and (4), and
(iii) by including adjusted income from rents and adjusted
income from mineral, oil, and gas royalties (within the
meaning of paragraphs (2) and (3) of subsection (a)).
(6) Special rules for affiliated group members
(A) In general
In any case in which -
(i) the taxpayer receives royalties in connection with the
licensing of computer software, and
(ii) another corporation which is a member of the same
affiliated group as the taxpayer meets the requirements of
paragraphs (2), (3), (4), and (5) with respect to such
computer software,
the taxpayer shall be treated as having met such requirements.
(B) Affiliated group
For purposes of this paragraph, the term "affiliated group"
has the meaning given such term by section 1504(a).
-SOURCE-
(Aug. 16, 1954, ch. 736, 68A Stat. 186; Pub. L. 86-435, Sec. 1(a),
(b), Apr. 22, 1960, 74 Stat. 77; Pub. L. 87-403, Sec. 3(c), Feb. 2,
1962, 76 Stat. 6; Pub. L. 88-272, title II, Sec. 225(d), (k)(2),
Feb. 26, 1964, 78 Stat. 81, 93; Pub. L. 88-484, Sec. 3(a), Aug. 22,
1964, 78 Stat. 598; Pub. L. 89-809, title I, Sec. 104(h)(2), title
II, Sec. 206(a), (b), Nov. 13, 1966, 80 Stat. 1559, 1578, 1579;
Pub. L. 94-455, title II, Sec. 211(a), title XIX, Secs.
1901(b)(32)(D), 1906(b)(13)(A), title XXI, Sec. 2106(a), Oct. 4,
1976, 90 Stat. 1544, 1800, 1834, 1902; Pub. L. 94-553, Sec. 105(d),
Oct. 19, 1976, 90 Stat. 2599; Pub. L. 97-248, title II, Sec.
222(e)(6), Sept. 3, 1982, 96 Stat. 480; Pub. L. 98-369, div. A,
title VII, Sec. 712(i)(3), July 18, 1984, 98 Stat. 948; Pub. L.
99-514, title VI, Sec. 645(a)(1), (2), (4), title XVIII, Sec.
1899A(18), Oct. 22, 1986, 100 Stat. 2289, 2291, 2959; Pub. L.
100-647, title I, Sec. 1010(f)(5), title VI, Sec. 6279(a), Nov. 10,
1988, 102 Stat. 3454, 3754; Pub. L. 104-188, title I, Sec.
1704(t)(6), Aug. 20, 1996, 110 Stat. 1887; Pub. L. 105-206, title
VI, Sec. 6023(9), July 22, 1998, 112 Stat. 825; Pub. L. 106-170,
title V, Sec. 532(c)(2)(E), Dec. 17, 1999, 113 Stat. 1930.)
-REFTEXT-
REFERENCES IN TEXT
Section 3(a)(4) and (5) of the Securities and Exchange Act of
1934, referred to in subsec. (a)(1)(D), is classified to section
78c(a)(4) and (5) of Title 15, Commerce and Trade.
-MISC1-
AMENDMENTS
1999 - Subsec. (a)(1)(D)(i). Pub. L. 106-170 substituted
"1221(a)(1)" for "1221(1)".
1998 - Subsec. (d)(5)(A)(ii). Pub. L. 105-206 substituted
"section 563(d)" for "section 563(c)".
1996 - Subsec. (a)(2)(B)(ii). Pub. L. 104-188 substituted
"563(d)" for "563(c)".
1988 - Subsec. (a)(1)(D). Pub. L. 100-647, Sec. 6279(a), added
subpar. (D).
Subsec. (c). Pub. L. 100-647, Sec. 1010(f)(5), substituted "other
than life insurance companies" for "other than life or mutual" in
heading and "other than a life insurance company" for "other than
life or mutual" in text.
1986 - Subsec. (a)(1)(B). Pub. L. 99-514, Sec. 1899A(18),
substituted "46 U.S.C. App." for "46 U.S.C.".
Subsec. (a)(1)(C). Pub. L. 99-514, Sec. 645(a)(1), added subpar.
(C).
Subsec. (a)(4). Pub. L. 99-514, Sec. 645(a)(4)(A), inserted "This
paragraph shall not apply to active business computer software
royalties."
Subsec. (b)(3)(E). Pub. L. 99-514, Sec. 645(a)(4)(B), added
subpar. (E).
Subsec. (d). Pub. L. 99-514, Sec. 645(a)(2), added subsec. (d).
1984 - Subsec. (a)(1)(C). Pub. L. 98-369 struck out subpar. (C)
providing for nonapplication of par. (1) to dividends to which
section 302(b)(4) would apply if the corporation were an
individual.
1982 - (a)(1)(C). Pub. L. 97-248 added subpar. (C).
1976 - Subsec. (a)(1). Pub. L. 94-455, Sec. 1901(b)(32)(D),
inserted in subpar. (B) "(46 U.S.C. 1161 or 1177)" after "Merchant
Marine Act, 1936", and struck out subpar. (C) relating to a
dividend distribution of divested stock.
Subsec. (a)(4). Pub. L. 94-553 struck out "(other than by reason
of section 2 or 6 thereof)" after "title 17 of the United States
Code".
Subsec. (a)(5)(B). Pub. L. 94-455, Sec. 211(a), inserted "In the
case of a producer who actually participates in the production of
the film, such term includes an interest in the proceeds or profits
from the film, but only to the extent such interest is attributable
to such active participation".
Subsec. (a)(6). Pub. L. 94-455, Sec. 2106(a), redesignated
existing provisions as subpars. (a), (B), and (C) and, as
redesignated, inserted in subpar. (A) "tangible" after "right to
use" and in subpar. (C) inserted exclusions from income embodied in
cl. (ii).
Subsec. (b)(2)(A), (B), (D). Pub. L. 94-455, Sec. 1906(b)(13)(A),
struck out "or his delegate" after "Secretary".
1966 - Subsec. (a)(2). Pub. L. 89-809, Sec. 206(b)(1), struck out
provision that royalties received for the use of, or for the
privilege of using, a patent, invention, model, or design, secret
formula, process, or other similar property right be treated as
rent if such property right is also used by the corporation
receiving such royalties in the manufacture or production of
tangible personal property held for lease to customers and if the
amount constituting rent from such leases to customers meets the
requirement of subparagraph (A).
Subsec. (b)(1)(C). Pub. L. 89-809, Sec. 104(h)(2), added subpar.
(C).
Subsec. (b)(2)(D). Pub. L. 89-809, Sec. 206(b)(2), added subpar.
(D).
Subsec. (b)(3). Pub. L. 89-809, Sec. 206(a), struck out "amounts
constituting personal holding company income under subsection
(a)(6), nor copyright royalties (as defined in subsection (a)(4)),
nor produced film rents (as defined in subsection (a)(5)(B))."
after "but does not include", and added subpars. (A) to (D).
1964 - Subsec. (a). Pub. L. 88-272, Sec. 225(d), amended subsec.
(a) generally, and among other changes, substituted "adjusted
ordinary gross income" for "gross income", provided, relative to
rental income, that in addition to the 50-percent test of par.
(2)(A), now applied on the basis of adjusted income from rents and
adjusted ordinary gross income, a second test for exclusion shall
be whether the sum on the dividends paid during the taxable year,
the dividends paid on the last day of the year, and the consent
dividends for the taxable year, equals or exceeds the amount by
which the personal holding company income for the year exceeds 10
percent of the ordinary gross income, relative to mineral, oil, and
gas royalties, that in addition to the 50-percent test of par.
(3)(A), now applied on the basis of adjusted ordinary gross income,
and the 15-percent test of par. (3)(C), from which test have been
excluded deductions "specifically allowable under sections other
than section 162" and is also now applied on the basis of adjusted
gross income, the royalties shall be excluded if the personal
holding company income for the taxable year is not more than 10
percent of the ordinary gross income, relative to copyright
royalties, retained the 50-percent test as in par. (4)(A), making
it applicable to ordinary gross income, included in the computation
of the income for the taxable year the adjusted income from rents
and the adjusted income from mineral, oil, and gas royalties,
excluded from the sum of deductions allocable to royalties,
deductions specifically allowable under sections other than 162,
and changed the requirement that deductions constitute 50 percent
or more of gross income to provide that they must equal 25 percent
of ordinary gross income reduced by royalties paid and by
depreciation deductions with respect to copyrights, relative to
produced film rents, that they be treated on their own basis and
not as rentals, and defined "produced film rents", relative to use
of corporation property by shareholders, that personal holding
company income includes copyright royalties and the adjusted income
from mineral, oil, and gas royalties, eliminated gains from the
sale or other disposition of any interest in an estate or trust,
from the sale or exchange of stock or securities, and from futures
transactions in any commodity, and also definition of "rents". See
subsec. (b)(3).
Subsec. (a)(2). Pub. L. 88-484 inserted sentence requiring
royalties received for the use of, or for the privilege of using, a
patent, invention, model, or design (whether or not patented),
secret formula or process, or any other similar property right to
be treated as rent, if such property right is also used by the
corporation receiving such royalties in the manufacture or
production of tangible personal property held for lease to
customers, and if the amount (computed without regard to this
sentence) constituting rent from such leases to customers meets the
requirements of subparagraph (A).
Subsec. (b). Pub. L. 88-272, Sec. 225(d), added subsec. (b).
Former subsec. (b), which provided that gross income and personal
holding company income determined with respect to transactions
relating to gains from stock and security transactions, and with
respect to transactions relating to gains from commodity
transactions, should include only the excess of gains over losses
from such transactions, was struck out.
Subsec. (d). Pub. L. 88-272, Sec. 225(k)(2), struck out subsec.
(d) which related to special adjustment on disposition of antitrust
stock received as a dividend.
1962 - Subsec. (a)(1). Pub. L. 87-403 prescribed conditions
making inapplicable the provisions of the paragraph to dividend
distribution of divested stock.
Subsec. (d). Pub. L. 87-403 added subsec. (d).
1960 - Subsec. (a)(1). Pub. L. 86-435, Sec. 1(b)(1), excluded
copyright royalties.
Subsec. (a)(6). Pub. L. 86-435, Sec. 1(b)(2), inserted sentence
providing that copyright royalties constitute personal holding
company income.
Subsec. (a)(9). Pub. L. 86-435, Sec. 1(a), added par. (9).
EFFECTIVE DATE OF 1999 AMENDMENT
Amendment by Pub. L. 106-170 applicable to any instrument held,
acquired, or entered into, any transaction entered into, and
supplies held or acquired on or after Dec. 17, 1999, see section
532(d) of Pub. L. 106-170, set out as a note under section 170 of
this title.
EFFECTIVE DATE OF 1988 AMENDMENT
Amendment by section 1010(f)(5) of Pub. L. 100-647 effective,
except as otherwise provided, as if included in the provision of
the Tax Reform Act of 1986, Pub. L. 99-514, to which such amendment
relates, see section 1019(a) of Pub. L. 100-647, set out as a note
under section 1 of this title.
Section 6279(b) of Pub. L. 100-647 provided that: "The amendments
made by this section [amending this section] shall apply to
interest received after the date of the enactment of this Act [Nov.
10, 1988], in taxable years ending after such date."
EFFECTIVE DATE OF 1986 AMENDMENT
Section 645(e) of Pub. L. 99-514 provided that: "The amendments
made by subsection (a) [amending this section and section 553 of
this title] shall apply to royalties received before, on, and after
December 31, 1986."
EFFECTIVE DATE OF 1984 AMENDMENT
Amendment by Pub. L. 98-369 effective as if included in the
provision of the Tax Equity and Fiscal Responsibility Act of 1982,
Pub. L. 97-248, to which such amendment relates, see section 715 of
Pub. L. 98-369, set out as a note under section 31 of this title.
EFFECTIVE DATE OF 1982 AMENDMENT
Amendment by Pub. L. 97-248 applicable to distributions after
Aug. 31, 1982, with exceptions for certain partial liquidations,
see section 222(f) of Pub. L. 97-248, set out as a note under
section 302 of this title.
EFFECTIVE DATE OF 1976 AMENDMENTS
Amendment by Pub. L. 94-553 effective Jan. 1, 1978, see section
102 of Pub. L. 94-553, set out as an Effective Date note preceding
section 101 of Title 17, Copyrights.
Section 211(b) of Pub. L. 94-455 provided that: "The amendment
made by subsection (a) [amending this section] shall apply to
taxable years ending on or after December 31, 1975."
Amendment by section 1901(b)(32)(D) of Pub. L. 94-455 applicable
with respect to taxable years beginning after Dec. 31, 1976, see
section 1901(d) of Pub. L. 94-455, set out as a note under section
2 of this title.
Section 2106(b) of Pub. L. 94-455 provided that: "The amendment
made by subsection (a) [amending this section] shall apply to
taxable years beginning after December 31, 1976."
EFFECTIVE DATE OF 1966 AMENDMENT
Amendment by section 104(h)(2) of Pub. L. 89-809 applicable with
respect to taxable years beginning after Dec. 31, 1966, see section
104(n) of Pub. L. 89-809, set out as a note under section 11 of
this title.
Section 206(c) of Pub. L. 89-809 provided that: "The amendments
made by subsections (a) and (b) [amending this section] shall apply
to taxable years beginning after the date of the enactment of this
Act [Nov. 13, 1966]. Such amendments shall also apply, at the
election of the taxpayer (made at such time and in such manner as
the Secretary or his delegate may prescribe), to taxable years
beginning on or before such date and ending after December 31,
1965."
EFFECTIVE DATE OF 1964 AMENDMENTS
Section 3(b) of Pub. L. 88-484 provided that: "The amendment made
by subsection (a) [amending this section] shall apply to taxable
years beginning after December 31, 1963."
Amendment by Pub. L. 88-272 applicable to taxable years beginning
after Dec. 31, 1963, see section 225(l) of Pub. L. 88-272, set out
as a note under section 316 of this title.
EFFECTIVE DATE OF 1962 AMENDMENT
Amendment by Pub. L. 87-403 applicable only with respect to
distributions made after Feb. 2, 1962, see section 3(g) of Pub. L.
87-403, set out as a note under section 312 of this title.
EFFECTIVE DATE OF 1960 AMENDMENT
Section 2 of Pub. L. 86-435 provided that: "The amendments made
by the first section of this Act [amending this section and
sections 544 and 553 of this title] shall apply only with respect
to taxable years beginning after December 31, 1959."
TREATMENT OF CERTAIN BANK HOLDING COMPANIES
Section 6280 of Pub. L. 100-647 provided that:
"(a) General Rule. - For purposes of subtitle A of the 1986 Code,
the term 'personal holding company income' shall not include any
dividend received by a qualified bank holding company from a
25-percent owned bank during any taxable year ending in 1989 or
1990.
"(b) $3,000,000 Limitation. - The aggregate amount excluded from
the personal holding company income of any qualified bank holding
company under subsection (a) for the taxable year shall not exceed
$3,000,000.
"(c) Qualified Bank Holding Company. - For purposes of this
section, the term 'qualified bank holding company' means any bank
holding company (as defined in section 2(a) of the Bank Holding
Company Act of 1956 [12 U.S.C. 1841(a)]) if 80 percent or more (by
value) of the assets of such company at all times during the
taxable year consist of stock in 1 or more 25-percent owned banks.
"(d) 25-Percent Owned Bank. - For purposes of this section, the
term '25-percent owned bank' means any bank (as defined in section
581 of the 1986 Code) if at least 25 percent of the stock of such
bank (by vote and value) is owned by the bank holding company."
SPECIAL RULES FOR BROKER-DEALERS, ROYALTIES RECEIVED BY QUALIFIED
TAXPAYER, AND TREATMENT OF ACTIVE BUSINESS COMPUTER ROYALTIES FOR S
CORPORATION PURPOSES
Section 645(b)-(d) of Pub. L. 99-514 provided that:
"(b) Special Rules for Broker-Dealers. - In the case of a
broker-dealer which is part of an affiliated group which files a
consolidated Federal income tax return, the common parent of which
was incorporated in Nevada on January 27, 1972, the personal
holding company income (within the meaning of section 543 of the
Internal Revenue Code of 1986) of such broker-dealer, shall not
include any interest received after the date of the enactment of
this Act [Oct. 22, 1986] with respect to -
"(1) any securities or money market instruments held as
inventory,
"(2) margin accounts, or
"(3) any financing for a customer sec |
