(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 (other than by reason of section 2 or 6 thereof) 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. (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. (6) Use of corporation property by shareholder. Amounts received as compensation (however designated and from whomsoever received) for the use of, or right to use, 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. This paragraph shall apply only to a corporation which has personal holding company income for the taxable year (computed without regard to this paragraph and paragraph (2), and computed by including as personal holding company income copyright royalties and the adjusted income from mineral, oil, and gas royalties) in excess of 10 percent of its ordinary gross income. (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 per form 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, and (B) all gains (other than those referred to in subpargraph (A)) from the sale or other disposition of property described in section 1231(b). (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 or his delegate, 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, (li) property and severance taxes, (iv) rent, to the extent allocable, under regulations prescribed by the Secretary or his delegate, 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) Interests. 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. (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 does not include 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)). (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 or mutual. In the case of an insurance company other than life or mutual, 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). (Aug. 16, 1954, ch. 736, 68A Stat. 186; Apr. 22, 1960, Pub. L. 86-435, § 1(a), (b), 74 Stat. 77; Feb. 2, 1962, Pub. L. 87-403, § 3(c), 76 Stat. 6; Feb. 26, 1964, Pub. L. 88-272, title II, § 225 (d), (k) (2), 78 Stat. 81, 93; Aug. 22, 1964, Pub. L. 88-484, § 3(a), 78 Stat. 598.) AMENDMENTS 1964 Subsec. (a). Pub. L. 88-272, § 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 the definition of "rents" which can now be found in 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, § 225(d), added subsec. (b), and omitted a prior 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. Subsec. (d). Pub. L. 88-272, § 225(k) (2), eliminated 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 the 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, § 1(b) (1), excluded copyright royalties. Subsec. (a) (6). Pub. L. 86-435, § 1(b) (2), added sentence providing that copyright royalties constitute personal holding company income. Subsec. (a) (9). Pub. L. 86-435, § 1(a), added subsec. (a) (9). EFFECTIVE DATE OF 1964 AMENDMENTS Section 3(b) of Pub. L. 88-484 provided that: "The amendment made by subsection (a) [to subsec. (a) (2) of this section] shall apply to taxable years beginning after December 31, 1963." Amendment of section by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 225(1) of Pub. L. 88-272 set out as a note under section 316 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment of section 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 [to subsec. (a) of this section and sections 544 (a), (b), and 553 of this title] shall apply only with respect to taxable years beginning after December 31, 1959." CROSS REFERENCES Foreign personal holding company income, see section 553 of this title. Limitations on assessment and collection, see section 6501 of this title. Liquidations before Jan. 1, 1966, see section 225 (h) of Pub. L. 88-272, set out as a note under section 333 of this title. Personal holding company Definition as dependent upon personal holding company income, see section 542 of this title. Dividend defined, see section 316 of this title. Rules for determining stock ownership, see section 544 of this title. Unincorporated business enterprises electing to be taxed as domestic corporations and treatment of personal holding company income, see section 1361 of this title. §544. Rules for determining stock ownership. (a) Constructive ownership. For purposes of determining whether a corporation is a personal holding company, insofar as such determination is based on stock ownership under section 542(a)(2), section 543(a) (7), section 543 (a) (6), or section 543 (a) (4) — (1) Stock not owned by individual. Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries. (2) Family and partnership ownership. An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family or by or for his partner. For purposes of this paragraph, the family of an individual includes only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants. (3) Options. If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock. (4) Application of family-partnership and option rules. Paragraphs (2) and (3) shall be applied (A) for purposes of the stock ownership requirement provided in section 542 (a) (2), if, but only if, the effect is to make the corporation a personal holding company; (B) for purposes of section 543 (a) (7) (relating to personal service contracts), of section 543(a) (6) (relating to use of property by shareholders), or of section 543(a) (4) (relating to copyright royalties), if, but only if, the effect is to make the amounts therein referred to includible under such paragraph as personal holding company income. (5) Constructive ownership as actual ownership. Stock constructively owned by a person by reason of the application of paragraph (1) or (3), shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by an individual by reason of the application of paragraph (2) shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. (6) Option rule in lieu of family and partnership rule. If stock may be considered as owned by an individual under either paragraph (2) or (3) it shall be considered as owned by him under paragraph (3). (b) Convertible securities. Outstanding securities convertible into stock (whether or not convertible during the taxable year) shall be considered as outstanding stock (1) for purposes of the stock ownership requirement provided in section 542 (a) (2), but only if the effect of the inclusion of all such securities is to make the corporation a personal holding company; (2) for purposes of section 543 (a) (7) (relating to personal service contracts), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such paragraph as personal holding company income; (3) for purposes of section 543 (a) (6) (relating to the use of property by shareholders), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such paragraph as personal holding company income; and (4) for purposes of section 543(a) (4) (relating to copyright royalties), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such paragraph as personal holding company income. The requirement in paragraphs (1), (2), (3), and (4) that all convertible securities must be included if any are to be included shall be subject to the exception that, where some of the outstanding securities are convertible only after a later date than in the case of others, the class having the earlier conversion date may be included although the others are not included, but no convertible securities shall be included unless all outstanding securities having a prior conversion date are also included. (Aug. 16, 1954, ch. 736, 68A Stat. 188; Apr. 22, 1960, Pub. L. 86-435, § 1 (c), (d), 74 Stat. 78; Feb. 26, 1964, Pub. L. 88-272, title II, § 225 (k) (3), 78 Stat. 93.) AMENDMENTS 1964-Pub. L. 88-272 substituted "section 543(a) (7)" for "section 543 (a) (5)", and "section 543 (a) (4)" for "section 543 (a) (9)," wherever appearing. 1960 Subsec. (a). Pub. L. 86-435, § 1(c) (1), inserted & reference to section 543(a) (9) in the opening provisions. Subsec. (a) (4) (B). Pub. L. 86-435, §1(c) (2), included section 543 (a) (9). Subsec. (b). Pub. L. 86-435, § 1(d), added par. (4), and inserted a reference to par. (4) in the last sentence. EFFECTIVE DATE OF 1964 AMENDMENT Amendment of section by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 225(1) of Pub. L. 88-272 set out as a note under section 316 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment of subsecs. (a) and (b) of this section by Pub. L. 86-435 applicable only with respect to taxable years beginning after Dec. 31, 1959, see section 2 of Pub. L. 86-435, set out as a note under section 543 of this title. CROSS REFERENCES Collapsible corporations, see section 341 of this title. Limitations on assessment and collection, see section 6501 of this title. Liquidations before Jan. 1, 1966, see section 225 (h) of Pub. L. 88-272, set out as a note under section 333 of this title. Returns of officers, directors, and shareholders of foreign personal holding companies, see section 6035 of this title. § 545. Undistributed personal holding company income. (a) Definition. For purposes of this part, the term "undistributed personal holding company income" means the taxable income of a personal holding company adjusted in the manner provided in subsections (b) and (c), minus the dividends paid deduction as defined in section 561. (b) Adjustments to taxable income. For the purposes of subsection (a), the taxable income shall be adjusted as follows: (1) Taxes. There shall be allowed as a deduction Federal income and excess profits taxes (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) 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) (1) or 960 (a) (1) (C) 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. A taxpayer which, for each taxable year in which it was subject to the tax imposed by section 500 of the Internal Revenue Code of 1939, deducted Federal income and excess profits taxes when paid for the purpose of computing subchapter A net income under such Code, shall deduct taxes under this paragraph when paid, unless the taxpayer elects, in its return for a taxable year ending after June 30, 1954, to deduct the taxes described in this paragraph when accrued. Such an election shall be irrevocable and shall apply to the taxable year for which the election is made and to all subsequent taxable years. (2) Charitable contributions. The deduction for charitable contributions provided under section 170 shall be allowed, but in computing such deduction the limitations in section 170 (b) (1) (A) and (B) shall apply, and section 170(b) (2) and (5) shall not apply. For purposes of this paragraph, the term "adjusted gross income" when used in section 170(b) (1) means the taxable income computed with the adjustments (other than the 5-percent limitation) provided in the first sentence of section 170(b) (2) and (5) and without deduction of the amount disallowed under paragraph (8) of this subsection. (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, but there shall be allowed as a deduction the amount of the net operating loss (as defined in section 172 (c)) for the preceding taxable year computed without the deductions provided in part VIII (except section 248) of subchapter B. (5) Long-term capital gains. There shall be allowed as a deduction the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for such year, minus the taxes imposed by this subtitle attributable to such excess. The taxes attributable to such excess shall be an amount equal to the difference between (A) the taxes imposed by this subtitle (except the tax imposed by this part) for such year, and (B) such taxes computed for such year without including such excess in taxable income. (6) Bank affiliates. There shall be allowed the deduction described in section 601 (relating to bank affiliates). (7) Payment of indebtedness incurred prior to January 1, 1934. There shall be allowed as a deduction amounts used or irrevocably set aside to pay or to retire indebtedness of any kind incurred before January 1, 1934, if such amounts are reasonable with reference to the size and terms of such indebtedness. (8) Expenses and depreciation applicable to property of the taxpayer. The aggregate of the deductions allowed under section 162 (relating to trade or business expenses) and section 167 (relating to depreciation), which are allocable to the operation and maintenance of property owned or operated by the corporation, shall be allowed only in an amount equal to the rent or other compensation received for the use of, or the right to use, the property, unless it is established (under regulations prescribed by the Secretary or his delegate) to the satisfaction of the Secretary or his delegate (A) that the rent or other compensation received was the highest obtainable, or, if none was received, that none was obtainable; (B) that the property was held in the course of a business carried on bona fide for profit; and (C) either that there was reasonable expectation that the operation of the property would result in a profit, or that the property was necessary to the conduct of the business. (9) Amount of a lien in favor of the United States. There shall be allowed as a deduction the amount, not to exceed the taxable income of the taxpayer, of any lien in favor of the United States (notice of which has been filed as provided in section 6323 (a) (1), (2), or (3)) to which the taxpayer is subject at the close of the taxable year. The sum of the amounts deducted under this paragraph with respect to any lien shall, for the purposes of this section, be added to the taxable income of the taxpayer for the taxable year in which such lien is satisfied or released. Where an amount is added to the taxable income of a corporation by reason of the preceding sentence of this paragraph, the shareholders of the corporation may, pursuant to regulations prescribed by the Secretary or his delegate, elect to compute the income tax with respect to such dividends as are attributable to such amount as though they were received ratably over the period the lien was in effect. (10) Distributions of divested stock. There shall be allowed as a deduction the amount of any income attributable to the receipt of a distribution of divested stock (as defined in subsection (e) of section 1111), minus the taxes imposed by this subtitle attributable to such receipt, but only if the stock with respect to which the distribution is made was owned by the distributee on September 6, 1961, or was owned by the distributee for at least 2 years prior to the date on which the antitrust order (as defined in subsection (d) of section 1111) was entered. (11) Special adjustment on disposition of antitrust stock received as a dividend. If (A) a corporation received antitrust stock (as defined in section 301(f) in a distribution to which section 301 applied, (B) the amount of the distribution determined under section 301(f) (2) exceeded the basis of the stock determined under section 301 (f) (3), and (C) Paragraph (10) did not apply in respect of such distribution, then proper adjustment shall be made, under regulations prescribed by the Secretary or his delegate, if such stock (or other property the basis of which is determined by reference to the basis of such stock) is sold or exchanged. (c) Special adjustment to taxable income. (1) In general. Except as otherwise provided in this subsection, for purposes of subsection (a) there shall be allowed as a deduction amounts used, or amounts irrevocably set aside (to the extent reasonable with reference to the size and terms of the indebtedness), to pay or retire qualified indebted ness. (2) Corporations to which applicable. This subsection shall apply only with respect to a corporation- (A) which for at least one of the two most recent taxable years ending before the date of the enactment of this subsection was not a personal holding company under section 542, but would have been a personal holding company under section 542 for such taxable year if the law applicable for the first taxable year beginning after December 31, 1963, had been applicable to such taxable year, or (B) to the extent that it succeeds to the deduction referred to in paragraph (1) by reason of section 381(c) (15). (3) Qualified indebtedness. (A) In general. Except as otherwise provided in this paragraph, for purposes of this subsection the term "qualified indebtedness" means (i) the outstanding indebtedness incurred by the taxpayer after December 31, 1933, and before January 1, 1964, and (ii) the outstanding indebtedness incurred after December 31, 1963, for the purpose of making a payment or set-aside referred to in paragraph (1) in the same taxable year, but, in the case of such a payment or set-aside which is made on or after the first day of the first taxable year beginning after December 31, 1963, only to the extent the deduction otherwise allowed in paragraph (1) with respect to such payment or set-aside is treated as nondeductible by reason of the election provided in paragraph (4). (B) Exception. For purposes of subparagraph (A), qualified indebtedness does not include any amounts which were, at any time after December 31, 1963, and before the payment or set-aside, owed to a person who at such time owned (or was considered as owning within the meaning of section 318(a)) more than 10 percent in value of the taxpayer's outstanding stock. (C) Reduction for amounts irrevocably set aside. For purposes of subparagraph (A), the qualified indebtedness with respect to a contract shall be reduced by amounts irrevocably set aside before the taxable year to pay or retire such indebtedness; and no deduction shall be allowed under paragraph (1) for payments out of amounts so set aside. (4) Election not to deduct. A taxpayer may elect, under regulations prescribed by the Secretary or his delegate, to treat as nondeductible an amount otherwise deductible under paragraph (1) ; but only if the taxpayer files such election on or before the 15th day of the third month following the close of the taxable year with respect to which such election applies, designating therein the amounts which are to be treated as nondeductible and specifying the indebtedness (referred to in paragraph (3) (A) (ii)) incurred for the purpose of making the payment or set-aside. (5) Limitations. The deduction otherwise allowed by this subsection for the taxable year shall be reduced by the sum of (A) the amount, if any, by which (i) the deductions allowed for the taxable year and all preceding taxable years beginning after December 31, 1963, for exhaustion, |