(A) for purposes of the stock ownership requirement provided in section 552(a)(2), if, but only if, the effect is to make the corporation a foreign personal holding company;

(B) for purposes of section 553 (a) (5) (relating to personal service contracts) or of section 553(a) (6) (relating to the use of property by shareholders), if, but only if, the effect is to make the amounts therein referred to includible under such paragraph as foreign 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 552(a) (2), but only if the effect of the inclusion of all such securities is to make the corporation a foreign personal holding company;

(2) for purposes of section 553 (a) (5) (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 foreign personal holding company income; and

(3) for purposes of section 553 (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 foreign personal holding company income.

The requirement in paragraphs (1), (2), and (3) 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. 196; Feb. 26, 1964, Pub. L. 88-272, title II, § 225 (e), 78 Stat. 86.)

AMENDMENTS

1964-Pub. L. 88-272 amended section generally by designating existing provisions as subsec. (a), and substituting pars. (1)-(6) therein and subsec. (b), for provisions which incorporated by reference substantially the same provisions as in such pars. (1)-(6) and subsec. (b).

36-500 0-65-vol. 628

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.

CROSS REFERENCES

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.

§ 555. Gross income of foreign personal holding companies.

(a) General rule.

For purposes of this part, the term "gross income" means, with respect to a foreign corporation, gross income computed (without regard to the provisions of subchapter N (sec. 861 and following)) as if the foreign corporation were a domestic corporation which is a personal holding company.

(b) Additions to gross income.

In the case of a foreign personal holding company (whether or not a United States group, as defined in section 552 (a) (2), existed with respect to such company on the last day of its taxable year) which was a shareholder in another foreign personal holding company on the day in the taxable year of the second company which was the last day on which a United States group existed with respect to the second company, there shall be included, as a dividend, in the gross income of the first company, for the taxable wear in which or with which the taxable year of the second company ends, the amount the first company would have received as a dividend if on such last day there had been distributed by the second company, and received by the shareholders, an amount which bears the same ratio to the undistributed foreign personal holding company income of the second company for its taxable year as the portion of such taxable year up to and including such last day bears to the entire taxable year.

(c) Application of subsection (b).

The rule provided in subsection (b)—

(1) shall be applied in the case of a foreign personal holding company for the purpose of determining its undistributed foreign personal holding company income which, or a part of which, is to be included in the gross income of its shareholders, whether United States shareholders or other foreign personal holding companies;

(2) shall be applied in the case of every foreign corporation with respect to which a United States group exists on some day of its taxable year, for the purpose of determining whether such corporation meets the gross income requirements of section 552 (a) (1).

(Aug. 16, 1954, ch. 736, 68A Stat. 196.) CROSS REFERENCES

Charitable contributions adjustment to taxable income, see section 556 of this title.

Deduction for obligations of United States and its instrumentalities, see section 551 of this title.

§ 556. Undistributed foreign personal holding company income.

(a) Definition.

For purposes of this part, the term "undistributed foreign personal holding company income" means the taxable income of a foreign personal holding

company adjusted in the manner provided in subsection (b), 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, 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 provisions of supplement P of the Internal Revenue Code of 1939, deducted Federal income and excess profits taxes when paid for the purpose of computing undistributed supplement P net income under such code, shall deduct taxes under this paragraph when paid, unless the corporation elects, under regulations prescribed by the Secretary or his delegate, after the date of enactment of this title to deduct the taxes described in this paragraph when accrued. Such 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.

contributions

The deduction for charitable 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 the deduction of the amounts disallowed under paragraphs (5) and (6) of this subsection or the inclusion in gross income of the amounts includible therein as dividends by reason of the application of the provisions of section 555 (b) (relating to the inclusion in gross income of a foreign personal holding company of its distributive share of the undistributed foreign personal holding company income of another company in which it is a shareholder).

(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) 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 company, 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.

(6) Taxes and contributions to pension trusts.

The deductions provided in section 164 (e) (relating to taxes of a shareholder paid by the corporation) and in section 404 (relating to pension, etc., trusts) shall not be allowed.

(7) 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.

(8) 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 (7) 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.

(Aug. 16, 1954, ch. 736, 68A Stat. 196; Sept. 2, 1958, Pub. L. 85-866, title I, § 33(a), (b) (1), (c) (1), 72 Stat. 1632; Feb. 2, 1962, Pub. L. 87-403, § 3(e), 76

Stat. 7; Feb. 26, 1964, Pub. L. 88-272, title II, §§ 207 (b) (6), 209(c) (2), 78 Stat. 42, 46.)

AMENDMENTS

1964 Subsec. (b) (1), (2). Pub. L. 88-272 substituted "section 275(a) (4)" for section 164 (b)(6)" in par. (1), and inserted the reference to section 170(b) (5) in par. (2).

1962 Subsec. (b) (7), (8). Pub. L. 87-403 added subsec. (b) (7), (8).

1958-Subsec. (b)(2). Pub. L. 85-866, § 33(a) (1) (2), substituted in the first sentence "but in computing such deduction the limitations in section 170 (b) (1) (A) and (B) shall apply, and section 170 (b) (2) shall not apply" for "but with the limitation in section 170 (b) (1) (A) and (B) (in lieu of the limitation in section 170 (b) (2))” and in the second sentence "the taxable income computed with the adjustments (other than the 5-percent limitation) provided in the first sentence of section 170 (b) (2) for "the taxable income computed with the adjustments provided in section 170 (b) (2)". Subsec. (b) (3). Pub. L. 85-866, § 33 (b) (1), substistuted "section 248" for "sections 242 and 248."

Subsec. (b)(4). Pub. L. 85-866, § 33 (c) (1), inserted "computed without the deductions provided in part VIII (except section 248) of subchapter B".

EFFECTIVE DATE OF 1964 AMENDMENT Amendment of subsec. (b)(1) by Pub. L. 88-272, § 207 (b)(6), applicable to taxable years beginning after Dec. 317, 1963, see section 207(c) of Pub. L. 88-272, set out as a note under section 164 of this title.

Amendment of subsec. (b) (2) by Pub. L. 88-227, § 209 (c) (2), applicable to contributions paid in taxable years beginning after Dec. 31, 1963, see section 209 (f)(1) of Pub. L. 88-272, set out as a note under section 170 of this title.

EFFECTIVE DATE OF 1962 AMENDMENT

Amendment of this section by Pub. L. 87-403 applicable only with respect to distribution 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 of subsec. (b) (2) of this section by Pub. L. 85-866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1 (c) of Pub. L. 85-866, set out as a note under section 165 of this title.

Section 33 (b) (2) of Pub. L. 85-866 provided that: "The amendment made by paragraph (1) [to subsec (b) (3) of this section] shall apply only with respect to taxable years ending after December 31, 1957."

Section 33 (c) (2) of Pub. L. 85-866 provided that: "The amendment made by paragraph (1) (to subsec. (b) (4) of this section] shall apply with respect to adjustments under section 556 (b) (4) of the Internal Revenue Code of 1954 for taxable years ending after December 31, 1957."

CROSS REFERENCES

Provisions for computation of tax on change of annual accounting period upon making returns for period less than 12 months as inapplicable in computation of tax imposed by this section, see section 557 of this title.

§ 557. Income not placed on annual basis.

Section 443 (b) (relating to computation of tax on change of annual accounting period) shall not apply in the computation of the undistributed foreign personal holding company income under section 556. (Aug. 16, 1954, ch. 736, 68A Stat. 198.)

CROSS REFERENCES

Accumulated earnings tax computation as not subJect to section 443 (b), see section 536 of this title. Personal holding company tax computation as not subject to section 443 (b), see section 546 of this title. Regulated investment company taxable income computation as not subject to section 443 (b), see section 852 of this title.

§ 558. Returns of officers, directors, and shareholders of foreign personal holding companies.

For provisions relating to returns of officers, directors, and shareholders of foreign personal holding companies, see section 6035.

(Added Pub. L. 85-866, title I, § 33 (d) (1), Sept. 2, 1958, 72 Stat. 1632.)

EFFECTIVE DATE

Section applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1 (c) of Pub. L. 85-866, set out as a note under section 165 of this title.

PART IV.DEDUCTION FOR DIVIDENDS PAID Sec.

561. Definition of deduction for dividends paid. 562. Rules applicable in determining dividends eligible for dividends paid deduction.

563. Rules relating to dividends paid after close of taxable year.

564. Dividend carryover. 565. Consent dividends.

§ 561. Definition of deduction for dividends paid. (a) General rule.

The deduction for dividends paid shall be the sum of

(1) the dividends paid during the taxable year, (2) the consent dividends for the taxable year (determined under section 565), and

(3) in the case of a personal holding company, the dividend carryover described in section 564. (b) Special rules applicable.

(1) In determining the deduction for dividends paid, the rules provided in section 562 (relating to rules applicable in determining dividends eligible for dividends paid deduction) and section 563 (relating to dividends paid after the close of the taxable year) shall be aplicable.

(2) If a corporation received antitrust stock (as defined in section 301(f) in a distribution to which section 301 applied and such corporation distributes such stock (or other property the basis of which is determined by reference to the basis of such stock) to its shareholders, proper adjustment shall be made, under regulations prescribed by the Secretary or his delegate, to the amount of the deduction provided for in subsection (a). (Aug. 16, 1954, ch. 736, 68A Stat. 198; Feb. 2, 1962, Pub. L. 87-403, § 3(f), 76 Stat. 8.)

AMENDMENTS

1962-Subsec. (b). Pub. L. 87-403 designated existing provisions as par. (1) and added par. (2).

EFFECTIVE DATE OF 1962 AMENDMENT Amendment of this 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.

CROSS REFERENCES

Accumulated taxable income as taxable income minus, among others, dividends paid deduction, and accumulated earnings credit as related to dividends paid deduction, see section 535 of this title.

Deductions of dividends paid on certain preferred stock as reducing deduction for dividends paid under this section, see section 583 of this title.

Deficiency dividend deduction of personal holding companies, see section 547 of this title.

Taxation of regulated investment companies and their shareholders, see section 852 of this title.

Undistributed foreign personal holding company income as taxable income minus, among others, dividends paid deduction, see section 556 of this title.

Undistributed personal holding company income as taxable income minus, among others, dividends paid deduction, see section 545 of this title.

§ 562. Rules applicable in determining dividends eligi ble for dividends paid deduction.

(a) General rule.

For purposes of this part, the term "dividend" shall, except as otherwise provided in this section, include only dividends described in section 316 (relating to definition of dividends for purposes of corporate distributions).

(b) Distributions in liquidation.

(1) Except in the case of a personal holding company described in section 542 or a foreign personal holding company described in section 552

(A) in the case of amounts distributed in liquidation, the part of such distribution which is properly chargeable to earnings and profits accumulated after February 28, 1913, shall be treated as a dividend for purposes of computing the dividends paid deduction, and

(B) in the case of a complete liquidation occurring within 24 months after the adoption of a plan of liquidation, any distribution within such period pursuant to such plan shall, to the extent of the earnings and profits (computed without regard to capital losses) of the corporation for the taxable year in which such distribution is made, be treated as a dividend for purposes of computing the dividends paid deduction.

(2) In the case of a complete liquidation of a personal holding company, occurring within 24 months after the adoption of a plan of liquidation, the amount of any distribution within such period pursuant to such plan shall be treated as a dividend for purposes of computing the dividends paid deduction, to the extent that such amount is distributed to corporate distributees and represents such corporate distributees' allocable share of the undistributed personal holding company income for the taxable year of such distribution computed without regard to this paragraph and without regard to subparagraph (B) of section 316(b) (2).

(c) Preferential dividends.

The amount of any distribution shall not be considered as a dividend for purposes of computing the dividends paid deduction, unless such distribution is pro rata, with no preference to any share of stock as compared with other shares of the same class, and with no preference to one class of stock as compared with another class except to the extent that the former is entitled (without reference to waivers of their rights by shareholders) to such preference. (d) Distributions by a member of an affiliated group. In the case where a corporation which is a member of an affiliated group of corporations filing or required to file a consolidated return for a taxable year is required to file a separate personal holding company schedule for such taxable year, a distribution by such corporation to another member of the

affiliated group shall be considered as a dividend for purposes of computing the dividends paid deduction if such distribution would constitute a dividend under the other provisions of this section to a recipient which is not a member of an affiliated group. (Aug. 16, 1954, ch. 736, 68A Stat. 198; Feb. 26, 1964, Pub. L. 88-272, title II, § 225 (f) (3), 78 Stat. 88.)

AMENDMENTS

1964 Subsec. (b). Pub. L. 88-272 designated existing provisions as subpars. (A) and (B) of par. (1), excepted personal holding companies in section 542, and foreign personal holding companies in section 552 therefrom, and added par. (2).

EFFECTIVE DATE OF 1964 AMENDMENT

Amendment of section Pub. L. 88-272 applicable to distributions made in any taxable year of the distributing corporation 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.

CROSS REFERENCES

Limitations on consent dividends, see section 565 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.

Partial liquidation defined, see section 346 of this title.

§ 563. Rules relating to dividends paid after close of taxable year.

(a) Accumulated earnings tax.

In the determination of the dividends paid deduction for purposes of the accumulated earnings tax imposed by section 531, a dividend paid after the close of any taxable year and on or before the 15th day of the third month following the close of such taxable year shall be considered as paid during such taxable year.

(b) Personal holding company tax.

In the determination of the dividends paid deduction for purposes of the personal holding company tax imposed by section 541, a dividend paid after the close of any taxable year and on or before the 15th day of the third month following the close of such taxable year shall, to the extent the taxpayer elects in its return for the taxable year, be considered as paid during such taxable year. The amount allowed as a dividend by reason of the application of this subsection with respect to any taxable year shall not exceed either

(1) The undistributed personal holding company income of the corporation for the taxable year, computed without regard to this subsection,

or

(2) 10 percent of the sum of the dividends paid during the taxable year computed without regard to this subsection.

(c) Dividends considered as paid on last day of taxable year.

For the purpose of applying section 562 (a), with respect to distributions under subsection (a) or (b) of this section, a distribution made after the close of a taxable year and on or before the 15th day of the third month following the close of the taxable year shall be considered as made on the last day of such taxable year. (Aug. 16, 1954, ch. 736, 68A Stat. 199.)

CROSS REFERENCES

Accumulated earnings credit reduced under certain circumstances by dividends paid after close of taxable

year but considered as paid during taxable year, see section 535 of this title.

Deficiency dividend deduction of personal holding companies, see section 547 of this title.

Personal holding company dividend defined, see section 316 of this title.

§ 564. Dividend carryover.

(a) General rule.

For purposes of computing the dividends paid deduction under section 561, in the case of a personal holding company the dividend carryover for any taxable year shall be the dividend carryover to such taxable year, computed as provided in subsection (b), from the two preceding taxable years. (b) Computation of dividend carryover.

The dividend carryover to the taxable year shall be determined as follows:

(1) For each of the 2 preceding taxable years there shall be determined the taxable income computed with the adjustments provided in section 545 (whether or not the taxpayer was a personal holding company for either of such preceding taxable years), and there shall also be determined for each such year the deduction for dividends paid during such year as provided in section 561 (but determined without regard to the dividend carryover to such year).

(2) There shall be determined for each such taxable year whether there is an excess of such taxable income over such deduction for dividends paid or an excess of such deduction for dividends paid over such taxable income, and the amount of each such excess.

(3) If there is an excess of such deductions for dividends paid over such taxable income for the first preceding taxable year, such excess shall be allowed as a dividend carryover to the taxable year.

(4) If there is an excess of such deduction for dividends paid over such taxable income for the second preceding taxable year, such excess shall be reduced by the amount determined in paragraph (5), and the remainder of such excess shall be allowed as a dividend carryover to the taxable year.

(5) The amount of the reduction specified in paragraph (4) shall be the amount of the excess of the taxable income, if any, for the first preceding taxable year over such deduction for dividends paid, if any, for the first preceding taxable year. (c) Determination of dividend carryover from taxable years to which this subtitle does not apply. In a case where the first or second preceding taxable year began before the taxpayer's first taxable year under this subtitle, the amount of the dividend carryover to taxable years to which this subtitle applies shall be determined under the provisions of the Internal Revenue Code of 1939. (Aug. 16, 1954, ch. 736, 68A Stat. 200.)

day of the taxable year of such corporation, and such person agrees, in a consent filed with the return of such corporation in accordance with regulations prescribed by the Secretary or his delegate, to treat as a dividend the amount specified in such consent, the amount so specified shall, except as provided in subsection (b), constitute a consent dividend for purposes of section 561 (relating to the deduction for dividends paid).

(b) Limitations.

A consent dividend shall not include—

(1) an amount specified in a consent which, if distributed in money, would constitute, or be part of, a distribution which would be disqualified for purposes of the dividends paid deduction under section 562 (c) (relating to preferential dividends), or

(2) an amount specified in a consent which would not constitute a dividend (as defined in section 316) if the total amounts specified in consents filed by the corporation had been distributed in money to shareholders on the last day of the taxable year of such corporation.

(c) Effect of consent.

The amount of a consent dividend shall be considered, for purposes of this title

(1) as distributed in money by the corporation to the shareholder on the last day of the taxable year of the corporation, and

(2) as contributed to the capital of the corporation by the shareholder on such day.

(d) Consent dividends and other distributions.

If a distribution by a corporation consists in part of consent dividends and in part of money or other property, the entire amount specified in the consents and the amount of such money or other property shall be considered together for purposes of applying this title.

(e) Nonresident aliens and foreign corporations.

In the case of a consent dividend which, if paid in money would be subject to the provisions of section 1441 (relating to withholding of tax on nonresident aliens) or section 1442 (relating to withholding of tax on foreign corporations), this section shall not apply unless the consent is accompanied by money, or such other medium of payment as the Secretary or his delegate may by regulations authorize, in an amount equal to the amount that would be required to be deducted and withheld under sections 1441 or 1442 if the consent dividend had been, on the last day of the taxable year of the corporation, paid to the shareholder in money as a dividend. The amount accompanying the consent shall be credited against the tax imposed by this subtitle on the shareholder.

(f) Definitions.

(1) Consent stock.

Consent stock, for purposes of this section, means the class or classes of stock entitled, after the payment of preferred dividends, to a share in the distribution (other than in complete or partial liquidation) within the taxable year of all the remaining earnings and profits, which share constitutes the same proportion of such distribution regardless of the amount of such distribution.