To amend the Internal Revenue Code of 1986 to repeal the tax on personal holding companies.

Summary: Personal Holding Company Tax Repeal Act of 2004 - Amends the Internal Revenue Code to repeal the tax on personal holding companies.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Personal Holding Company Tax Repeal 
Act of 2004''.

SEC. 2. REPEAL OF PERSONAL HOLDING COMPANY TAX.

    (a) In General.--Part II of subchapter G of chapter 1 of the 
Internal Revenue Code of 1986 (relating to personal holding companies) 
is hereby repealed.
    (b) Conforming Amendments.--
            (1) Section 12(2) of such Code is amended to read as 
        follows:
            ``(2) For accumulated earnings tax, see part I of 
        subchapter G (sec. 531 and following).''.
            (2) Section 26(b)(2) of such Code is amended by striking 
        subparagraph (G) and by redesignating the succeeding 
        subparagraphs accordingly.
            (3) Section 30A(c) of such Code is amended by striking 
        paragraph (3), by inserting ``or'' at the end of paragraph (2), 
        and by redesignating paragraph (4) as paragraph (3).
            (4) Section 41(e)(7)(E) of such Code is amended by adding 
        ``and'' at the end of clause (i), by striking clause (ii), and 
        by redesignating clause (iii) as clause (ii).
            (5) Section 56(b)(2) of such Code is amended by striking 
        subparagraph (C) and by redesignating subparagraph (D) as 
        subparagraph (C).
            (6) Section 170(e)(4)(D) of such Code is amended by adding 
        ``and'' at the end of clause (i), by striking clause (ii), and 
        by redesignating clause (iii) as clause (ii).
            (7) Section 111(d) of such Code is amended to read as 
        follows:
    ``(d) Special Rules for Accumulated Earnings Tax.--In applying 
subsection (a) for the purpose of determining the accumulated earnings 
tax under section 531--
            ``(1) any excluded amount under subsection (a) allowed for 
        purposes of this subtitle (other than section 531) shall be 
        allowed whether or not such amount resulted in a reduction of 
        the tax under section 531 for the prior taxable year, and
            ``(2) where any excluded amount under subsection (a) was 
        not allowed as a deduction for the prior taxable year for 
        purposes of this subtitle other than section 531 but was 
        allowable for the same taxable year under section 531, then 
        such excluded amount shall be allowable if it did not result in 
        a reduction of the tax under section 531.''.
            (8)(A) Section 316(b) of such Code is amended by striking 
        paragraph (2) and by redesignating paragraph (3) as paragraph 
        (2).
            (B) Section 331(b) of such Code is amended by striking 
        ``(other than a distribution referred to in paragraph (2)(B) of 
        section 316(b))''.
            (9) Section 341(d) of such Code is amended--
                    (A) by striking ``section 544(a)'' and inserting 
                ``section 465(f)'', and
                    (B) by inserting before the period at the end of 
                the next to the last sentence ``and such paragraph (2) 
                shall be applied by inserting `by or for his partner' 
                after `his family'''.
            (10) Section 381(c) of such Code is amended by striking 
        paragraphs (14) and (17).
            (11) Section 443(e) of such Code is amended by striking 
        paragraph (2) and by redesignating paragraphs (3), (4), and (5) 
        as paragraphs (2), (3), and (4), respectively.
            (12) Section 447(g)(4)(A) of such Code is amended by 
        striking ``other than--'' and all that follows and inserting 
        ``other than an S corporation.''
            (13)(A) Section 465(a)(1)(B) of such Code is amended to 
        read as follows:
                    ``(B) a C corporation which is closely held,''.
            (B) Section 465(a)(3) of such Code is amended to read as 
        follows:
            ``(3) Closely held determination.--For purposes of 
        paragraph (1), a corporation is closely held if, 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) shall be considered an individual.''
            (C) Section 465 of such Code is amended by adding at the 
        end the following new subsection:
    ``(f) Constructive Ownership Rules.--For purposes of subsection 
(a)(3)--
            ``(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 ownership.--An individual shall be considered 
        as owning the stock owned, directly or indirectly, by or for 
        his family. 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 and option rules.--Paragraphs 
        (2) and (3) shall be applied if, but only if, the effect is to 
        make the corporation closely held under subsection (a)(3).
            ``(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 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).
            ``(7) Convertible securities.--Outstanding securities 
        convertible into stock (whether or not convertible during the 
        taxable year) shall be considered as outstanding stock if the 
        effect of the inclusion of all such securities is to make the 
        corporation closely held under subsection (a)(3). The 
        requirement under the preceding sentence 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.''
            (D) Section 465(c)(7)(B) of such Code is amended by 
        striking clause (i) and by redesignating clauses (ii) and (iii) 
        as clauses (i) and (ii), respectively.
            (E) Section 465(c)(7)(G) of such Code is amended to read as 
        follows:
                    ``(G) Loss of 1 member of affiliated group may not 
                offset income of personal service corporation.--Nothing 
                in this paragraph shall permit any loss of a member of 
                an affiliated group to be used as an offset against the 
                income of any other member of such group which is a 
                personal service corporation (as defined in section 
                269A(b) but determined by substituting `5 percent' for 
                `10 percent' in section 269A(b)(2)).''
            (14) Sections 508(d), 4947, and 4948(c)(4) of such Code are 
        each amended by striking ``545(b)(2),'' each place it appears.
            (15) Section 532(b) of such Code is amended by striking 
        paragraph (1) and by redesignating paragraphs (2), (3), and (4) 
        as paragraphs (1), (2), and (3), respectively.
            (16) Sections 535(b)(1) and 556(b)(1) of such Code are each 
        amended by striking ``section 541'' and inserting ``section 541 
        (as in effect before its repeal)''.
            (17)(A) Section 553(a)(1) of such Code is amended by 
        striking ``section 543(d)'' and inserting ``subsection (c)''.
            (B) Section 553 of such Code is amended by adding at the 
        end the following new subsection:
    ``(c) Active Business Computer Software Royalties.--
            ``(1) In general.--For purposes of subsection (a), 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 individuals holding 
                less than 5 percent (by value) of the stock of such 
                corporation shall not be taken into account.''
            (18) Section 561(a) of such Code is amended by striking 
        paragraph (3), by inserting ``and'' at the end of paragraph 
        (1), and by striking '', and'' at the end of paragraph (2) and 
        inserting a period.
            (19) Section 562(b) of such Code is amended to read as 
        follows:
    ``(b) Distributions in Liquidation.--Except in the case of a 
foreign personal holding company described in section 552--
            ``(1) 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
            ``(2) 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.
For purposes of paragraph (1), a liquidation includes a redemption of 
stock to which section 302 applies. Except to the extent provided in 
regulations, the preceding sentence shall not apply in the case of any 
mere holding or investment company which is not a regulated investment 
company.''
            (20) Section 563 of such Code is amended by striking 
        subsection (b).
            (21) Section 564 of such Code is hereby repealed.
            (22) Section 631(c) of such Code is amended by striking 
        ``or section 545(b)(5)''.
            (23) Section 852(b)(1) of such Code is amended by striking 
        ``which is a personal holding company (as defined in section 
        542) or''.
            (24)(A) Section 856(h)(1) of such Code is amended to read 
        as follows:
            ``(1) In general.--For purposes of subsection (a)(6), a 
        corporation, trust, or association is closely held if the stock 
        ownership requirement of section 465(a)(3) is met.''
            (B) Section 856(h)(3)(A)(i) of such Code is amended by 
        striking ``section 542(a)(2)'' and inserting ``section 
        465(a)(3)''.
            (C) Paragraph (3) of section 856(h) of such Code is amended 
        by striking subparagraph (B) and by redesignating subparagraphs 
        (C) and (D) as subparagraphs (B) and (C), respectively.
            (D) Subparagraph (C) of section 856(h)(3) of such Code, as 
        redesignating by the preceding subparagraph, is amended by 
        striking ``subparagraph (C)'' and inserting ``subparagraph 
        (B)''.
            (25) The last sentence of section 882(c)(2) of such Code is 
        amended to read as follows: ``The preceding sentence shall not 
        be construed to deny the credit provided by section 33 for tax 
        withheld at source or the credit provided by section 34 for 
        certain uses of gasoline.''.
            (26) Section 936(a)(3) of such Code is amended by striking 
        subparagraph (C), by inserting ``or'' at the end of 
        subparagraph (B), and by redesignating subparagraph (D) as 
        subparagraph (C).
            (27) Section 992(d) of such Code is amended by striking 
        paragraph (2) and by redesignating succeeding paragraphs 
        accordingly.
            (28) Section 992(e) of such Code is amended by striking 
        ``and section 541 (relating to personal holding company tax)''.
            (29) Section 1202(e)(8) of such Code is amended by striking 
        ``section 543(d)(1)'' and inserting ``section 553(c)(1)''.
            (30) Section 1362(d)(3)(C)(iii) of such Code is amended by 
        adding at the end the following new sentence: ``References to 
        section 542 in the preceding sentence shall be treated as 
        references to such section as in effect on the day before its 
        repeal.''
            (31) Section 1504(c)(2)(B) of such Code is amended by 
        adding ``and'' at the end of clause (i), by striking clause 
        (ii), and by redesignating clause (iii) as clause (ii).
            (32) Section 2057(e)(2)(C) of such Code is amended by 
        adding at the end the following new sentence: ``References to 
        sections 542 and 543 in the preceding sentence shall be treated 
        as references to such sections as in effect on the day before 
        their repeal.''
            (33) Sections 6422 of such Code is amended by striking 
        paragraph (3) and by redesignating paragraphs (4) through (12) 
        and paragraphs (3) through (11), respectively.
            (34) Section 6501 of such Code is amended by striking 
        subsection (f).
            (35) Section 6503(k) of such Code is amended by striking 
        paragraph (1) and by redesignating paragraphs (2) through (5) 
        as paragraphs (1) through (4), respectively.
            (36) Section 6515 of such Code is amended by striking 
        paragraph (1) and by redesignating paragraphs (2) through (6) 
        as paragraphs (1) through (5), respectively.
            (37) Subsections (d)(1)(B) and (e)(2) of section 6662 of 
        such Code are each amended by striking ``or a personal holding 
        company (as defined in section 542)''.
            (38) Section 6683 of such Code is hereby repealed.
    (c) Clerical Amendments.--
            (1) The table of parts for subchapter G of chapter 1 of 
        such Code is amended by striking the item relating to part II.
            (2) The table of sections for part IV of such subchapter G 
        of such Code is amended by striking the item relating to 
        section 564.
            (3) The table of sections for part I of subchapter B of 
        chapter 68 of such Code is amended by striking the item 
        relating to section 6683.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.