I

106TH CONGRESS

1ST SESSION H. R. 2111

To amend the Internal Revenue Code of 1986 to repeal the personal holding

company tax.

IN THE HOUSE OF REPRESENTATIVES

JUNE 9, 1999

Mr. RANGEL introduced the following bill; which was referred to the

Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to repeal

the personal holding company tax.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. REPEAL OF PERSONAL HOLDING COMPANY

4 TAX.

5 (a) IN GENERAL.—Part II of subchapter G of chap6 ter 1 of the Internal Revenue Code of 1986 (relating to

7 personal holding companies) is hereby repealed.

8 (b) LIMITATION ON DIVIDEND RECEIVED DEDUC9 TION OF CLOSELY HELD CORPORATIONS.—Section 246 of
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1 such Code is amended by inserting the following at the

2 end thereof:

3 ‘‘(f) CERTAIN CLOSELY HELD CORPORATIONS.—

4 ‘‘(1) GENERAL RULE.—In the case of a cor5 poration to which this subsection applies, the deduc6 tion allowed under this part for non-100 percent

7 dividends received during the taxable year shall not

8 exceed the dividends paid during such year.

9 ‘‘(2) CORPORATIONS TO WHICH PARAGRAPH (1)

10 APPLIES.—Paragraph (1) shall apply to a corpora11 tion if—

12 ‘‘(A) at least 5 percent of its gross income

13 for the taxable year is dividends, and

14 ‘‘(B) the corporation is described in section

15 465(a)(1)(B).

16 ‘‘(3) CARRYOVER OF DISALLOWED DEDUC17 TION.—The amount of deduction which is disallowed

18 by paragraph (1) shall be allowable in the suc19 ceeding taxable year in the same manner as if the

20 non-100 percent dividends to which such disallowed

21 deduction relates were received during such suc22 ceeding year.

23 ‘‘(4) NON-100 PERCENT DIVIDEND.—The term

24 ‘non-100 percent dividend’ means any dividend not

25 described in paragraph (2) or (3) of section 243(a).’’
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1 (c) CONFORMING AMENDMENTS.—

2 (1) Section 12(2) of such Code is amended to

3 read as follows:

4 ‘‘(2) For accumulated earnings tax, see part I

5 of subchapter G (sec. 531 and following).’’.

6 (2) Section 26(b)(2) of such Code is amended

7 by striking subparagraph (G) and by redesignating

8 the succeeding subparagraphs accordingly.

9 (3) Section 30A(c) of such Code is amended by

10 striking paragraph (3) and by redesignating para11 graph (4) as paragraph (3).

12 (4) Section 41(e)(7)(E) of such Code is amend13 ed by adding ‘‘and’’ at the end of clause (i), by

14 striking clause (ii), and by redesignating clause (iii)

15 as clause (ii).

16 (5) Section 56(b)(2) of such Code is amended

17 by striking subparagraph (C) and by redesignating

18 subparagraph (D) as subparagraph (C).

19 (6) Section 170(e)(4)(D) of such Code is

20 amended by adding ‘‘and’’ at the end of clause (i),

21 by striking clause (ii), and by redesignating clause

22 (iii) as clause (ii).

23 (7) Section 111(d) of such Code is amended to

24 read as follows:
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1 ‘‘(d) SPECIAL RULES FOR ACCUMULATED EARNINGS

2 TAX.—In applying subsection (a) for the purpose of deter3 mining the accumulated earnings tax under section 531—

4 ‘‘(1) any excluded amount under subsection (a)

5 allowed for purposes of this subtitle (other than sec6 tion 531) shall be allowed whether or not such

7 amount resulted in a reduction of the tax under sec8 tion 531 for the prior taxable year, and

9 ‘‘(2) where any excluded amount under sub10 section (a) was not allowed as a deduction for the

11 prior taxable year for purposes of this subtitle other

12 than section 531 but was allowable for the same tax13 able year under section 531, then such excluded

14 amount shall be allowable if it did not result in a re15 duction of the tax under section 531.’’.

16 (8)(A) Section 316(b) of such Code is amended

17 by striking paragraph (2) and by redesignating

18 paragraph (3) as paragraph (2).

19 (B) Section 331(b) of such Code is amended by

20 striking ‘‘(other than a distribution referred to in

21 paragraph (2)(B) of section 316(b))’’.

22 (9) Section 341(d) of such Code is amended—

23 (A) by striking ‘‘section 544(a)’’ and in24 serting ‘‘section 465(f)’’, and
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1 (B) by inserting before the period at the

2 end of the next to the last sentence ‘‘and such

3 paragraph (2) shall be applied by inserting ‘by

4 or for his partner’ after ‘his family’ ’’.

5 (10) Section 381(c) of such Code is amended by

6 striking paragraphs (14) and (17).

7 (11) Section 443(e) of such Code is amended by

8 striking paragraph (2) and by redesignating para9 graphs (3), (4), and (5) as paragraphs (2), (3), and

10 (4), respectively.

11 (12) Section 447(g)(4)(A) of such Code is

12 amended by striking ‘‘other than—’’ and all that fol13 lows and inserting ‘‘other than an S corporation.’’

14 (13)(A) Section 465(a)(1)(B) of such Code is

15 amended to read as follows:

16 ‘‘(B) a C corporation which is closely

17 held,’’.

18 (B) Section 465(a)(3) of such Code is amended

19 to read as follows:

20 ‘‘(3) CLOSELY HELD DETERMINATION.—For

21 purposes of paragraph (1), a corporation is closely

22 held if, at any time during the last half of the tax23 able year, more than 50 percent in value of its out24 standing stock is owned, directly or indirectly, by or

25 for not more than 5 individuals. For purposes of this
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1 paragraph, an organization described in section

2 401(a), 501(c)(17), or 509(a) or a portion of a trust

3 permanently set aside or to be used exclusively for

4 the purposes described in section 642(c) shall be

5 considered an individual.’’

6 (C) Section 465 of such Code is amended by

7 adding at the end the following new subsection:

8 ‘‘(f) CONSTRUCTIVE OWNERSHIP RULES.—For pur9 poses of subsection (a)(3)—

10 ‘‘(1) STOCK NOT OWNED BY INDIVIDUAL.—

11 Stock owned, directly or indirectly, by or for a cor12 poration, partnership, estate, or trust shall be con13 sidered as being owned proportionately by its share14 holders, partners, or beneficiaries.

15 ‘‘(2) FAMILY OWNERSHIP.—An individual shall

16 be considered as owning the stock owned, directly or

17 indirectly, by or for his family. For purposes of this

18 paragraph, the family of an individual includes only

19 his brothers and sisters (whether by the whole or

20 half blood), spouse, ancestors, and lineal descend21 ants.

22 ‘‘(3) OPTIONS.—If any person has an option to

23 acquire stock, such stock shall be considered as

24 owned by such person. For purposes of this para25 graph, an option to acquire such an option, and each
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1 one of a series of such options, shall be considered

2 as an option to acquire such stock.

3 ‘‘(4) APPLICATION OF FAMILY AND OPTION

4 RULES.—Paragraphs (2) and (3) shall be applied if,

5 but only if, the effect is to make the corporation

6 closely held under subsection (a)(3).

7 ‘‘(5) CONSTRUCTIVE OWNERSHIP AS ACTUAL

8 OWNERSHIP.—Stock constructively owned by a per9 son by reason of the application of paragraph (1) or

10 (3), shall, for purposes of applying paragraph (1) or

11 (2), be treated as actually owned by such person;

12 but stock constructively owned by an individual by

13 reason of the application of paragraph (2) shall not

14 be treated as owned by him for purposes of again

15 applying such paragraph in order to make another

16 the constructive owner of such stock.

17 ‘‘(6) OPTION RULE IN LIEU OF FAMILY

18 RULE.—If stock may be considered as owned by an

19 individual under either paragraph (2) or (3) it shall

20 be considered as owned by him under paragraph (3).

21 ‘‘(7) CONVERTIBLE SECURITIES.—Outstanding

22 securities convertible into stock (whether or not con23 vertible during the taxable year) shall be considered

24 as outstanding stock if the effect of the inclusion of

25 all such securities is to make the corporation closely
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1 held under subsection (a)(3). The requirement under

2 the preceding sentence that all convertible securities

3 must be included if any are to be included shall be

4 subject to the exception that, where some of the out5 standing securities are convertible only after a later

6 date than in the case of others, the class having the

7 earlier conversion date may be included although the

8 others are not included, but no convertible securities

9 shall be included unless all outstanding securities

10 having a prior conversion date are also included.’’

11 (D) Section 465(c)(7)(B) of such Code is

12 amended by striking clause (i) and by redesignating

13 clauses (ii) and (iii) as clauses (i) and (ii), respec14 tively.

15 (E) Section 465(c)(7)(G) of such Code is

16 amended to read as follows:

17 ‘‘(G) LOSS OF 1 MEMBER OF AFFILIATED

18 GROUP MAY NOT OFFSET INCOME OF PERSONAL

19 SERVICE CORPORATION.—Nothing in this para20 graph shall permit any loss of a member of an

21 affiliated group to be used as an offset against

22 the income of any other member of such group

23 which is a personal service corporation (as de24 fined in section 269A(b) but determined by sub-
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1 stituting ‘5 percent’ for ‘10 percent’ in section

2 269A(b)(2)).’’

3 (14) Sections 508(d), 4947, and 4948(c)(4) of

4 such Code are each amended by striking

5 ‘‘545(b)(2),’’ each place it appears.

6 (15) Section 532(b) of such Code is amended

7 by striking paragraph (1) and by redesignating

8 paragraphs (2), (3), and (4) as paragraphs (1), (2),

9 and (3), respectively.

10 (16) Sections 535(b)(1) and 556(b)(1) of such

11 Code are each amended by striking ‘‘section 541’’

12 and inserting ‘‘section 541 (as in effect before its re13 peal)’’.

14 (17)(A) Section 553(a)(1) of such Code is

15 amended by striking ‘‘section 543(d)’’ and inserting

16 ‘‘subsection (c)’’.

17 (B) Section 553 of such Code is amended by

18 adding at the end the following new subsection:

19 ‘‘(c) ACTIVE BUSINESS COMPUTER SOFTWARE ROY20 ALTIES.—

21 ‘‘(1) IN GENERAL.—For purposes of subsection

22 (a), the term ‘active business computer software roy23 alties’ means any royalties—
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1 ‘‘(A) received by any corporation during

2 the taxable year in connection with the licensing

3 of computer software, and

4 ‘‘(B) with respect to which the require5 ments of paragraphs (2), (3), (4), and (5) are

6 met.

7 ‘‘(2) ROYALTIES MUST BE RECEIVED BY COR8 PORATION ACTIVELY ENGAGED IN COMPUTER SOFT9 WARE BUSINESS.—The requirements of this para10 graph are met if the royalties described in paragraph

11 (1)—

12 ‘‘(A) are received by a corporation engaged

13 in the active conduct of the trade or business

14 of developing, manufacturing, or producing

15 computer software, and

16 ‘‘(B) are attributable to computer software

17 which—

18 ‘‘(i) is developed, manufactured, or

19 produced by such corporation (or its prede20 cessor) in connection with the trade or

21 business described in subparagraph (A), or

22 ‘‘(ii) is directly related to such trade

23 or business.

24 ‘‘(3) ROYALTIES MUST CONSTITUTE AT LEAST

25 50 PERCENT OF INCOME.—The requirements of this
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1 paragraph are met if the royalties described in para2 graph (1) constitute at least 50 percent of the ordi3 nary gross income of the corporation for the taxable

4 year.

5 ‘‘(4) DEDUCTIONS UNDER SECTIONS 162 AND

6 174 RELATING TO ROYALTIES MUST EQUAL OR EX7 CEED 25 PERCENT OF ORDINARY GROSS INCOME.—

8 ‘‘(A) IN GENERAL.—The requirements of

9 this paragraph are met if—

10 ‘‘(i) the sum of the deductions allow11 able to the corporation under sections 162,

12 174, and 195 for the taxable year which

13 are properly allocable to the trade or busi14 ness described in paragraph (2) equals or

15 exceeds 25 percent of the ordinary gross

16 income of such corporation for such tax17 able year, or

18 ‘‘(ii) the average of such deductions

19 for the 5-taxable year period ending with

20 such taxable year equals or exceeds 25 per21 cent of the average ordinary gross income

22 of such corporation for such period.

23 If a corporation has not been in existence dur24 ing the 5-taxable year period described in clause

25 (ii), then the period of existence of such cor-
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1 poration shall be substituted for such 5-taxable

2 year period.

3 ‘‘(B) DEDUCTIONS ALLOWABLE UNDER

4 SECTION 162.—For purposes of subparagraph

5 (A), a deduction shall not be treated as allow6 able under section 162 if it is specifically allow7 able under another section.

8 ‘‘(C) LIMITATION ON ALLOWABLE DEDUC9 TIONS.—For purposes of subparagraph (A), no

10 deduction shall be taken into account with re11 spect to compensation for personal services ren12 dered by the 5 individual shareholders holding

13 the largest percentage (by value) of the out14 standing stock of the corporation. For purposes

15 of the preceding sentence individuals holding

16 less than 5 percent (by value) of the stock of

17 such corporation shall not be taken into ac18 count.’’

19 (18) Section 561(a) of such Code is amended

20 by striking paragraph (3), by inserting ‘‘and’’ at the

21 end of paragraph (1), and by striking ’’, and’’ at the

22 end of paragraph (2) and inserting a period.

23 (19) Section 562(b) of such Code is amended to

24 read as follows:
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1 ‘‘(b) DISTRIBUTIONS IN LIQUIDATION.—Except in

2 the case of a foreign personal holding company described

3 in section 552—

4 ‘‘(1) in the case of amounts distributed in liq5 uidation, the part of such distribution which is prop6 erly chargeable to earnings and profits accumulated

7 after February 28, 1913, shall be treated as a divi8 dend for purposes of computing the dividends paid

9 deduction, and

10 ‘‘(2) in the case of a complete liquidation occur11 ring within 24 months after the adoption of a plan

12 of liquidation, any distribution within such period

13 pursuant to such plan shall, to the extent of the

14 earnings and profits (computed without regard to

15 capital losses) of the corporation for the taxable year

16 in which such distribution is made, be treated as a

17 dividend for purposes of computing the dividends

18 paid deduction.

19 For purposes of paragraph (1), a liquidation includes a

20 redemption of stock to which section 302 applies. Except

21 to the extent provided in regulations, the preceding sen22 tence shall not apply in the case of any mere holding or

23 investment company which is not a regulated investment

24 company.’’
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1 (20) Section 563 of such Code is amended by

2 striking subsection (b).

3 (21) Section 564 of such Code is hereby re4 pealed.

5 (22) Section 631(c) of such Code is amended by

6 striking ‘‘or section 545(b)(5)’’.

7 (23) Section 852(b)(1) of such Code is amend8 ed by striking ‘‘which is a personal holding company

9 (as defined in section 542) or’’.

10 (24)(A) Section 856(h)(1) of such Code is

11 amended to read as follows:

12 ‘‘(1) IN GENERAL.—For purposes of subsection

13 (a)(6), a corporation, trust, or association is closely

14 held if the stock ownership requirement of section

15 465(a)(3) is met.’’

16 (B) Section 856(h)(3)(A)(i) of such Code is

17 amended by striking ‘‘section 542(a)(2)’’ and insert18 ing ‘‘section 465(a)(3)’’.

19 (25) The last sentence of section 882(c)(2) of

20 such Code is amended to read as follows:

21 ‘‘The preceding sentence shall not be construed to

22 deny the credit provided by section 33 for tax with23 held at source or the credit provided by section 34

24 for certain uses of gasoline.’’.
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1 (26) Section 936(a)(3) of such Code is amended

2 by striking subparagraph (C), by inserting ‘‘or’’ at

3 the end of subparagraph (B), and by redesignating

4 subparagraph (D) as subparagraph (C).

5 (27) Section 992(d) of such Code is amended

6 by striking paragraph (2) and by redesignating suc7 ceeding paragraphs accordingly.

8 (28) Section 992(e) of such Code is amended by

9 striking ‘‘and section 541 (relating to personal hold10 ing company tax)’’.

11 (29) Section 1202(e)(8) of such Code is amend12 ed by striking ‘‘section 543(d)(1)’’ and inserting

13 ‘‘section 553(c)(1)’’.

14 (30) Section 1362(d)(3)(C)(iii) of such Code is

15 amended by adding at the end the following new

16 sentence: ‘‘References to section 542 in the pre17 ceding sentence shall be treated as references to

18 such section as in effect on the day before its re19 peal.’’

20 (31) Section 1504(c)(2)(B) of such Code is

21 amended by adding ‘‘and’’ at the end of clause (i),

22 by striking clause (ii), and by redesignating clause

23 (iii) as clause (ii).

24 (32) Section 2057(e)(2)(C) of such Code is

25 amended by adding at the end the following new
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1 sentence: ‘‘References to sections 542 and 543 in

2 the preceding sentence shall be treated as references

3 to such sections as in effect on the day before their

4 repeal.’’

5 (33) Sections 6422 of such Code is amended by

6 striking paragraph (3) and by redesignating para7 graphs (4) through (12) as paragraphs (3) through

8 (11), respectively.

9 (34) Section 6501 of such Code is amended by

10 striking subsection (f).

11 (35) Section 6503(k) of such Code is amended

12 by striking paragraph (1) and by redesignating

13 paragraphs (2) through (5) as paragraphs (1)

14 through (4), respectively.

15 (36) Section 6515 of such Code is amended by

16 striking paragraph (1) and by redesignating para17 graphs (2) through (6) as paragraphs (1) through

18 (5), respectively.

19 (37) Section 6501 of such Code is amended by

20 striking subsection (f).

21 (38) Section 6515 of such Code is amended by

22 striking paragraph (1) and by redesignating para23 graphs (2) through (6) as paragraphs (1) through

24 (5), respectively.
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1 (39) Subsections (d)(1)(B) and (e)(2) of section

2 6662 of such Code are each amended by striking ‘‘or

3 a personal holding company (as defined in section

4 542)’’.

5 (40) Section 6683 of such Code is hereby re6 pealed.

7 (d) CLERICAL AMENDMENTS.—

8 (1) The table of parts for subchapter G of

9 chapter 1 of such Code is amended by striking the

10 item relating to part II.

11 (2) The table of sections for part IV of such

12 subchapter G is amended by striking the item relat13 ing to section 564.

14 (3) The table of sections for part I of sub15 chapter B of chapter 68 of such Code is amended

16 by striking the item relating to section 6683.

17 (e) EFFECTIVE DATE.—The amendments made by

18 this Act shall apply to taxable years beginning after De19 cember 31, 1999.

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