I 

108TH CONGRESS 

2D SESSION H. R. 4138 

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

holding companies. 

IN THE HOUSE OF REPRESENTATIVES 

APRIL 2, 2004 

Mr. HOUGHTON 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 tax on personal holding companies. 

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

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Personal Holding Com5 pany Tax Repeal Act of 2004’’. 

6 SEC. 2. REPEAL OF PERSONAL HOLDING COMPANY TAX. 

7 (a) IN GENERAL.—Part II of subchapter G of chap8 ter 1 of the Internal Revenue Code of 1986 (relating to 

9 personal holding companies) is hereby repealed. 

10 (b) CONFORMING AMENDMENTS.— 
2 

•HR 4138 IH 

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

2 read as follows: 

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

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

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

6 by striking subparagraph (G) and by redesignating 

7 the succeeding subparagraphs accordingly. 

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

9 striking paragraph (3), by inserting ‘‘or’’ at the end 

10 of paragraph (2), and by redesignating paragraph 

11 (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: 
3 

•HR 4138 IH 

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 
4 

•HR 4138 IH 

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 
5 

•HR 4138 IH 

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 
6 

•HR 4138 IH 

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 
7 

•HR 4138 IH 

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-
8 

•HR 4138 IH 

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— 
9 

•HR 4138 IH 

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 
10 

•HR 4138 IH 

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-
11 

•HR 4138 IH 

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: 
12 

•HR 4138 IH 

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.’’ 
13 

•HR 4138 IH 

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 (C) Paragraph (3) of section 856(h) of such 

20 Code is amended by striking subparagraph (B) and 

21 by redesignating subparagraphs (C) and (D) as sub22 paragraphs (B) and (C), respectively. 

23 (D) Subparagraph (C) of section 856(h)(3) of 

24 such Code, as redesignating by the preceding sub-
14 

•HR 4138 IH 

1 paragraph, is amended by striking ‘‘subparagraph 

2 (C)’’ and inserting ‘‘subparagraph (B)’’. 

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

4 such Code is amended to read as follows: ‘‘The pre5 ceding sentence shall not be construed to deny the 

6 credit provided by section 33 for tax withheld at 

7 source or the credit provided by section 34 for cer8 tain uses of gasoline.’’. 

9 (26) Section 936(a)(3) of such Code is amended 

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

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

12 subparagraph (D) as subparagraph (C). 

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

14 by striking paragraph (2) and by redesignating suc15 ceeding paragraphs accordingly. 

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

17 striking ‘‘and section 541 (relating to personal hold18 ing company tax)’’. 

19 (29) Section 1202(e)(8) of such Code is amend20 ed by striking ‘‘section 543(d)(1)’’ and inserting 

21 ‘‘section 553(c)(1)’’. 

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

23 amended by adding at the end the following new 

24 sentence: ‘‘References to section 542 in the pre25 ceding sentence shall be treated as references to 
15 

•HR 4138 IH 

1 such section as in effect on the day before its re2 peal.’’ 

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

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

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

6 (iii) as clause (ii). 

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

8 amended by adding at the end the following new 

9 sentence: ‘‘References to sections 542 and 543 in 

10 the preceding sentence shall be treated as references 

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

12 repeal.’’ 

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

14 striking paragraph (3) and by redesignating para15 graphs (4) through (12) and paragraphs (3) through 

16 (11), respectively. 

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

18 striking subsection (f). 

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

20 by striking paragraph (1) and by redesignating 

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

22 through (4), respectively. 

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

24 striking paragraph (1) and by redesignating para-
16 

•HR 4138 IH 

1 graphs (2) through (6) as paragraphs (1) through 

2 (5), respectively. 

3 (37) Subsections (d)(1)(B) and (e)(2) of section 

4 6662 of such Code are each amended by striking ‘‘or 

5 a personal holding company (as defined in section 

6 542)’’. 

7 (38) Section 6683 of such Code is hereby re8 pealed. 

9 (c) CLERICAL AMENDMENTS.— 

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

11 chapter 1 of such Code is amended by striking the 

12 item relating to part II. 

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

14 subchapter G of such Code is amended by striking 

15 the item relating to section 564. 

16 (3) The table of sections for part I of sub17 chapter B of chapter 68 of such Code is amended 

18 by striking the item relating to section 6683. 

19 (d) EFFECTIVE DATE.—The amendments made by 

20 this section shall apply to taxable years beginning after 

21 December 31, 2004. 

Æ