to income from all other sources within the United States, gains from sales or
exchanges made within the United States of capital assets including stocks, securi-
ties, and commodities, Although such gains may not be subject to tax under
section 881 (a), they are subject to tax imposed by section 541.

2, Amount to be included in income where lien in favor of the United States
is satisfied or released.—The sum of the amounts deducted from taxable income
under section 545 (b) (9) with respect to any lien in favor of the United States
must be added to taxable income, in computing undistributed personal holding
company income, in the taxable year in which the lien is satisfied or released. Where
an amount is so added to taxable income, the shareholders of the corporation may,
pursuant to regulations prescribed by the Secretary or his delegate, elect to compute
the income tax with tespect to such dividends as are attributable to such amount
as though they were received ratably over the period the lien was in effect.

3, Expenses and depreciation applicable to property of the taxpayer in excess of
amount allowable under section 545 (b) (8).—If the corporation derived rent
or other compensation for the use or right to use property which was less than’ the
‘sum of the expenses incurred in connection therewith and deductible under section
162 and the depreciation allowable under section 167, Schedule A should be filled
in.and the excess of the expenses and depreciation over the rent or other compensa-
tion shown therein should be entered as item 3, page 1. This adjustment must be
made unless the taxpayer establishes, in accordance with section 545 (b) (8), that
the rent or other compensation received was the highest obtainable, or, if none was
received, that none was obtainable; that the property was held in the course of a
business carried on bona fide for profit; and either that there was reasonable expec-
tation that the operation of the property would result in a profit, or that the property
‘was necessary to the conduct of the business.

The burden of proof will rest upon the taxpayer to sustain the deduction of the
aggregate of the expenses and depreciation allowed under subtitle A in excess of
the rent or other compensation derived from the property. A corporation claiming
such excess deductions shall, in lieu of filling in Schedule A, attach to the return
@ statement setting forth its claim for allowance of the deductions together with a
complete statement of facts, circumstances, and arguments on which it relies in
support of the deductions. Such statement shall include:

(2). A description of the property;

(4) The cost or other basis to the corporation and the nature and value of the
consideration paid for the property;

(c) The name and address of the petson from whom acquired and the date
thereof;

(4) The name and address of the person to whom leased or rented, or the person
permitted to use the property, and the number of shares of stock, if any, held by

such person and the members of his family;
(2) The nature (cash, securities, services, etc.) and gross amount of the rent or

other compensation received or accrued for the use of, or the right to use, the
property during the taxable year and for each of the five preceding years and the
amount of the expenses incurred with respect to, and the depreciation sustained on,
the. property for such years;

(f) Evidence that the rent or other compensation was the highest obtainable and
if none was received or accrued, a statement of the reasons therefor;

(g) A copy of the contract, lease, or rental agreement;

{4) The purpose for which the property was used;

(i) The business carried on by the corporation with respect to which the prop-
erty was held and the gross income, expenses, and net income derived from the
conduct of such business for the taxable year and for each of the five preceding
years;

(j) A statement of any reasons which existed for expectation that the operation
of the property would be profitable, or a statement of the necessity for the use of
the property in the business of the corporation and the reasons why the property
‘was acquired;

(2) Any other information on which the corporation relies.

5. Additional contributions or gifts deductible under section 545 (b) (2) (not
deducted in computing item 1).—For purposes of the personal holding company
tax, section 545 (b) (2) provides for a larger limitation on deductions for chari-
table contributions than the 5 percent limitation for purposes of determining the
corporate tax. The limitations on charitable deductions of individuals are appli-
cable but are to be applied to the amount of taxable income to which the 5 percent
limitation applied. (See Specific Instruction 23, Form 1120.) However, a further
adjustmear for this purpose is that the taxable income shall also be computed
without the deduction of the amount disallowed under section 545 (b) (8)
(relating to expenses and depreciation applicable to property of the taxpayer).
6, Federal income and excess profits taxes—Section 545 (b) (1) provides that
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)
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. How-
ever, a taxpayer shall deduct Federal income and excess profits taxes under this
paragraph when paid if for each taxable year in which it was subject to tax imposed
by section 500 of the Internal Revenue Code of 1939 it deducted such taxes when
paid, unless it 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 all subsequent taxable years.

7. Income, war-profits, and excess profits taxes of a foreign country or U. S.
possession (not deducted in computing item 1).—The credit allowed to domestic
corporations by section 901 for income, war-profits, and excess profits taxes of
foreign countries and U. S. possessions is not allowed as a credit with respect to the
personal holding company tax. However, there shall be allowed as a deduction
the income, war profits, and excess profits taxes of foreign countries and possessions
of the United States accrued during the taxable year, even though the taxpayer
claims a credit for such taxes in computing its income tax.

Foreign corporations should treat such taxes as deductions to be allocated in
accordance with section 861 in computing income from sources within the United

1. 5, GOVERNMENT PRINTING OFFICE

States, and in such cases taxes of this nature will be reflected in taxable
stated in item 1 instead of being stated separately as a deduction in item 7.
8. Net operating loss for the preceding year deductible under section §
(4).—Section 545 (b) (4) provides that in lieu of the net operating loss de
provided in section 172 there shall be allowed the amount of the net operati
(as defined in section 172 (c)) for the preceding taxable year.

11, Lien in favor of the United States.—The taxpayer may deduct the s
not to exceed its taxable income, of any lien in favor of the United States
of which has been filed as provided in section 6323 (a) (1), (2), or (3)) tc
the taxpayer is subject at the close of the taxable year.

13. Deduction for dividends paid—Enter as item 13 the amount of the div.
paid deduction as computed in Schedule D. The deduction for dividends
the sum of (1) the dividends paid during the taxable year, (2) the consent dis
for the taxable year, and (3) the dividend carryover from the two preceding
years.

In general, a consent dividend is not an actual corporate distribution b
hypothetical distribution evidenced by shareholders’ consents to treat as a di
an amount which would constitute a dividend if distributed in money to suct
holders on the last day of the taxable year of such corporation. Such consei
dend may be availed of only if the person filing such consent owns commo:
(or participating preferred stock, the participating rights of which are unlit
and the amount specified in the consent is pro rata, with no preference to an
of stock as compared with other shares of the same class, and with no pre
to-one class of stock as compared with another class except to the extent t
former is entitled to such preference. The effect of the consent is that the :
of the consent dividend is treated both as a dividend and as a contribution
capital of the corporation by the shareholder on the last day of the taxab
of the corporation. A consent shall be filed in duplicate on Form 972 at ar
but not later than the due date of the corporation’s income tax return for the
year for which credit is claimed. In addition, Form 973 must be filed
taxpayer corporation.

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

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

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

(3) If there is an excess of such deductions for dividends paid over such 1
income for the first preceding taxable year, such excess shall be allowed as
dend carryover to the taxable year.

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

(5) The amount of the reduction specified in paragraph (4) shall be the a

of the excess of the taxable income, if any, for the first preceding taxable yea
such deduction for dividends paid, if any, for the first preceding taxable yea
14. Amounts used or irrevocably set aside to pay or retire indebtedness «
kind incurred prior to January 1, 1934.—Enter as item 14 the total a
reflected in line 12, Schedule E. Section 545 (b) (7) provides that in deter:
undistributed personal holding company income there shall be allowed as a
tion amounts used of irrevocably set aside to pay or retire indebtedness of an
incurred before January 1, 1934, if such amounts are reasonable with rel
to the size and terms of such indebtedness.
17. Dividends paid after close of taxable year (excluding deficiency divide
defined in section 547 (d)).—Enter as item 17 and not in Schedule D, the a
of the dividends paid after the close of the taxable year and before the 15th
the third month thereafter, if the taxpayer elects in its return for the taxab
ividends considered as paid during such taxable year. The 3
idend under this paragraph with respect to any taxable yea
not exceed either the undistributed personal holding company income of tl
poration for the taxable year, computed without regard to the dividend
pursuant to this paragraph (Item 16 of page 1 of this Schedule) or 10 pert
the sum of the dividends paid during the taxable year, computed without
to this paragraph (i. . 10 percent of line 3, Schedule D).

Neither item 13 nor item 17 should include “deficiency dividends.” Th
“deficiency dividends” means in general only those dividends which are pai
corporation pursuant to a specific procedure set forth in section 547, which it
a requirement that there must first be a determination by a court, by closing
ment, or (under regulations) a written agreement signed by the District C
and by or on behalf of the taxpayer relating to the liability of the corporat.
personal holding company tax.

Schedule required under section 6501 (£).—Section 6501 (f) prov:
follows:

(£) Personal Holding Company Tax.—If a corporation which is a p
holding company for any taxable year fails to file with its return under ch:
for such year a schedule setting forth—

(1) the items of gross income, described in section 543 (a), received
corporation during such year, and
(2) the names and addresses of the individuals who owned, within the
ing of section 544 (relating to rules for determining stock ownership),
time during the last half of such year more than 50 percent in value
outstanding capital stock of the corporation,
the personal holding company tax for such year may be assessed, or a prot
in court for the collection of such tax may be begun without assessment,
time within 6 years after the return for such year was filed.
oo 10—71975-1



SCHEDULE PH

Form 1120 COMPUTATION OF U. S. PERSONAL HOLDING COMPANY TAX 1954

U. 8. Trecsury Department
Internal Revenue Service

FOR CALENDAR YEAR 1954
or other taxable year beginning , 1984, and ending a
Name and address

UNDISTRIBUTED PERSONAL HOLDING COMPANY INCOME COMPUTATION

Instruction
and Item No.
1, Taxable ‘nesme before net operating loss deduction and special deductions from Schedule K, Form 1120 (item 31, page 1,
Form 112
2. Amount to be included in income where lien in favor of the United States is satisfied or released. .......... neces enceeeeseeeee

3. Expenses and depreciation applicable to property of the taxpayer in excess of amount allowable under.section 545 (b).-(8).
(From Schedule A).

4, Total of items 1 to 3, inclusive
8. Additional contributions or gifts deductible under section 545 (b) (2). (Not included in computing
item 1) rom,Schedule B)

6. Federal income and excess profits taxes. (Attach schedule) .........ssseeeeeeneee

7. Income, war-profits and excess protits taxes of a foreign country or U, S, possession (not deducted in com-
puting item 1), (From Schedule C)...

. Net operating loss for the preceding taxable year deductible under section 545 (b) (4).
9. Excess of net long-term capital gain over net short-term capital loss (item 13

(b), page 1, Form 1120)
10. Less: Income tax attributable to such excess. (Attach computation if
amount is different from line 17, separate Schedule D, 1120)...... i

11, Amount of a lien in favor of the United States

12. Special deduction for bank affiliates allowable under section 545 (b) (6).....+++eeeeeee be eeeeeeeeee

13. Deduction for dividends paid (excluding dividends paid after close of taxable year). (From Schedule D)..|__

14. Amounts used or irrevocably set aside to pay or retire indebtedness of any kind incurred prior to January
1, 1934, (From Schedule E)......secseeeecseseeseecsereeeseeeeseeececessesseeesesen seach

15. Total of items 5 to 14, inchisive.....sseceeseeeeeeereceseeneeseeeeeeteseeeseeee sent eee e eee ee ee en cent eect eeeeneeeeees

16. Undistributed personal holding company income before deducting dividends paid after close of taxable year (item 4 minus item 15).

17. Less: Dividends paid after close of taxable year (excluding deficiency dividends as defined in section 547 (d)) but not in
excess of the lesser of item 16 or 10% of line 3, Schedule D..

18. Undistributed personal holding company income (item 16 minus item 17)

COMPUTATION OF TAX
19. Tax on portion of item 18, not in excess of $2,000, at 75%

20. Tax on portion of item 18, in excess of $2,000, at 85%... 0.6... ece eee eect cette eee en ee nett neers reste esse ee nee ee

21. Total Personal Holding Company tax due (total of items 19 and 20). (Enter here and as item 37, page 1, Form 1120).......... $

SCHEDULE REQUIRED UNDER SECTION 6501 (£)
(a) Personal Holding Company Income

1.
2. Interest. .
3. Royalties (other than mineral, ofl, or gas royalties) .
4. Annuities. .

§. Gains from sale or exchange of stock or securities
6. Gains from futures transactions.
1. Amounts received from estates and trusts and gains from the sale or other disposition of any interest in an estate or trust.
8. Income from personal service contracts.
9. Amounts received as compensation for use of corporation property by shareholder

11. Mineral, oil, or gas royalties .
12. Total personal holding company income ......+++++.++++

(b) Stock Ownership
Enter below the names and addresses of the individuals who owned, directly or indirectly, at any time during the last half cf the taxable year, more th
percent in value of the outstanding capital stock of the corporation:

Highest percentage of shares owned during last half of taxab
Preferred Common

Name Address

oo—10—7137


Pa
Schedule A.—EXCESS OF EXPENSES AND DEPRECIATION OVER INCOME FROM PROPERTY NOT ALLOWABLE UNDER SECTION 545 (b) (8). (See Instructk

5, Repairs, Insurance, and Other | 6. Aggregate of Expenses:
; 2. Dae wa BCID] 7 nemo tom Rent | 8 fc (a
1 tind of Property Heats | s coteronersns | 4 devecotn | "Brustetsa itty” |* 2 Stettae | "gpemetom ete | 8 Gewgo

$.

Total excess of expenses and depreciation over rent or other compensation, (Enter here and as item 3, page 1)
Explanation of expenses entered in column 5 -

State the names and addresses of persons from whom rent or other compensation was received for the use of, or the right to use, each property -

Schedule B.—ADDITIONAL CONTRIBUTIONS OR GIFTS PAID. (Not deducted in computing item 1, page 1) (See Instruction 5)

Name and Address of Organization Amount Name and Address of Organization Amount

(Enter here and as item 5, page 1, subject to appropriate percentage limitations) .

Schedule C.—INCOME, WAR-PROFITS, AND EXCESS-PROFITS TAXES OF A FOREIGN COUNTRY OR U. S. POSSESSION.
(See Instruction 7)

Nature of Tax Taxable Year Amount Nature of Tax Taxable Year ‘Amount

Total. (Enter here and as item 7, page 1) .

Schedule D.—DEDUCTION FOR DIVIDENDS PAID. (Sco Instruction 13)

1. Taxable dividends paid, excluding (a) dividends paid in current taxable year and claimed in the preceding year under section
563, and (b) deficiency dividends as defined in section 547.
2. Consent dividends. (Submit schedule)

3. Taxable distributions (total of lines 1 and 2).. tee
4. Dividend carry-over from first and second preceding taxable years, (Submit schedule of computation).
5. Deduction for dividends paid (total of lines 3 and 4), (Enter here and as item 13, page 1)

Schedule E.—AMOUNT USED OR SET ASIDE TO PAY OR RETIRE INDEBTEDNESS INCURRED PRIOR TO JANUARY 1, 1934. (See Instruction 14)

1, Description of indebtedness
2. Date incurred or assumed.
3. Date due
4. Original amount of indebtedness.
§. Amount used or set aside prior to January 1, 1934, to pay or retire such

6.
aside prior to that date to pay or retire such indebtedness............ .

. Aggregate of amounts used or set aside to retire such indebtedness in taxable
years beginning on and after January 1, 1934 (not including taxable year
covered by this return) bees

8 Amount used or irrevocably set aside during the taxable year covered by

rey

this return to pay or retire such indebtedness. $. 8. $.
9. Total of lines 7 and 8. $ $ 8.
10. Balance of indebtedness (line 6 minus line 9). is Ss. 3.

11. Indicate separately:
(a) Amount actually used during the taxable year covered by this return
to pay or retire the indebtedness.........0.....eeeeee scenes eee Ss. $ $
(b) Amount irrevocably set aside during the taxable year covered by
this return to pay or retire tho indebtedness, but not actually used

during the taxable year for such purpose 3 $
12, Portions of amounts entered on line 8 above, claimed as deductions for the |
taxable year covered by this return. (Enter portions of amounts here and |

total of such portions as item 14, page 1)... I $ $

Indicate by check mark whether the deduction claimed in item 14, page 1 of this return, represents:
A (Amount actually used during the taxable year to pay or retire the indebtedness;
B (J Amount irrevocably set aside during the taxable year to pay or retire the indebtedness; or
CO Combination of both A and B.

There must be furnished all of the facts and circumstances upon which the taxpayer relies to establish the reasonableness of the amount claimec
deduction. Describe fully in an attached statement the plan for payment or retirement of the obligations, indicating date and method of adoption, and, \
the plan is covered by a mandatory sinking fund agreement or similar arrangement, submit a copy of the indenture or agreement by which the func
established and under which it is maintained.

If the amount claimed as a deduction in item 14, page] of this return, represents an amount irrevocably set aside to pay or retire the indebtedness, ex
fully in an attached siatement tle circumstances and method by which it was irrevocably set aside.

V6. GOVERNMENT PRINTING OFFICE — cO—16—71875-1



INSTRUCTIONS FOR SCHEDULE PH 1120
COMPUTATION OF U. S. PERSONAL HOLDING COMPANY TAX

(Under Subtitle A, Internal Revenue Code)

(Roterences are to th

internal Revenue Code of 1954 unless otherwise noted)

GENERAL INSTRUCTIONS

Corporations which must file Schedule PH (1120).—Every corporation which
comes within the classification of a “personal holding company” must file a Sched-
ule PH. The term “personal holding company” means any corporation, other than
those listed in the exceptions below, if at least 80 percent of its gross income for
the taxable year is personal holding company income and 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 determining such stock ownership, an organization described in section 503 (b)
or a portion of a trust permanently set aside or to be used exclusively for the pur-
poses described in section 642 (c) or a corresponding provision of a prior income
tax Jaw shall be considered an individual. (See section 542 (a).)

In the case of corporations filing consolidated returns, see section 542 (b).

‘The term “personal holding company,” as referred to above, does not include
any of the following:

(1) A corporation exempt from tax under subchapter F (sec. 501 and

following) ;

(2) a bank as defined in section 581;

(3) a life insurance company;

(4) a surety company;

(5) 2 foreign personal holding company as defined in section 552;

(6) a licensed personal finance company as defined in section 542 (c) (6);

(7) a lending company as defined in section 542 (c) (7);

(8) a loan or investment corporation as defined in section 542 (c) (8)3

(9) a finance company as defined in section 542 (c) (9); and

(10) a foreign corporation the gross income and stock ownership of which falls

within the provisions of section 542 (c) (10).

A foreign corporation, whether resident or nonresident, which is classified as a
personal holding company under section 542 (not including a foreign personal
holding company as defined in section 552) is subject to the tax imposed by section
541 with respect to its income from sources within the United States even though
such income is not fixed or determinable annual or periodical income specified in
section 881 (a). (See section 861.) ‘The term “personal holding company” as
used in subtitle A does not include a foreign corporation if (1) its gross income
from sources within the United States for the period specified in section 861 (a)
(2) (B) is less than 50 percent of its total gross income from all sources and
(2) all of its stock outstanding during the last half of the taxable year is owned
by nonresident alien individuals, whether directly or indirectly through other
foreign corporations.

Personal holding company income.—The term “personal holding company
income” is defined by section 543 as the portion of the gross income which con-
sists of:

(1) Divienns, Brc—Dividends, interest, royalties (other than mineral, oil,
‘of gas royalties), and annuities. ‘This paragraph shall not apply to interest con-
stituting rent as defined in paragraph (7) or to interest on amounts set aside in
a reserve fund under section 511 or 607 of the Merchant Marine Act, 1936.

(2) Srock AND SECURITIES TRANSACTIONS.—Except in the case of regular
dealers in stock or securities, gains from the sale or exchange of stock or
securities.

(3) CoMMODITIES TRANSACTIONS.—Gains from futures transactions in any
commodity on or subject to the rules of a board of trade or commodity exchange.
This paragraph shall not apply to gains by a producer, processor, merchant, or
handler of the commodity which arise out of bona fide hedging transactions
reasonably necessary to the conduct of its business in the manner in which such
business is customarily and usually conducted by others.

(4) 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); and gains from the sale or other
disposition of any interest in an estate or trust.

(5) 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
me services, or if the individual who is to perform 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
‘& particular contract only if at some time during the taxable year 25 percent or
‘ore in value of the outstanding stock of the corporation is owned, directly or
andirectly, by or for the individual who has performed, is to perform, or may be
cesignated (by name or by description) as the one to perform, such services.

(6) Usk 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
poration or by means of a sublease or other arrangement. This paragraph
apply only to a corporation which has personal holding company income fo
taxable year, computed without regard to this paragraph and paragraph (7
excess of 10 percent of its gross income,

(7) Renrts.—Rents, unless constituting 50 percent or more of the gross inc
For purposes of this paragraph, the term “rents” means compensation, hov
designated, for the use of, or right to use, property, and the interest on debts «
to the corporation, to the extent such debts represent the price for which
properly held primarily for sale to customers in the ordinary course of its i
ot business was sold or exchanged by the corporation; but does not in«
amounts constituting personal holding company income ‘under paragraph

(8) MuNERAL, OIL, oR GAs ROYALTIES—Mineral, oil, ot gas royalties, unle

(A) such royalties constitute 50 percent or more of the gross income,
(B) the deductions allowable under section 162 (relating to trade or

ness expenses) other than compensation for personal services rendered b:

shareholders, constitute 15 percent or more of the gross income.

Stock ownership.—Section 544 contains the following provision with refe:
to stock ownership.

(a) Consrructive OwnersHiP.—For purposes of determining whether a
poration is a personal holding company, insofar as such determination is base
stock ownership under section 542 (a) (2), section 543 (a) (5), or section
(a) (6)—

(1) Srock NoT OWNED BY INDIVIDUAL.—Stock owned, directly or indir:
by or for a corporation, partnership, estate, or trust shall be considered as k
owned proportionately by its shareholders, partners, or beneficiaries.

(2) FAMILY AND PARTNERSHIP OWNERSHIP.—An individual shall be co
ered as owning the stock owned, directly or indirectly, by or for his family «
or for his partner. For purposes of this paragraph, the family of an indivi
includes only his brothers and sisters (whether by the whole or half blc
spouse, ancestors, and lineal descendants.

(3) Options.—If any person has an option to acquire stock, such stock
be considered as owned by such person. For purposes of this paragrapt
option to acquire such an option, and each one of a series of such options,
be considered as an option to acquire such stock.

(4) APPLICATION OF FAMILY-PARTNERSHIP AND OPTION RULES.—Paragt
(2) and (3) shall be applied—

(A) for purposes of the stock ownership requirement provided in se
542 (a) (2), if, but only if, the effect is to make the corporation a pers
holding company;

(B) for purposes of section 543 (a) (5) (relating to personal service
tracts), or of section 543 (a) (6) (relating to the use of property by sl
holders), if, but only if, the effect is to make the amounts therein referre
includible under such paragraph as personal holding company income.
(5) CoNsTRUCTIVE OWNERSHIP AS ACTUAL OWNERSHIP.—Stock construct

owned by a person by reason of the application of paragraph (1) or (3) s

for purposes of applying paragraph (1) or (2), be treated as actually owne

such person; but stock constructively owned by an individual by reason o:

application of paragraph (2) shall not be treated as owned by him for pur}

of again applying such paragraph in order to make another the constructive o

of such stock.

(6) OPTION RULE IN LIEU OF FAMILY AND PARTNERSHIP RULE.—If stock
be considered as owned by an individual under either paragraph (2) or (:
shall be considered as owned by him under paragraph (3).

(b) ConverTIBLE SECURITIES.—Outstanding securities convertible into :
(whether or not convertible during the taxable year) shall be considered as
standing stock—

(1) for purposes of the stock ownership requirement provided in section
(a) (2), but only if the effect of the inclusion of all such securities is to 1
the corporation a personal holding company;

(2) for purposes of section 543 (a) (5) (relating to personal service
tracts), but only if the effect of the inclusion of all such securities is to 1
the amounts therein referred to includible under such paragraph as personal |
ing company income; and

(3) for purposes of section 543 (a) (6) (relating to the use of proper
shareholders), but only if the effect of the inclusion of all such securities
make the amounts therein referred to includible under such paragraph as per:
holding company income.

‘The requirement in paragraphs (1), (2), and (3) that all convertible secu.
must be included if any are to be included shall be subject to the exception
where some of the outstanding securities are convertible only after a later date
in the case of others, the class having the earlier conversion date may be incl
although the others are not included, but no convertible securities shall be incl
unless all outstanding securities having a prior conversion date are also include:

SPECIFIC INSTRUCTIONS

‘The following instructions are numbered to correspond with item numbers on
page 1 of this schedule.
1, Taxable income before net operating loss deduction and special deductions
from Schedule K, Form 1120.—Enter here the amount shown on line 31, Form
1120, computed in accordance with the provisions of subtitle A, but without regard
to section 443 (b) (relating to income placed on an anoual basis). In the event
such taxable income in item 1 includes any amount with respect to coal royalties

to which section 631 (c) is applicable, see section 631 (c) and the regula
thereunder.

In the case of a nonresident foreign corporation (not engaged in trade or bus
within the United States) which qualifies as a personal holding company u
section 542 but not as a foreign personal holding company under section 552
amount to be entered in item 1 must be computed under section 861 rather
under section 881 (a), The taxable income so computed will reflect, in add

ie n1a7