Schedule PH (Form 1120) 1986

Page 4

Deductions

Line 5—Federal and foreign income,
war profits, and excess profits
taxes.—Attach a schedule showing the
kind of tax, the tax year, and the
amount. Under section 545(b)(1), the
company can deduct federal income
taxes accrued during the tax year, but
not the accumulated earnings tax under
section 531 or the personal holding
company tax under section 541

The foreign tax credit is not allowed
against personal holding company tax.
A deduction is allowed, however, for
income, war profits, and excess profits
taxes accrued (or considered paid
under sections 902(a) or 960(a)(1))
during the tax year to foreign countries
and U.S. possessions. This is true if the
corporation claims a credit for the taxes
in figuring its income tax.

Line 6—Contributions.—Section
545(b)(2) provides a different
limitation for charitable contributions
for figuring the personal holding
company tax than the 10% limitation
used in determining the corporate
income tax. The limitations on
charitable deductions of individuals
apply, but are applied to the taxable
income to which the 10% limitation
applied. However, figure taxable
income without deducting the amount
disallowed under section 545(b)(6),
(excess expenses and depreciation).

The contribution carryover under
section 170(d) is not allowed when
figuring personal holding company tax.
Line 7—Net operating loss.—Section
545(b)(4) provides that instead of the
net operating loss deduction provided
in section 172, a deduction is allowed
for the net operating loss (as defined in
section 172(c)) for the preceding tax
year figured without the deductions
provided in Part VIII (except section
248) of Subchapter B.

Line 9—Amounts used or irrevocably
set aside.—Subject to the limitations
in section 545(c), section 545(c)(1)
allows a deduction for amounts used,
or irrevocably set aside, to the extent
reasonable, to pay or retire qualified
indebtedness as defined in section
545(c)(3). This deduction applies only
to corporations described in section
545(c)(2).

Any corporation taking this deduction
must provide detailed information and
any necessary computation showing it is
a corporation described in section
545(c)(2)(A). To the extent that it
succeeds to the deduction by section
381(c)(15), it must submit detailed
information showing that the distributor
or transferor corporation was a

corporation described in section
545(c)(2)(A).

A corporation succeeding to the
deduction must adjust its qualified
indebtedness to take this indebtedness
into account.

The corporation must establish that
the amount reported as a deduction is
reasonable. Attach a statement giving a
description of the indebtedness, date
incurred or assumed, date due, and
plan for payment or retirement of the
obligations (indicating date and method
of adoption). If the plan is covered by a
mandatory sinking fund agreement or
similar arrangement, include a copy of
the indenture or agreement by which
the fund was established and under
which it is maintained.

The statement must also include
e@ Amount of indebtedness on January
1, 1964; and
e@ Total amounts used or irrevocably
set aside to pay or retire the
indebtedness in earlier tax years
beginning on and after January 1,
1964; and
e@ Amount actually used during the tax
year to pay or retire the indebtedness;
and
e@ Amount irrevocably set aside during
the tax year to pay or retire the
indebtedness but not actually used
during the tax year for that purpose

Also, the statement must
indicate if the deduction claimed
represents:

e@ Anamount actually used during
the tax year to pay or retire the
indebtedness; or

e@ Anamount irrevocably set aside
during the tax year to pay or retire the
indebtedness; or

@ Acombination of the two.

If the amount reported as a
deduction on line 9 represents an
amount irrevocably set aside, and not
used to pay or retire the indebtedness,
attach a statement explaining the
circumstances and method by which it
was irrevocably set aside.

The corporation must also provide a
schedule for amounts described in
section 545(c)(5) that reduce the
amounts used or irrevocably set aside
to pay or retire qualified indebtedness.

Section 545(c)(4) allows
corporations to elect to treat as
nondeductible certain amounts used or
irrevocably set aside to pay or retire
qualified indebtedness that are
otherwise deductible under section
545(c)(1). See Regulations section
1,545-3(e) for time and manner of
making the election.

Line 10—Deduction for dividends
paid.—Enter this deduction from
Schedule B. The rules in section 562
apply in determining the deduction for
dividends paid.

Line 13—Dividends paid after the
end of the tax year.—Enter on line 13,
and not in Schedule B, the dividends
paid after the end of the tax year and
before the 16th day of the third month
following the end of the tax year if the
corporation elects to have the
dividends considered as paid during
that tax year.

Do not include on line 10 or line 13
deficiency dividends paid under
section 547.

Line 14—-Undistributed personal
holding company income of certain
foreign corporations.—If 10% or less
in value of the outstanding stock of a
foreign corporation is owned (see
section 958(a)) during the last half of
the tax year by U.S. persons,
undistributed personal holding
company income is determined by
multiplying the undistributed personal
holding company income (determined
without this instruction) by the
percentage in value of the corporation's
outstanding stock. This percentage is
figured by using the greatest
percentage in value of its outstanding
stock owned by the U.S. persons on any
one day during the period.

Personal Holding Company Income
Exception (line 7).—

Computer software royalties are not
considered personal holding company
income if the personal holding
company satisfies these five
conditions. First, the income must be
received during the tax year in
connection with the licensing of
computer software. Second, the
company must be in the active
business of developing, manufacturing,
or producing computer software. Third,
the computer software royalty income
must constitute at least 50% of the
company’s ordinary gross income for
the tax year. Fourth, the expenses
allowed under sections 162, 174, and
195 relating to computer software
royalty income must be at least 25% of
the company’s ordinary gross income.
Fifth, the sum of the dividends paid
under section 562, and dividends
considered paid under section 563(c),
and consent dividends under section
565 must equal or exceed the amount,
if any, by which personal company
income for the tax year exceeds 10% of
the company’s ordinary gross income.
These new rules apply to all qualified
computer software royalties whenever
received. See section 543(d).


SCHEDULE PH Computation of U.S.

(Form 1120)

Personal Holding Company Tax

Department of the Treasury
Internal Revenue Service P Attach to your tax return.

OMB No. 1545-0123

1986

Name

Employer identification number

Computation of Undistributed Personal Holding Company Income

1 Taxable income before net operating loss deduction and special deductions (Form 1120, line 28
as modified for section 465 losses, section 189 limitations, or section 280 limitations—see

2
Ss instructions for line 1) . 1
| 2 Contributions deducted in figuring line 1 (Form 1120, ‘ine 19). : 2
Z| 3. Excess expenses and depreciation under section 545(b)(6) (Schedule A, line 2) 3
4 Total—Add lines 1 through 3 4
5 Federal and foreign income, war profits, and excess profits taxes not deducted in figuring line 1
(attach schedule) - 5
6 Contributions deductible under section 545(b\(2) (ee line 6 instructions for limitation) 6
7 Net operating loss for the preceding tax year (deductible under section 545(b)(4))_ 7
8a Net capital gain (from separate Schedule D (Form 1120), line 10). . 8a
b Less: Income tax on this net capital gain (see section 545(b)(5)—
a attach computation) an 8b 8c
§ | 9 Amounts used or irrevocably set aside to pay or retire qualified indebtedness (see instructions for
3 line 9) . . 9
3 10 Deduction for dividends paid (other ‘than dividends paid after the end of the tax year ar (Schedule B,
a line 5)). 10
11  Total—Add lines 5 through 10 . 11
12 Subtract line 11 fromline4 . . 12
13 Dividends paid after the end of the tax year “(other than deficiency dividends “defined it in section
547(d)) but not more than the smaller of line 12 or 20% of Schedule B, line 1 . . 13
14 Undistributed personal holding company income—Subtract line 13 from line 12. Foreign
corporations—see instructions for line 14 14
a 15 Personal holding company tax (enter 50% of jine 14 here and on: Schedule J J Form 12),
- line 7; or the proper line of the appropriate tax return) - 15

INFORMATION REQUIRED UNDER SECTION 6501(f). If the information on income and stock ownership is not submitted

with the corporation's return, the limitation period for assessment and collection of personal holding company tax is 6 years.

Personal Holding Company Income

1
2a
b
3
4

1
1

KF Owan

12

Dividends . oe 1
Interest... . | 2a

Less: Amount excluded under section 543(b)(2(C) (attach schedule) . . L2b 2c
Royalties (other than mineral, oil, gas, or copyright royalties) . 3 _
Annuities Be 4
Rents... . [ba

Less: Adjustments described in section 543(b)(2\(A) (attach schedule) . [Sb Se

Mineral, oil, and gas royalties . . . . [Ga

Less: Adjustments described in section 543(b)(2)(B) (attach schedule) . (Sb 6c 7
Copyright royalties (see instructions for an exception for certain computer software royalties) . 7

Produced film rents : 8
Compensation received for use of corporation | property by shareholder 9

Amounts received under personal service contracts and from their sale 10
Amounts received from estates and trusts . 11

Total personal holding company income—Add lines 1 through 11 . 12

For Paperwork Reduction Act Notice, see page 1 of Form 1120 instructions.

Schedule PH (Form 1120) 1986


Schedule PH (Form 1120) 1986

Page 2

Stock Ownership.

Enter the names and addresses of the individuals who together owned directly or indirectly at any time during the

last half of the tax year more than 50% in value of the outs’

landing stock of the corporation.

(a) Name

(b) Address

Highest percentage of shares
owned during last half of tax year

(©) Preferred | (a) Common’

% %
% %
% %
% %
% %

Bdge 4 Excess of Expenses and Depreciation Over Income From Property Not Allowable Under
Section 545(b)(6) (See instructio

n for line 3)

(e) Repairs, in-
surance, and other

een” | kh) Excess (col

(b) Date (c) Cost or other (f) Total of

f pr

(a) Kind of property acquired ais (4) Depreciation one cttech columns (d) and (e) componeaten (f) less col. (g))
schedule)

2 Total excess of expenses and depreciation over rent or other compensation. Enter here and on line 3, page 1.
Note: Attach a statement showing 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

Siriass Deduction for Dividends Paid (See instruction for line 10)

1 Taxable dividends paid (do not include dividends considered as paid in the preceding tax year under

section 563, or deficiency dividends as defined in section 547)

2 Consent dividends (attach Forms 972 and 973) .

3 Taxable distributions—Add lines 1 and 2

4 Dividend carryover from first and second preceding tax years (attach computation) .

5 Deduction for dividends paid—Add lines 3 and 4. Enter here and online 10, page 1 .



Schedule PH (Form 1120) 1986

Page 3

General Instructions
(References are to the Internal Revenue
Code, unless otherwise noted.)

Purpose of Form
This schedule is used to figure personal
holding company tax.

Tax Reform Act of 1986

The Tax Reform Act of 1986 lowered
the tax rates for tax years that begin in
1987 and for later tax years. For tax
years beginning in 1987, the tax rate
for personal holding companies is
decreased to 38.5%. For tax years
beginning after 1987, the tax rate is
decreased to 28%.

Who Must File

Every personal holding company must
have this schedule attached to its
income tax return.

Definitions
Personal Holding Company.—A
corporation is a personal holding
company if:
@ Atleast 60% of its adjusted ordinary
gross income, defined in section
543(b)(2), for the tax year is personal
holding company income as defined in
section 543(a); and
e@ Atany time during the last half of
the tax year more than 50% in value of
its outstanding stock is owned, directly
or indirectly, by not more than 5
individuals.
For exceptions to the term ‘‘personal
holding company,” see section 542(c).
Certain personal holding companies
may elect to be treated as a regulated
investment company and be taxed at
the highest corporate rate on their
undistributed taxable income. For

definitions, limitations, and procedures.

see sections 851 and 852.
Individual.—An organization
described in section 401(a),
501(c)(17), or 509(a), or a part of a
trust permanently set aside or to be
used exclusively for the purpose
described in section 642(c) is also
considered an individual. See section
542(a)(2).

Foreign Corporations Must File a
Return.—If a foreign corporation that
is a personal holding company does not
file Schedule PH as required, the
corporation will be charged a penalty.
The penalty is 10% of the corporation's
Federal income taxes (including the
personal holding company tax) and is in
addition to any other penalties charged
the corporation. See section 6683
Note: For a foreign corporation all of
whose outstanding stock during the last
half of the tax year is owned directly or
indirectly by nonresident alien
individuals, taxable income for section
545(a) is only income received under a
contract for personal services as

described in section 543(a)(7). This
income must be reduced by deductions
for that income, and have special
adjustments made to the income, as
provided in section 545(b)

In determining net capital gains
under section 545(b)(5), see section
545(b)(7) which provides that, for
gains and losses realized after February
28, 1986, only those which are
effectively connected with the conduct
of a trade or business within the U.S.
and are not exempt from tax under
treaty, shall be taken into account.

Specific Instructions

These instructions are numbered to
correspond with the line numbers on
page 1 of Schedule PH (Form 1120).
Other line items on the form are self-
explanatory.

Additions

Line 1—Taxable income before net
operating loss deduction.—Enter the
amount shown on Form 1120, page 1,
line 28. If you figured the income on
line 28 using section 443(b), (placing
the income on an annual basis),
refigure it without that section.
However, adjust it for sections 189,
280, and 465.

See section 189 for limitations on
deductions for construction period
interest and taxes on real property
other than low-income housing.

See section 280 for the limitation on
deduction of certain expenditures
incurred in the production of films,
books, or similar property.

Note: Sections 189 and 280 are
repealed for costs incurred after 1986.

Section 465 contains special at-risk
rules that generally limit a personal
holding company’s losses. The at-risk
rules may apply to a personal holding
company engaged in any activity as a
trade or business or for the production
of income. Also, these provisions
generally apply to the holding of real
property acquired after 1986. See
section 465 (b)(6).

Section 465(d) losses are generally
limited to the total for which the
personal holding company is at risk for
each separate activity at the end of the
tax year. Generally, the corporation is
at risk for an activity for amounts
described in sections 465(b)(1) and
(2). Also, see section 465 (b)(6). The
amounts borrowed are not considered
to be at risk if they are excluded under
sections 465(b)(3) and (4).

If the corporation is involved in one
or more activities, one or more of
which incurs a loss for the year, report
the losses for each activity separately.
Attach Form 6198, Computation of
Deductible Loss From an Activity
Described in Section 465(c), showing

the amount at risk and gross income
and deductions for the activities with
the losses.

If a loss from an activity is more than
the amount the personal holding
company is at risk for the activity at the
end of the tax year, the amount of that
loss that is included on line 28 of Form
1120 cannot be more than the amount
at risk for the activity.

If the personal holding company
disposes of an asset in, or its interest in
(either total or partial), an activity to
which the at-risk rules apply, combine
the gain or loss on the disposition with
the profit or loss from the activity to
determine the net profit or loss from
the activity. If the personal holding
company has a net loss, it may be
limited because of the at-risk rules.

Treat any loss from an activity not
allowed for the corporation’s 1985 tax
year by section 465 as a deduction for
the activity in 1986. Include this
deduction on line 26 of Form 1120
See section 465(a).

If you are a foreign corporation
(whether or not engaged in a trade or
business within the United States) that
qualifies as a personal holding company
under section 542 but not as a foreign
personal holding company under
section 552, enter on line 1 the amount
figured under section 861 and not
under section 881(a).

Line 2—Contributions.—See
instructions for Form 1120.

Line 3—Expenses and depreciation.—
If the corporation earned rent or other
compensation for the use of, or right to
use, property that was less than the total
allowable expenses and depreciation,
complete Schedule A and enter the
excess on line 3.

You must make this adjustment
unless you establish, according to
section 545(b)(6), that the rent or
other compensation the corporation
received was the highest obtainable. If
none was received, you must show that
none was obtainable. The property
must be held in the course of a
business carried on for profit. There
must be a reasonable expectation that
the property's operation would result in
aprofit, or that the property was
necessary to conduct the business.

The burden of proof is on the
corporation. For a corporation with
excess deductions you must, instead of
completing Schedule A, attach a
statement reporting the deductions
with the complete facts,
circumstances, and arguments to
support them. The statement must
include the information required by
Regulations section 1.545-2(h)(2).