paragraph are met if the royalties described in para-
graph (1) constitute at least 50 percent of the ordi-
nary gross income of the corporation for the taxable
year.
‘‘(4) DEDUCTIONS UNDER SECTIONS 162 AND
174 RELATING TO ROYALTIES MUST EQUAL OR EX-
CEED 25 PERCENT OF ORDINARY GROSS INCOME.—
‘‘(A) IN GENERAL.—The requirements of
this paragraph are met if—
‘‘(i) the sum of the deductions allow-
able to the corporation under sections 162,
174, and 195 for the taxable year which
are properly allocable to the trade or busi-
ness described in paragraph (2) equals or
exceeds 25 percent of the ordinary gross
income of such corporation for such tax-
able year, or
‘‘(ii) the average of such deductions
for the 5-taxable year period ending with
such taxable year equals or exceeds 25 per-
cent of the average ordinary gross income
of such corporation for such period.
If a corporation has not been in existence dur-
ing the 5-taxable year period described in clause
(ii), then the period of existence of such cor-
poration 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 allow-
able under section 162 if it is specifically allow-
able under another section.
‘‘(C) LIMITATION ON ALLOWABLE DEDUC-
TIONS.—For purposes of subparagraph (A), no
deduction shall be taken into account with re-
spect to compensation for personal services ren-
dered by the 5 individual shareholders holding
the largest percentage (by value) of the out-
standing 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 ac-
count.’’
(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 liq-
uidation, the part of such distribution which is prop-
erly chargeable to earnings and profits accumulated
after February 28, 1913, shall be treated as a divi-
dend for purposes of computing the dividends paid
deduction, and
‘‘(2) in the case of a complete liquidation occur-
ring 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 sen-
tence 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 re-
pealed.
(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 amend-
ed 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 insert-
ing ‘‘section 465(a)(3)’’.
(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 with-
held at source or the credit provided by section 34
for certain uses of gasoline.’’.