I
107TH CONGRESS
1ST SESSION
H. R. 1728
To amend the Internal Revenue Code of 1986 to repeal the personal holding
company tax.
IN THE HOUSE OF REPRESENTATIVES
MAY 3, 2001
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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. REPEAL OF PERSONAL HOLDING COMPANY
TAX.
(a) IN GENERAL.—Part II of subchapter G of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to
personal holding companies) is hereby repealed.
(b) LIMITATION ON DIVIDEND RECEIVED DEDUC-
TION OF CLOSELY HELD CORPORATIONS.—Section 246 of
such Code is amended by inserting the following at the
end thereof:
‘‘(f) CERTAIN CLOSELY HELD CORPORATIONS.—
‘‘(1) GENERAL RULE.—In the case of a cor-
poration to which this subsection applies, the deduc-
tions allowed under this part for dividends (other
than qualifying dividends) received during the tax-
able year shall not exceed the dividends paid during
such year.
‘‘(2) CORPORATIONS TO WHICH PARAGRAPH (1)
APPLIES.—Paragraph (1) shall apply to a corpora-
tion if—
‘‘(A) at least 5 percent of it gross income
for the taxable year consists of dividends other
than qualifying dividends, and
‘‘(B) the corporation is described in section
465(a)(1)(B).
‘‘(3) CARRYOVER
OF
DISALLOWED
DEDUC-
TION.—The amount of deduction which is disallowed
by paragraph (1) shall be allowable in the suc-
ceeding taxable year in the same manner as if the
dividends to which such disallowed deduction relates
were received during such succeeding year.
‘‘(4) QUALIFYING DIVIDENDS.—For purposes of
this subsection, the term ‘qualifying dividends’ has
the meaning given to such term by section 243(b);
except that such term shall not include any distribu-
tion directly or indirectly from earnings and profits
attributable to dividends which are not described in
section 243(b).’’
(c) CONFORMING AMENDMENTS.—
(1) Section 12(2) of such Code is amended to
read as follows:
‘‘(2) For accumulated earnings tax, see part I
of subchapter G (sec. 531 and following).’’.
(2) Section 26(b)(2) of such Code is amended
by striking subparagraph (G) and by redesignating
the succeeding subparagraphs accordingly.
(3) Section 30A(c) of such Code is amended by
striking paragraph (3) and by redesignating para-
graph (4) as paragraph (3).
(4) Section 41(e)(7)(E) of such Code is amend-
ed by adding ‘‘and’’ at the end of clause (i), by
striking clause (ii), and by redesignating clause (iii)
as clause (ii).
(5) Section 56(b)(2) of such Code is amended
by striking subparagraph (C) and by redesignating
subparagraph (D) as subparagraph (C).
(6) Section 170(e)(4)(D) of such Code is
amended by adding ‘‘and’’ at the end of clause (i),
by striking clause (ii), and by redesignating clause
(iii) as clause (ii).
(7) Section 111(d) of such Code is amended to
read as follows:
‘‘(d) SPECIAL RULES FOR ACCUMULATED EARNINGS
TAX.—In applying subsection (a) for the purpose of deter-
mining the accumulated earnings tax under section 531—
‘‘(1) any excluded amount under subsection (a)
allowed for purposes of this subtitle (other than sec-
tion 531) shall be allowed whether or not such
amount resulted in a reduction of the tax under sec-
tion 531 for the prior taxable year, and
‘‘(2) where any excluded amount under sub-
section (a) was not allowed as a deduction for the
prior taxable year for purposes of this subtitle other
than section 531 but was allowable for the same tax-
able year under section 531, then such excluded
amount shall be allowable if it did not result in a re-
duction of the tax under section 531.’’.
(8)(A) Section 316(b) of such Code is amended
by striking paragraph (2) and by redesignating
paragraph (3) as paragraph (2).
(B) Section 331(b) of such Code is amended by
striking ‘‘(other than a distribution referred to in
paragraph (2)(B) of section 316(b))’’.
(9) Section 341(d) of such Code is amended—
(A) by striking ‘‘section 544(a)’’ and in-
serting ‘‘section 465(f)’’, and
(B) by inserting before the period at the
end of the next to the last sentence ‘‘and such
paragraph (2) shall be applied by inserting ‘by
or for his partner’ after ‘his family’ ’’.
(10) Section 381(c) of such Code is amended by
striking paragraphs (14) and (17).
(11) Section 443(e) of such Code is amended by
striking paragraph (2) and by redesignating para-
graphs (3), (4), and (5) as paragraphs (2), (3), and
(4), respectively.
(12) Section 447(g)(4)(A) of such Code is
amended by striking ‘‘other than—’’ and all that fol-
lows and inserting ‘‘other than an S corporation.’’
(13)(A) Section 465(a)(1)(B) of such Code is
amended to read as follows:
‘‘(B) a C corporation which is closely
held,’’.
(B) Section 465(a)(3) of such Code is amended
to read as follows:
‘‘(3) CLOSELY
HELD
DETERMINATION.—For
purposes of paragraph (1), a corporation is closely
held if, at any time during the last half of the tax-
able year, more than 50 percent in value of its out-
standing stock is owned, directly or indirectly, by or
for not more than 5 individuals. For purposes of this
paragraph, an organization described in section
401(a), 501(c)(17), or 509(a) or a portion of a trust
permanently set aside or to be used exclusively for
the purposes described in section 642(c) shall be
considered an individual.’’
(C) Section 465 of such Code is amended by
adding at the end the following new subsection:
‘‘(f) CONSTRUCTIVE OWNERSHIP RULES.—For pur-
poses of subsection (a)(3)—
‘‘(1) STOCK
NOT
OWNED
BY
INDIVIDUAL.—
Stock owned, directly or indirectly, by or for a cor-
poration, partnership, estate, or trust shall be con-
sidered as being owned proportionately by its share-
holders, partners, or beneficiaries.
‘‘(2) FAMILY OWNERSHIP.—An individual shall
be considered as owning the stock owned, directly or
indirectly, by or for his family. For purposes of this
paragraph, the family of an individual includes only
his brothers and sisters (whether by the whole or
half blood), spouse, ancestors, and lineal descend-
ants.
‘‘(3) OPTIONS.—If any person has an option to
acquire stock, such stock shall be considered as
owned by such person. For purposes of this para-
graph, an option to acquire such an option, and each
one of a series of such options, shall be considered
as an option to acquire such stock.
‘‘(4) APPLICATION
OF
FAMILY
AND
OPTION
RULES.—Paragraphs (2) and (3) shall be applied if,
but only if, the effect is to make the corporation
closely held under subsection (a)(3).
‘‘(5) CONSTRUCTIVE
OWNERSHIP
AS
ACTUAL
OWNERSHIP.—Stock constructively owned by a per-
son by reason of the application of paragraph (1) or
(3), shall, for purposes of applying paragraph (1) or
(2), be treated as actually owned by such person;
but stock constructively owned by an individual by
reason of the application of paragraph (2) shall not
be treated as owned by him for purposes of again
applying such paragraph in order to make another
the constructive owner of such stock.
‘‘(6) OPTION
RULE
IN
LIEU
OF
FAMILY
RULE.—If stock may be considered as owned by an
individual under either paragraph (2) or (3) it shall
be considered as owned by him under paragraph (3).
‘‘(7) CONVERTIBLE SECURITIES.—Outstanding
securities convertible into stock (whether or not con-
vertible during the taxable year) shall be considered
as outstanding stock if the effect of the inclusion of
all such securities is to make the corporation closely
held under subsection (a)(3). The requirement under
the preceding sentence that all convertible securities
must be included if any are to be included shall be
subject to the exception that, where some of the out-
standing securities are convertible only after a later
date than in the case of others, the class having the
earlier conversion date may be included although the
others are not included, but no convertible securities
shall be included unless all outstanding securities
having a prior conversion date are also included.’’
(D) Section 465(c)(7)(B) of such Code is
amended by striking clause (i) and by redesignating
clauses (ii) and (iii) as clauses (i) and (ii), respec-
tively.
(E) Section 465(c)(7)(G) of such Code is
amended to read as follows:
‘‘(G) LOSS OF 1 MEMBER OF AFFILIATED
GROUP MAY NOT OFFSET INCOME OF PERSONAL
SERVICE CORPORATION.—Nothing in this para-
graph shall permit any loss of a member of an
affiliated group to be used as an offset against
the income of any other member of such group
which is a personal service corporation (as de-
fined in section 269A(b) but determined by sub-
stituting ‘5 percent‘ for ‘10 percent‘ in section
269A(b)(2)).’’
(14) Sections 508(d), 4947, and 4948(c)(4) of
such 
Code 
are 
each 
amended 
by 
striking
‘‘545(b)(2),’’ each place it appears.
(15) Section 532(b) of such Code is amended
by striking paragraph (1) and by redesignating
paragraphs (2), (3), and (4) as paragraphs (1), (2),
and (3), respectively.
(16) Sections 535(b)(1) and 556(b)(1) of such
Code are each amended by striking ‘‘section 541’’
and inserting ‘‘section 541 (as in effect before its re-
peal)’’.
(17)(A) Section 553(a)(1) of such Code is
amended by striking ‘‘section 543(d)’’ and inserting
‘‘subsection (c)’’.
(B) Section 553 of such Code is amended by
adding at the end the following new subsection:
‘‘(c) ACTIVE BUSINESS COMPUTER SOFTWARE ROY-
ALTIES.—
‘‘(1) IN GENERAL.—For purposes of subsection
(a), the term ‘active business computer software roy-
alties’ means any royalties—
‘‘(A) received by any corporation during
the taxable year in connection with the licensing
of computer software, and
‘‘(B) with respect to which the require-
ments of paragraphs (2), (3), (4), and (5) are
met.
‘‘(2) ROYALTIES MUST BE RECEIVED BY COR-
PORATION ACTIVELY ENGAGED IN COMPUTER SOFT-
WARE BUSINESS.—The requirements of this para-
graph are met if the royalties described in paragraph
(1)—
‘‘(A) are received by a corporation engaged
in the active conduct of the trade or business
of developing, manufacturing, or producing
computer software, and
‘‘(B) are attributable to computer software
which—
‘‘(i) is developed, manufactured, or
produced by such corporation (or its prede-
cessor) in connection with the trade or
business described in subparagraph (A), or
‘‘(ii) is directly related to such trade
or business.
‘‘(3) ROYALTIES MUST CONSTITUTE AT LEAST
50 PERCENT OF INCOME.—The requirements of this
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)’’.
(C) Paragraph (3) of section 856(h) of such
Code is amended by striking subparagraph (B) and
by redesignating subparagraphs (C) and (D) as sub-
paragraphs (B) and (C), respectively.
(D) Subparagraph (C) of section 856(h)(3) of
such Code, as redesignating by the preceding sub-
paragraph, is amended by striking ‘‘subparagraph
(C)’’ and inserting ‘‘subparagraph (B)’’.
(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 used of gasoline.’’.
(26) Section 936(a)(3) of such Code is amended
by striking subparagraph (C), by inserting ‘‘or’’ at
the end of subparagraph (B), and by redesignating
subparagraph (D) as subparagraph (C).
(27) Section 992(d) of such Code is amended
by striking paragraph (2) and by redesignating suc-
ceeding paragraphs accordingly.
(28) Section 992(e) of such Code is amended by
striking ‘‘and section 541 (relating to personal hold-
ing company tax)’’.
(29) Section 1202(e)(8) of such Code is amend-
ed by striking ‘‘section 543(d)(1)’’ and inserting
‘‘section 553(c)(1)’’.
(30) Section 1362(d)(3)(C)(iii) of such Code is
amended by adding at the end the following new
sentence: ‘‘References to section 542 in the pre-
ceding sentence shall be treated as references to
such section as in effect on the day before its re-
peal.’’
(31) Section 1504(c)(2)(B) of such Code is
amended by adding ‘‘and’’ at the end of clause (i),
by striking clause (ii), and by redesignating clause
(iii) as clause (ii).
(32) Section 2057(e)(2)(C) of such Code is
amended by adding at the end the following new
sentence: ‘‘References to sections 542 and 543 in
the preceding sentence shall be treated as references
to such sections as in effect on the day before their
repeal.’’
(33) Sections 6422 of such Code is amended by
striking paragraph (3) and by redesignating para-
graphs (4) through (12) and paragraphs (3) through
(11), respectively.
(34) Section 6501 of such Code is amended by
striking subsection (f).
(35) Section 6503(k) of such Code is amended
by striking paragraph (1) and by redesignating
paragraphs (2) through (5) as paragraphs (1)
through (4), respectively.
(36) Section 6515 of such Code is amended by
striking paragraph (1) and by redesignating para-
graphs (2) through (6) as paragraphs (1) through
(5), respectively.
(37) Subsections (d)(1)(B) and (e)(2) of section
6662 of such Code are each amended by striking ‘‘or
a personal holding company (as defined in section
542)’’.
(38) Section 6683 of such Code is hereby re-
pealed.
(d) CLERICAL AMENDMENTS.—
(1) The table of parts for subchapter G of
chapter 1 of such Code is amended by striking the
item relating to part II.
(2) The table of sections for part IV of such
subchapter G is amended by striking the item relat-
ing to section 564.
(3) The table of sections for part I of sub-
chapter B of chapter 68 of such Code is amended
by striking the item relating to section 6683.
(e) EFFECTIVE DATE.—The amendments made by
this Act shall apply to taxable years beginning after De-
cember 31, 2001.
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