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. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Personal Holding Com-
pany Tax Repeal Act of 2004’’. 
SEC. 2. 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personal holding companies) is hereby repealed.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) 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), by inserting ‘‘or’’ at the end 
of paragraph (2), and by redesignating paragraph 
(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 pre-
ceding sentence shall not be construed to deny the 
credit provided by section 33 for tax withheld at 
source or the credit provided by section 34 for cer-
tain uses 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. 
(c) 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 of such Code is amended by striking 
the item relating 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. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
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