
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC542]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
   Subchapter G--Corporations Used to Avoid Income Tax on Shareholders
 
                   PART II--PERSONAL HOLDING COMPANIES
 
Sec. 542. Definition of personal holding company


(a) General rule

    For purposes of this subtitle, the term ``personal holding company'' 
means any corporation (other than a corporation described in subsection 
(c)) if--

           (1) Adjusted ordinary gross income requirement

        At least 60 percent of its adjusted ordinary gross income (as 
    defined in section 543(b)(2)) for the taxable year is personal 
    holding company income (as defined in section 543(a)), and

                   (2) Stock ownership requirement

        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 
    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) or a corresponding provision of a prior income tax law shall 
    be considered an individual.

(b) Corporations filing consolidated returns

                          (1) General rule

        In the case of an affiliated group of corporations filing or 
    required to file a consolidated return under section 1501 for any 
    taxable year, the adjusted ordinary gross income requirement of 
    subsection (a)(1) of this section shall, except as provided in 
    paragraphs (2) and (3), be applied for such year with respect to the 
    consolidated adjusted ordinary gross income and the consolidated 
    personal holding company income of the affiliated group. No member 
    of such an affiliated group shall be considered to meet such 
    adjusted ordinary gross income requirement unless the affiliated 
    group meets such requirement.

                   (2) Ineligible affiliated group

        Paragraph (1) shall not apply to an affiliated group of 
    corporations if--
            (A) any member of the affiliated group of corporations 
        (including the common parent corporation) derived 10 percent or 
        more of its adjusted ordinary gross income for the taxable year 
        from sources outside the affiliated group, and
            (B) 80 percent or more of the amount described in 
        subparagraph (A) consists of personal holding company income (as 
        defined in section 543).

    For purposes of this paragraph, section 543 shall be applied as if 
    the amount described in subparagraph (A) were the adjusted ordinary 
    gross income of the corporation.

                      (3) Excluded corporations

        Paragraph (1) shall not apply to an affiliated group of 
    corporations if any member of the affiliated group (including the 
    common parent corporation) is a corporation excluded from the 
    definition of personal holding company under subsection (c).

       (4) Certain dividend income received by a common parent

        In applying paragraph (2) (A) and (B), personal holding company 
    income and adjusted ordinary gross income shall not include 
    dividends received by a common parent corporation from another 
    corporation if--
            (A) the common parent corporation owns, directly or 
        indirectly, more than 50 percent of the outstanding voting stock 
        of such other corporation, and
            (B) such other corporation is not a personal holding company 
        for the taxable year in which the dividends are paid.

     (5) Certain dividend income received from a nonincludible 
                           life insurance company

        In the case of an affiliated group of corporations filing or 
    required to file a consolidated return under section 1501 for any 
    taxable year, there shall be excluded from consolidated personal 
    holding company income and consolidated adjusted ordinary gross 
    income for purposes of this part dividends received by a member of 
    the affiliated group from a life insurance company taxable under 
    section 801 that is not a member of the affiliated group solely by 
    reason of the application of paragraph (2) of subsection (b) of 
    section 1504.

(c) Exceptions

    The term ``personal holding company'' as defined in subsection (a) 
does not include--
        (1) a corporation exempt from tax under subchapter F (sec. 501 
    and following);
        (2) a bank as defined in section 581, or a domestic building and 
    loan association within the meaning of section 7701(a)(19);
        (3) a life insurance company;
        (4) a surety company;
        (5) a foreign personal holding company as defined in section 
    552;
        (6) a lending or finance company if--
            (A) 60 percent or more of its ordinary gross income (as 
        defined in section 543(b)(1)) is derived directly from the 
        active and regular conduct of a lending or finance business;
            (B) the personal holding company income for the taxable year 
        (computed without regard to income described in subsection 
        (d)(3) and income derived directly from the active and regular 
        conduct of a lending or finance business, and computed by 
        including as personal holding company income the entire amount 
        of the gross income from rents, royalties, produced film rents, 
        and compensation for use of corporate property by shareholders) 
        is not more than 20 percent of the ordinary gross income;
            (C) the sum of the deductions which are directly allocable 
        to the active and regular conduct of its lending or finance 
        business equals or exceeds the sum of--
                (i) 15 percent of so much of the ordinary gross income 
            derived therefrom as does not exceed $500,000, plus
                (ii) 5 percent of so much of the ordinary gross income 
            derived therefrom as exceeds $500,000; and

            (D) the loans to a person who is a shareholder in such 
        company during the taxable year by or for whom 10 percent or 
        more in value of its outstanding stock is owned directly or 
        indirectly (including, in the case of an individual, stock owned 
        by members of his family as defined in section 544(a)(2)), 
        outstanding at any time during such year do not exceed $5,000 in 
        principal amount;

        (7) a foreign corporation (other than a corporation which has 
    income to which section 543(a)(7) applies for the taxable year), if 
    all of its stock outstanding during the last half of the taxable 
    year is owned by nonresident alien individuals, whether directly or 
    indirectly through foreign estates, foreign trusts, foreign 
    partnerships, or other foreign corporations;
        (8) A \1\ small business investment company which is licensed by 
    the Small Business Administration and operating under the Small 
    Business Investment Act of 1958 (15 U.S.C. 661 and following) and 
    which is actively engaged in the business of providing funds to 
    small business concerns under that Act. This paragraph shall not 
    apply if any shareholder of the small business investment company 
    owns at any time during the taxable year directly or indirectly 
    (including, in the case of an individual, ownership by the members 
    of his family as defined in section 544(a)(2)) a 5 per centum or 
    more proprietary interest in a small business concern to which funds 
    are provided by the investment company or 5 per centum or more in 
    value of the outstanding stock of such concern;
---------------------------------------------------------------------------
    \1\ So in original. Probably should not be capitalized.
---------------------------------------------------------------------------
        (9) a corporation which is subject to the jurisdiction of the 
    court in a title 11 or similar case (within the meaning of section 
    368(a)(3)(A)) unless a major purpose of instituting or continuing 
    such case is the avoidance of the tax imposed by section 541; and
        (10) a passive foreign investment company (as defined in section 
    1297).

(d) Special rules for applying subsection (c)(6)

               (1) Lending or finance business defined

        (A) In general

            Except as provided in subparagraph (B), for purposes of 
        subsection (c)(6), the term ``lending or finance business'' 
        means a business of--
                (i) making loans,
                (ii) purchasing or discounting accounts receivable, 
            notes, or installment obligations,
                (iii) rendering services or making facilities available 
            in connection with activities described in clauses (i) and 
            (ii) carried on by the corporation rendering services or 
            making facilities available, or
                (iv) rendering services or making facilities available 
            to another corporation which is engaged in the lending or 
            finance business (within the meaning of this paragraph), if 
            such services or facilities are related to the lending or 
            finance business (within such meaning) of such other 
            corporation and such other corporation and the corporation 
            rendering services or making facilities available are 
            members of the same affiliated group (as defined in section 
            1504).

        (B) Exceptions

            For purposes of subparagraph (A), the term ``lending or 
        finance business'' does not include the business of--
                (i) making loans, or purchasing or discounting accounts 
            receivable, notes, or installment obligations, if (at the 
            time of the loan, purchase, or discount) the remaining 
            maturity exceeds 144 months; unless--
                    (I) the loans, notes, or installment obligations are 
                evidenced or secured by contracts of conditional sale, 
                chattel mortgages, or chattel lease agreements arising 
                out of the sale of goods or services in the course of 
                the borrower's or transferor's trade or business, or
                    (II) the loans, notes, or installment obligations 
                are made or acquired by the taxpayer and meet the 
                requirements of subparagraph (C), or

                (ii) making loans evidenced by, or purchasing, 
            certificates of indebtedness issued in a series, under a 
            trust indenture, and in registered form or with interest 
            coupons attached.

        For purposes of clause (i), the remaining maturity shall be 
        treated as including any period for which there may be a renewal 
        or extension under the terms of an option exercisable by the 
        borrower.

        (C) Indefinite maturity credit transactions

            For purposes of subparagraph (B)(i), a loan, note, or 
        installment obligation meets the requirements of this 
        subparagraph if it is made under an agreement--
                (i) under which the creditor agrees to make loans or 
            advances (not in excess of an agreed upon maximum amount) 
            from time to time to or for the account of the debtor upon 
            request, and
                (ii) under which the debtor may repay the loan or 
            advance in full or in installments.

                       (2) Business deductions

        For purposes of subsection (c)(6)(C), the deductions which may 
    be taken into account shall include only--
            (A) deductions which are allowable only by reason of section 
        162 or section 404, except there shall not be included any such 
        deduction in respect of compensation for personal services 
        rendered by shareholders (including members of the shareholder's 
        family as described in section 544(a)(2)), and
            (B) deductions allowable under section 167, and deductions 
        allowable under section 164 for real property taxes, but in 
        either case only to the extent that the property with respect to 
        which such deductions are allowable is used directly in the 
        active and regular conduct of the lending or finance business.

      (3) Income received from certain affiliated corporations

        For purposes of subsection (c)(6)(B), in the case of a lending 
    or finance company which meets the requirements of subsection 
    (c)(6)(A), there shall not be treated as personal holding company 
    income the lawful income received from a corporation which meets the 
    requirements of subsection (c)(6) and which is a member of the same 
    affiliated group (as defined in section 1504) of which such company 
    is a member.

(Aug. 16, 1954, ch. 736, 68A Stat. 182; ch. 871, Sec. 3, Aug. 12, 1955, 
69 Stat. 718; Pub. L. 86-376, Sec. 3(a), Sept. 23, 1959, 73 Stat. 700; 
Pub. L. 87-768, Sec. 1, Oct. 9, 1962, 76 Stat. 766; Pub. L. 88-272, 
title II, Sec. 225(b), (c), (k)(1), Feb. 26, 1964, 78 Stat. 79, 93; Pub. 
L. 89-809, title I, Sec. 104(h)(1), Nov. 13, 1966, 80 Stat. 1559; Pub. 
L. 91-172, title I, Sec. 101(j)(16), Dec. 30, 1969, 83 Stat. 528; Pub. 
L. 93-480, Sec. 3(a), Oct. 26, 1974, 88 Stat. 1454; Pub. L. 94-455, 
title XIX, Sec. 1901(a)(76), Oct. 4, 1976, 90 Stat. 1777; Pub. L. 96-
589, Sec. 5(a), Dec. 24, 1980, 94 Stat. 3405; Pub. L. 97-248, title II, 
Sec. 293(a)-(c), Sept. 3, 1982, 96 Stat. 575; Pub. L. 98-369, div. A, 
title II, Sec. 211(b)(7), July 18, 1984, 98 Stat. 755; Pub. L. 99-514, 
title XII, Sec. 1235(f)(2), Oct. 22, 1986, 100 Stat. 2575; Pub. L. 105-
34, title XI, Sec. 1122(d)(1), Aug. 5, 1997, 111 Stat. 977.)

                       References in Text

    The Small Business Investment Act of 1958, referred to in subsec. 
(c)(8), is Pub. L. 85-699, Aug. 21, 1958, 72 Stat. 689, as amended, 
which is classified principally to chapter 14B (Sec. 661 et seq.) of 
Title 15, Commerce and Trade. For complete classification of this Act to 
this Code, see Short Title note set out under section 661 of Title 15 
and Tables.


                               Amendments

    1997--Subsec. (c)(10). Pub. L. 105-34 substituted ``section 1297'' 
for ``section 1296''.
    1986--Subsec. (c)(10). Pub. L. 99-514 added par. (10).
    1984--Subsec. (b)(5). Pub. L. 98-369 substituted ``section 801'' for 
``section 802''.
    1982--Subsec. (c)(6)(C)(ii). Pub. L. 97-248, Sec. 293(a), struck out 
``but not $1,000,000'' after ``exceeds $500,000''.
    Subsec. (d)(1)(B)(i). Pub. L. 97-248, Sec. 293(b), substituted ``144 
months'' for ``60 months'' after ``remaining maturity exceeds'', 
designated existing provisions from ``the loans'' through ``transferor's 
trade or business, or'' as subcl. (I), and added subcl. (II).
    Subsec. (d)(1)(C). Pub. L. 97-248, Sec. 293(c), added subpar. (C).
    1980--Subsec. (c)(9). Pub. L. 96-589, added par. (9).
    1976--Subsec. (a)(2). Pub. L. 94-455, Sec. 1901(a)(76)(A), struck 
out last sentence providing that the preceding sentence shall not apply 
in the case of an organization or trust organized or created before July 
1, 1950, if at all times on or after July 1, 1950, and before the close 
of the taxable year such organization or trust has owned all of the 
common stock and at least 80 percent of the total number of shares of 
all other classes of stock of the corporation.
    Subsec. (b)(2). Pub. L. 94-455, Sec. 1901(a)(76)(B), struck out 
``other than an affiliated group of railroad corporations the common 
parent of which would be eligible to file a consolidated return under 
section 141 of the Internal Revenue Act of 1942'' after ``group of 
corporations''.
    Subsec. (c)(2). Pub. L. 94-455, Sec. 1901(a)(76)(C), struck out 
``without regard to subparagraphs (D) and (E) thereof'' after ``meaning 
of section 7701(a)(19)''.
    Subsec. (c)(8). Pub. L. 94-455, Sec. 1901(a)(76)(D), inserted ``(15 
U.S.C. 661 and following)'' after ``Small Business Investment Act of 
1958''.
    1974--Subsec. (b)(5). Pub. L. 93-480 added par. (5).
    1969--Subsec. (a)(2). Pub. L. 91-172 substituted ``section 401(a), 
501(c)(17), or 509(a)'' for ``section 503(b)'' in the list of sections 
that contain the description of organizations that may be considered as 
individuals for the purpose of establishing stock ownership, and struck 
out provisions which would have kept an organization or trust created 
before July 1, 1950, from being so designated if it had been denied 
exemption under section 504 or an unlimited charitable deduction under 
section 681(c) of this title.
    1966--Subsec. (c)(7). Pub. L. 89-809 substituted requirement that 
the foreign corporation be other than a corporation which has income to 
which section 543(a)(7) applies for the taxable year for requirement 
that the foreign corporation's gross income from sources within the 
United States for the period specified in section 861(a)(2)(B) be less 
than 50 percent of its total gross income from all sources, and expanded 
the devices included in methods of indirect ownership to encompass 
foreign estates, foreign trusts, and foreign partnerships.
    1964--Subsec. (a)(1). Pub. L. 88-272, Sec. 225(b), substituted ``60 
percent of its adjusted ordinary gross income (as defined in section 
543(b)(2)) for the taxable year is personal holding company income (as 
defined in section 543(a))'' for ``80 percent of its gross income for 
the taxable year is personal holding company income as defined in 
section 543''.
    Subsec. (b). Pub. L. 88-272, Sec. 225(k)(1), substituted ``adjusted 
ordinary gross income'' for ``gross income'', wherever appearing.
    Subsec. (c)(2), (6) to (11). Pub. L. 88-272, Sec. 225(c)(1), (2), 
inserted among the exceptions, domestic building and loan associations 
within section 7701(a)(19) without regard to subpars. (D) and (E) 
thereof, added par. (6), redesignated former pars. (10) and (11) as (7) 
and (8), respectively, and omitted former pars. (6) to (9) which related 
to licensed personal finance companies, lending companies, loan or 
investment corporations, and finance companies, respectively.
    Subsec. (d). Pub. L. 88-272, Sec. 225(c)(3), added subsec. (d).
    1962--Subsec. (c)(7). Pub. L. 87-768 substituted ``authorized to 
engage in and actively and regularly engaged in the small loan business 
(consumer finance business)'' for ``authorized to engage in the small 
loan business'', inserted provisions excepting from the definition of 
``personal holding company'' a lending company that received 80 percent 
or more of its gross income from lawful income from domestic subsidiary 
corporations (of which stock possessing at least 80 percent of the 
voting power of all classes of stock and of which at least 80 percent of 
each class of the nonvoting stock is owned directly by such lending 
company), which are themselves excepted under pars. (6), (7), (8), or 
(9) of this subsection, increased the maximum amount of the loan where 
no limit is prescribed from $500 to $1,500, and eliminated provisions 
which required loans to mature in not more than 36 months, and which 
limited interest, discount and other charges to not more than an amount 
equal to simple interest at 3 percent per month payable in advance and 
computed only on unpaid balances.
    1959--Subsec. (c)(11). Pub. L. 86-376 added par. (11).
    1955--Subsec. (a)(2). Act Aug. 12, 1955, Sec. 3, inserted sentence 
at end excepting from consideration as ``individuals'' certain 
charitable foundations created before July 1, 1950.


                    Effective Date of 1997 Amendment

    Amendment by Pub. L. 105-34 applicable to taxable years of United 
States persons beginning after Dec. 31, 1997, and to taxable years of 
foreign corporations ending with or within such taxable years of United 
States persons, see section 1124 of Pub. L. 105-34, set out as a note 
under section 532 of this title.


                    Effective Date of 1986 Amendment

    Amendment by Pub. L. 99-514 applicable to taxable years of foreign 
corporations beginning after Dec. 31, 1986, see section 1235(h) of Pub. 
L. 99-514, set out as an Effective Date note under section 1291 of this 
title.


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-369 applicable to taxable years beginning 
after Dec. 31, 1983, see section 215 of Pub. L. 98-369, set out as an 
Effective Date note under section 801 of this title.


                    Effective Date of 1982 Amendment

    Section 293(d) of Pub. L. 97-248 provided that:
    ``(1) Subsection (a).--The amendment made by subsection (a) 
[amending this section] shall apply to taxable years beginning after 
December 31, 1981.
    ``(2) Subsections (b) and (c).--The amendments made by subsections 
(b) and (c) [amending this section] shall apply to taxable years 
beginning after December 31, 1980.''


                    Effective Date of 1980 Amendment

    Amendment by Pub. L. 96-589 applicable to bankruptcy cases or 
similar judicial proceedings commenced after Dec. 31, 1980, with 
exception permitting the debtor to make the amendment applicable to such 
cases or judicial proceedings commenced after Sept. 30, 1979, see 
section 7(d)(1), (f) of Pub. L. 96-589, set out as a note under section 
108 of this title.


                    Effective Date of 1976 Amendment

    Amendment by Pub. L. 94-455 applicable with respect to taxable years 
beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, 
set out as a note under section 2 of this title.


                    Effective Date of 1974 Amendment

    Section 3(b) of Pub. L. 93-480 provided that: ``The amendment made 
by this section [amending this section] shall apply to taxable years 
beginning after December 31, 1973.''


                    Effective Date of 1969 Amendment

    Amendment by Pub. L. 91-172 applicable to taxable years beginning 
after Dec. 31, 1969, see section 101(k)(2)(B) of Pub. L. 91-172, set out 
as a note under section 4940 of this title.


                    Effective Date of 1966 Amendment

    Amendment by Pub. L. 89-809 with respect to taxable years beginning 
after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as a 
note under section 11 of this title.


                    Effective Date of 1964 Amendment

    Amendment by section 225(b), (c)(2), (3), (k)(1) of Pub. L. 88-272 
applicable to taxable years beginning after Dec. 31, 1963, and amendment 
by section 225(c)(1) of Pub. L. 88-272 applicable to taxable years 
beginning after Oct. 16, 1962, see section 225(l) of Pub. L. 88-272, set 
out as a note under section 316 of this title.


                    Effective Date of 1962 Amendment

    Section 2 of Pub. L. 87-768 provided that: ``The amendment made by 
the first section of this Act [amending this section] shall apply with 
respect to taxable years beginning after December 31, 1961.''


                    Effective Date of 1959 Amendment

    Section 3(b) of Pub. L. 86-376 provided that: ``The amendment made 
by this section [amending this section] shall apply to taxable years 
beginning after December 31, 1958.''


                    Effective Date of 1955 Amendment

    Section 4 of act Aug. 12, 1955, provided that: ``The amendment made 
by section 3 of this Act [amending this section] shall apply only with 
respect to taxable years beginning after December 31, 1954.''


Stock Ownership Requirement; Organization or Trust Organized or Created 
                           Before July 1, 1950

    Pub. L. 95-600, title VII, Sec. 701(o), Nov. 6, 1978, 92 Stat. 2907, 
as amended by Pub. L. 99-514, Sec. 2, Oct. 22, 1986, 100 Stat. 2095, 
provided that:
    ``(1) In general.--The last sentence of section 542(a)(2) of the 
Internal Revenue Code of 1986 [formerly I.R.C. 1954] (relating to stock 
ownership requirement) shall not apply in the case of an organization or 
trust organized or created before July 1, 1950, if at all times on or 
after July 1, 1950, and before the close of the taxable year such 
organization or trust has owned all of the common stock and at least 80 
percent of the total number of shares of all other classes of stock of 
the corporation.
    ``(2) Effective date.--The provisions of paragraph (1) shall apply 
with respect to taxable years beginning after December 31, 1976.''

                  Section Referred to in Other Sections

    This section is referred to in sections 41, 56, 170, 316, 447, 465, 
532, 541, 544, 562, 852, 856, 992, 1362, 1504, 2057, 6662 of this title; 
title 43 section 1620.
