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TITLE 26-INTERNAL REVENUE CODE PART II-PERSONAL HOLDING "COMPANIES Sec. 541. Imposition of personal holding company tax. 542. Definition of personal holding company. 543. Personal holding company income. 544, Rules for determining stock ownership. 545. Undistributed personal holding company income. 546, Income not placed on annual basis. 547. Deduction for deficiency dividends. PART RE UtM TO IN OTHER SECTIONS This part is referred to in section 12 of this title. § 541. Imposition of personal holding company tax In addition to other taxes imposed by this chapter, there is hereby imposed for each tax- able year on the undistributed personal holding company income (as defined in section 545) of every personal holding company (as defined in section 542) a personal holding company tax equal to 70 percent of the undistributed person- al holding company income. (Aug. 16, 1954, ch. 736, 68A Stat. 182; Feb. 26, 1964, Pub. L. 88-272, title II, § 225(a), 78 Stat. 79.) AMENDmENTS 1964-Pub. L. 88-272 reduced the tax from 75 per- cent of undistributed income not in excess of $2,000, and 85 percent when in excess of $2,000, to 70 percent. EFEcTivE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 225(1) of Pub. L. 88-272 set out as an Effective Date of 1964 Amendment note under section 316 of this title. CROSS REFERENCES Adjustments for- Accumulated taxable income as excluding deduc. tion for tax imposed by this section, see section 535 of this title. Undistributed foreign personal holding company income as excluding deduction for tax imposed by this section, see section 556 of this title. Undistributed personal holding company income as excluding deduction for tax imposed by this section, see section 545 of this title. Liquidations before Jan. 1, 1966, see section 225(h) of Pub. L. 88-272, set out as a note under section 333 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 46, 50A, 56, 111, 535, 545, 546, 547, 556. 563, 882, 901, 992, 6683 of this title. § 542. Definition of personal holding company (a) General rule For purposes of this subtitle, the term "per- sonal holding company" means any corporation (other than a corporation described in subsec- tion (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 com- pany income (as defined in section 543(a)), and (2) Stock ownership requirement At any time during the last half of the tax- able year more than 50 percent in value of its outstanding stock is owned, directly or indi- rectly, by or for not more than 5 individuals. For purposes of this paragraph, an organiza- tion 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 pur- poses described in section 642(c) or a corre- sponding 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 corpo- rations filing or required to file a consolidated return under section 1501 for any taxable year, the adjusted ordinary gross income re- quirement 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 affili- ated group meets such requirement. (2) Ineligible affiliated group Paragraph (1) shall not apply to an affili- ated 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 affili- ated group, and (B) 80 percent or more of the amount de- scribed in subparagraph (A) consists of per- sonal 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 affili- ated 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 com- pany under subsection (c). (4) Certain dividend income received by a common parent In applying paragraph (2) (A) and (B), per- sonal holding company income and adjusted ordinary gross income shall not include divi- dends received by a common parent corpora- tion 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 per- sonal holding company for the taxable year in which the dividends are paid. (5) Certain dividend income received from a nonin- cludible life insurance company In the case of an affiliated group of corpo- rations filing or required to file a consolidated return under section 1501 for any taxable year, there shall be excluded from consolidat- ed personal holding company income and con- Page 408