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TITLE 26-INTERNAL REVENUE CODE second company for its taxable year as the por- tion of such taxable year up to and including such last day bears to the entire taxable year. (c) Application of subsection (b) The rule provided in subsection (b)- (1) shall be applied in the case of a foreign personal holding company for the purpose of determining its undistributed foreign person- al holding company income which, or a part of which, is to be included in the gross income of its shareholders, whether United States shareholders or other foreign personal hold- ing companies; (2) shall be applied in the case of every for- eign corporation with respect to which a United States group exists on some day of its taxable year, for the purpose of determining whether such corporation meets the gross income requirements of section 552(a)(1). (Aug. 16, 1954, ch. 736, 68A Stat. 196.) CROSS REFRENCES Charitable contributions adjustment to taxable income, see section 556 of this title. Deduction for obligations of United States and its in. strumentalites, see section 551 of this title. SECTIoN REFERRED TO IN OTrM SECTIONS This section is referred to in sections 551, 552, 556, 6035 of this title. § 556. Undistributed foreign personal holding compa- ny income (a) Definition For purposes of this part, the term "undistri- buted foreign personal holding company income" means the taxable income of a foreign personal holding company adjusted in the manner provided in subsection (b), minus the dividends paid deduction (as defined in section 561). (b) Adjustments to taxable income For the purposes of subsection (a), the tax- able income shall be adjusted as follows: (1) Taxes There shall be allowed as a deduction Fed- eral income and excess profits taxes and income, war profits, and excess-profits taxes of foreign countries and possessions of the United States (to the extent not allowable as a deduction under section 275(a)(4)), accrued during the taxable year, but not including the accumulated earnings tax imposed by section 531, the personal holding company tax im- posed by section 541, or the taxes imposed by corresponding sections of a prior income tax law. A taxpayer which, for each taxable year in which it was subject to the provisions of supplement P of the Internal Revenue Code of 1939, deducted Federal income and excess profits taxes when paid for the purpose of computing undistributed supplement P net income under such code, shall deduct taxes under this paragraph when paid, unless the corporation elects, under regulations pre- scribed by the Secretary, after the date of en- actment of this title to deduct the taxes de- scribed in this paragraph when accrued. Such election shall be irrevocable and shall apply to the taxable year for which the election is made and to all subsequent taxable years. (2) Charitable contributions The deduction for charitable contributions provided under section 170 shall be allowed, but in computing such deduction the limita- tions in section 170(b)(1)(A), (B), and (D) shall apply, and section 170(b)(2) and (d)(1) shall not apply. For purposes of this para- graph, the term "contribution base" when used in section 170(b)(1) means the taxable income computed with the adjustments (other than the 5-percent limitation) pro- vided in section 170(b)(2) and (d)(1) and with- out the deduction of the amounts disallowed under paragraphs (5) and (6) of this subsec- tion or the inclusion in gross income of the amounts includible therein as dividends by reason of the application of the provisions of section 555(b) (relating to the inclusion in gross income of a foreign personal holding company of its distributive share of the un- distributed foreign personal holding company income of another company in which it is a shareholder). (3) Special deductions disallowed The special deductions for corporations pro- vided in part VIII (except section 248) of sub- chapter B (section 241 and following, relating to the deduction for dividends received by corporations, etc.) shall not be allowed. (4) Net operating loss The net operating loss deduction provided in section 172 shall not be allowed, but there shall be allowed as a deduction the amount of the net operating loss (as defined in section 172(c)) for the preceding taxable year com- puted without the deductions provided in part VIII (except section 248) of subchapter B. (5) Expenses and depreciation applicable to proper- ty of the taxpayer The aggregate of the deductions allowed under section 162 (relating to trade or busi- ness expenses) and section 167 (relating to de- preciation) which are allocable to the oper- ation and maintenance of property owned or operated by the company, shall be allowed only in an amount equal to the rent or other compensation received for the use of, or the right to use, the property, unless it is estab- lished (under regulations prescribed by the Secretary) to the satisfaction of the Secre- tary- (A) that the rent or other compensation received was the highest obtainable, or, if none was received, that none was obtain- able; (B) that the property was held in the course of a business carried on bona fide for profit; and (C) either that there was reasonable ex- pectation that the operation of the proper- ty would result in a profit, or that the prop- erty was necessary to the conduct of the business. (6) Taxes and contributions to pension trusts The deductions provided in section 164(e) (relating to taxes of a shareholder paid by the corporation) and in section 404 (relating to pension, etc., trusts) shall not be allowed. Page 425 § 556