[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1728 Introduced in House (IH)]
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 Representatives 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 chapter 1 of the
Internal Revenue Code of 1986 (relating to personal holding companies)
is hereby repealed.
(b) Limitation on Dividend Received Deduction 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 corporation to which
this subsection applies, the deductions allowed under this part
for dividends (other than qualifying dividends) received during
the taxable year shall not exceed the dividends paid during
such year.
``(2) Corporations to which paragraph (1) applies.--
Paragraph (1) shall apply to a corporation 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 deduction.--The amount of
deduction which is disallowed by paragraph (1) shall be
allowable in the succeeding 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 distribution 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 paragraph (4) as paragraph
(3).
(4) Section 41(e)(7)(E) 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).
(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 determining the accumulated earnings
tax under section 531--
``(1) any excluded amount under subsection (a) allowed for
purposes of this subtitle (other than section 531) shall be
allowed whether or not such amount resulted in a reduction of
the tax under section 531 for the prior taxable year, and
``(2) where any excluded amount under subsection (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 taxable year under section 531, then
such excluded amount shall be allowable if it did not result in
a reduction 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 inserting
``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 paragraphs (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 follows 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 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) 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 purposes of subsection
(a)(3)--
``(1) Stock not owned by individual.--Stock owned, directly
or indirectly, by or for a corporation, partnership, estate, or
trust shall be considered as being owned proportionately by its
shareholders, 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
descendants.
``(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 paragraph, 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 person 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 convertible 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 outstanding
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), respectively.
(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 paragraph 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 defined in section
269A(b) but determined by substituting `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 repeal)''.
(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 Royalties.--
``(1) In general.--For purposes of subsection (a), the term
`active business computer software royalties' 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 requirements of
paragraphs (2), (3), (4), and (5) are met.
``(2) Royalties must be received by corporation actively
engaged in computer software business.--The requirements of
this paragraph 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
predecessor) 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 paragraph (1) constitute at least 50
percent of the ordinary gross income of the corporation for the
taxable year.
``(4) Deductions under sections 162 and 174 relating to
royalties must equal or exceed 25 percent of ordinary gross
income.--
``(A) In general.--The requirements of this
paragraph are met if--
``(i) the sum of the deductions allowable
to the corporation under sections 162, 174, and
195 for the taxable year which are properly
allocable to the trade or business described in
paragraph (2) equals or exceeds 25 percent of
the ordinary gross income of such corporation
for such taxable year, or
``(ii) the average of such deductions for
the 5-taxable year period ending with such
taxable year equals or exceeds 25 percent of
the average ordinary gross income of such
corporation for such period.
If a corporation has not been in existence during the
5-taxable year period described in clause (ii), then
the period of existence of such corporation 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 allowable under section 162 if it is
specifically allowable under another section.
``(C) Limitation on allowable deductions.--For
purposes of subparagraph (A), no deduction shall be
taken into account with respect to compensation for
personal services rendered by the 5 individual
shareholders holding the largest percentage (by value)
of the outstanding 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 account.''
(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 liquidation,
the part of such distribution which is properly chargeable to
earnings and profits accumulated after February 28, 1913, shall
be treated as a dividend for purposes of computing the
dividends paid deduction, and
``(2) in the case of a complete liquidation occurring
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 sentence 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 repealed.
(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 amended 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 inserting ``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 subparagraphs (B) and (C), respectively.
(D) Subparagraph (C) of section 856(h)(3) of such Code, as
redesignating by the preceding subparagraph, 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 withheld 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 succeeding paragraphs
accordingly.
(28) Section 992(e) of such Code is amended by striking
``and section 541 (relating to personal holding company tax)''.
(29) Section 1202(e)(8) of such Code is amended 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 preceding sentence shall be treated as
references to such section as in effect on the day before its
repeal.''
(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 paragraphs (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 paragraphs (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 repealed.
(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 relating to section 564.
(3) The table of sections for part I of subchapter 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 December 31, 2001.
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