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II of subchapter G of chapter 1 of the Internal Revenue Code of 1986 (relating to personal holding companies) is hereby repealed.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)

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 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 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 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. (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 subchapter 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.