§542 — Definition of personal holding company

68 cases·6 followed·2 distinguished·1 questioned·1 criticized·1 limited·57 cited—9% support

Statute Text — 26 U.S.C. §542

(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 corporation;

(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 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; and

(8)

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.

(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.

Treasury Regulations

Treas. Reg. §Treas. Reg. §1.542-1 General rule
Treas. Reg. §Treas. Reg. §1.542-1(a) The gross income requirement specified in section 542(a)(1) and § 1.
Treas. Reg. §Treas. Reg. §1.542-1(b) The stock ownership requirement specified in section 542(a)(2) and § 1.
Treas. Reg. §Treas. Reg. §1.542-2 Gross income requirement
Treas. Reg. §Treas. Reg. §1.542-3 Stock ownership requirement
Treas. Reg. §Treas. Reg. §1.542-3(a) General rule.
Treas. Reg. §Treas. Reg. §1.542-3(b) Changes in stock outstanding.
Treas. Reg. §Treas. Reg. §1.542-3(c) Value of stock outstanding.
Treas. Reg. §Treas. Reg. §1.542-3(i) It was organized or created before July 1, 1950.
Treas. Reg. §Treas. Reg. §1.542-4 Corporations filing consolidated returns
Treas. Reg. §Treas. Reg. §1.542-4(a) General rule.
Treas. Reg. §Treas. Reg. §1.542-4(b) Ineligible affiliated group.
Treas. Reg. §Treas. Reg. §1.542-4(c) Excluded corporations.
Treas. Reg. §Treas. Reg. §1.542-4(d) Certain dividend income received by a common parent.
Treas. Reg. §Treas. Reg. §1.542-4(i) §1.542-4(i)

68 Citing Cases

Calypso Music Incorporated, Petitioner T.C. Memo. 2000-293 · 2000

’s services as a music editor. Each of the contracts was memorialized, in part, by a “loan-out agreement” or a “deal memorandum”. Each contract made specific reference to the services of K. R determined P was a personal holding company as defined in sec. 542 I.R.C. for its 1996 and 1997 taxable years. R also determined that P was liable for accuracy related penalties under sec. 6662(a) I.R.C.. Held: P was a personal holding company for its taxable years of 1996 and 1997. Held, further: P in good

Oakbrook Land Holdings, LLC, William Duane Horton, Tax Matters Partner, Petitioner · 2020

05-277, sec. 1004(a)(1), 112 Stat. at 2681-888 (1998); Pub. L. No. 106-170, secs. 532(c)(1)(A) and (B), 537(a), 113 Stat. at 1930, 1936 (1999); Pub. L. No. 106-554, secs. 1(a)(7), 165(a)-(e), 114 Stat. at 2763, 2763A-626 (2000); Pub. L. No. 107-16, sec. 542(e)(2)(B), 115 Stat. at 84 (2001); Pub. L. No. 107-147, sec. 417(7), (22), 116 Stat. at 56, 57 (2002); Pub. L. No. 108-81, sec. 503, 117 Stat. at 1003 (2003); Pub. L. No. 108-311, secs. (continued...) -33- disagreement with the construction of

Wendy H. Doran Revocable Trust, James Doran, Wendy H. Doran and Andrew Namm, Trustees, Transferee, Petitioners · 2018

er shareholders ofArebec Corp. (Arebec), a C corpora- tion whose assets consisted chiefly ofappreciated marketable securities. At the time petitioners were shareholders, Arebec was subject to Federal income tax as a "personal holding company" under section 542. This tax classification was disad- vantageous: Section 541 imposes, in addition to applicable income taxes, "a per- sonal holding company tax equal to 20 percent" ofundistributed personal holding company mcome. Petitioners desired to liqu

James Perilman, Transferee, Petitioner · 2018

Beth N. Doran Revocable Trust, James Doran and Andrew Namm, Trustees, Transferee, Petitioners · 2018

Patients Mutual Assistance Collective Corporation d.b.a. Harborside Health Center, Petitioner · 2018

hat authorize the use, distribution, possession, or - 17 - cultivation ofmedical marijuana." Consolidated Appropriations Act, 2017, Pub. L. No. 115-31, sec. 537, 131 Stat. at 228; see also Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, sec. 542, 129 Stat. at 2332-33 (2015); Consolidated and Further Continuing Appropriations Act, 2015, Pub. L. No. 113- 235, sec. 538, 128 Stat. at 2217 (2014). When interpreting such a rider, the Ninth Circuit said that DOJ prosecutions ofindividuals w

Andrew I. Namm, Transferee, Petitioner · 2018

Trust U/W/O Peggotty N. Doran, James Doran and Andrew Namm, Trustees, Transferee, Petitioners · 2018

Trust U/W/O BH and MW Namm F/B/O Andrew I. Namm, Andrew I. Namm and James Doran, Trustees, Transferee, Petitioners · 2018

Barbara P. Lempit, Transferee, Petitioner · 2018

Pamela White, Transferee, Petitioner · 2018

Wendy Doran-Paley, Transferee, Petitioner · 2018

Patients Mutual Assistance Collective Corporation d.b.a. Harborside Health Center, Petitioner · 2018

Patients Mutual Assistance CollectiveCorporation d.b.a. Harborside Health Center, Petitioner · 2018

The Markell Company, Inc., Petitioner · 2014

KPMG agreed in 2001 to help find a buyer for a flat fee of 6 Under section 542, a corporation is a personal holding company ifit meets certain income and stock ownership requirements.

Jerald W. & Claudia K. White, Petitioner T.C. Memo. 2012-104 · 2012

However, in the case ofa corporation other than an S corporation or a personal holding company (as defined in section 542), there is a substantial understatement ofincome tax for any taxable year ifthe amount ofthe - 55 - understatement for the taxable year exceeds the greater of 10% ofthe tax required to be shown on the return for the taxable year, or $10,000.

Kin Sang Chan, Petitioner T.C. Memo. 2001-268 · 2001

The adjustments treated KSCI as a personal holding company under section 542, and the proposed tax deficiencies for KSCI were computed as if KSCI were a C corporation.

Char-Lil Corporation, Petitioner T.C. Memo. 1998-457 · 1998

Kelvey told the agent that petitioner's operating expenses related to the rental properties. In the subject notice of deficiency, respondent determined that during each of the years in issue, petitioner was a personal holding company, as defined by section 542. The notice of deficiency states as follows: Since over 50 [sic] percent of your adjusted ordinary gross income reported for the taxable years 1989, 1990, 1991, 1992, 1993, and 1994 was from dividends, rents and interest, you qualified as

Galedrige Construction, Inc., Petitioner T.C. Memo. 1997-485 · 1997

1.6661-3(b)(1), 5(...continued) (B) Special rule for corporations.--In the case of a corporation other than an S corporation or a personal holding company (as defined in section 542), paragraph (1) shall be applied by substituting "$10,000" for "$5,000".

Fidelity Commercial Co. v. Commissioner 55 T.C. 483 · 1970

Jos. K., Inc. v. Commissioner 51 T.C. 584 · 1969

Sieh v. Commissioner 56 T.C. 1386 · 1971

Pleasanton Gravel Co. v. Commissioner 85 T.C. 839 · 1985

Matthew Copley v. United States 959 F.3d 118 · Cir.

Kenyatta Corp. v. Commissioner 86 T.C. 171 · 1986

Mariani Frozen Foods, Inc. v. Commissioner 81 T.C. 448 · 1983

Austin State Bank v. Commissioner 57 T.C. 180 · 1971

Oak Hill Finance Co. v. Commissioner 40 T.C. 419 · 1963

McNutt-Boyce Co. v. Commissioner 38 T.C. 462 · 1962

Rink v. Commissioner 100 T.C. 319 · 1993

Rod Warren Ink v. Commissioner 92 T.C. 995 · 1989

Woods v. Commissioner 91 T.C. 88 · 1988

Ferrell v. Commissioner 90 T.C. 1154 · 1988

Elliston v. Commissioner 82 T.C. 747 · 1984

Thompson Engineering Co. v. Commissioner 80 T.C. 672 · 1983

Eller v. Commissioner 77 T.C. 934 · 1981

Peters v. Commissioner 77 T.C. 1158 · 1981

Brountas v. Commissioner 73 T.C. 491 · 1979

Capital Sales, Inc. v. Commissioner 71 T.C. 416 · 1978

C. Blake McDowell, Inc. v. Commissioner 67 T.C. 1043 · 1977

Julio v. Commissioner 69 T.C. 1 · 1977

Hirshfield v. Commissioner 64 T.C. 103 · 1975

Pleasanton Gravel Co. v. Commissioner 64 T.C. 510 · 1975

L. C. Bohart Plumbing & Heating Co. v. Commissioner 64 T.C. 602 · 1975

Estate of Heckscher v. Commissioner 63 T.C. 485 · 1975

Marshall v. Commissioner 60 T.C. 242 · 1973

Pacific Security Companies v. Commissioner 59 T.C. 744 · 1973

Ellis Corp. v. Commissioner 57 T.C. 520 · 1972

Inter-American Life Insurance v. Commissioner 56 T.C. 497 · 1971

Kaufman v. Commissioner 55 T.C. 1046 · 1971

Montgomery Co. v. Commissioner 54 T.C. 986 · 1970

Callan v. Commissioner 54 T.C. 1514 · 1970

Bayou Verret Land Co. v. Commissioner 52 T.C. 971 · 1969

Audrey Realty, Inc. v. Commissioner 50 T.C. 583 · 1968

Ogden Co. v. Commissioner 50 T.C. 1000 · 1968

Simpson v. Commissioner 43 T.C. 900 · 1965

Claggett v. Commissioner 44 T.C. 503 · 1965

Kurt Frings Agency, Inc. v. Commissioner 42 T.C. 472 · 1964

Western Credit Co. v. Commissioner 38 T.C. 979 · 1962

Dean v. Commissioner 35 T.C. 1083 · 1961

Able Metal Products, Inc. v. Commissioner 32 T.C. 1149 · 1959

Northern Refrigerator Line, Inc. v. Commissioner 1 T.C. 824 · 1943

Diebold Foundation, Inc. v. Commissioner of Internal Revenue 736 F.3d 172 · Cir.

Aviva Life & Annuity Co. v. White (In Re Millennium Multiple Employer Welfare Benefit Plan) 772 F.3d 634 · Cir.

Green Solution Retail, Inc. v. United States 855 F.3d 1111 · Cir.

Rodriguez v. Fed. Deposit Ins. Corp. (In Re United W. Bancorp, Inc.) 893 F.3d 716 · Cir.

Rodriguez v. Fed. Deposit Ins. Corp. (In Re United W. Bancorp, Inc.) 914 F.3d 1262 · Cir.

United States v. Frederick Schultz 333 F.3d 393 · Cir.

§542 — Definition of personal holding company

68 Citing Cases

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