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Section 542 provides the definition of a personal holding company (PHC). A corporation is a personal holding company, and thus subject to the PHC tax, if it meets both the income test and the stock ownership test. The income test requires that at least 60 percent of a corporation’s adjusted ordinary gross income for the tax year is from dividends, interest, rent, royalties and annuities. The stock ownership test requires that during the last half of the tax year, 5 or fewer individuals directly or indirectly own more than 50 percent in value of the corporation's outstanding stock. Individuals include qualified pension, profit-sharing, or stock bonus plan described in section 401(a), a trust described in section 501(c)(17) that provides for the payment of supplemental unemployment compensation under certain conditions, a private foundation described in section 509(a), and a part of a trust permanently set aside or exclusively used for the purpose described in section 642(c).
A corporation that is a PHC must file Schedule PH with its income tax return, Form 1120, to calculate the PHC tax. Suspended or limited losses or deductions are not used in PHC computations.
For purposes of subpart F and the taxation of controlled foreign corporations (CFCs), section 954 defines foreign personal holding company income (FPHCI) as part of foreign base company income (FBCI). FPHCI includes dividends, interest, rents, royalties, and annuities, net gains from the sale and exchange of certain properties including gains from the sale or other disposition of any interest in a partnership or trust, net gains from commodities transactions, net currency gains from nonfunctional transactions, income equivalent to interest, income from notional principal contracts, and payments in lieu of dividends.
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