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Contents : Department of the Treasury Internal Revenue Service Instructions for Schedule PH (Form 1120) U.S. Personal Holding Company (PHC) Tax Section references are to the Internal Revenue Code unless otherwise noted. A Change To Note The Revenue Reconciliation Act of 1993 increased the personal holding company tax rate to 39.6% effective for tax years beginning after December 31 1992. General Instructions Purpose of Schedule This schedule is used to figure personal holding company (PHC) tax. Who Must File A corporation that is a personal holding company (PHC) must attach this schedule to its income tax return. To find out if a corporation is a PHC complete Part I of Schedule PH and lines 1 through 5 of the worksheet below. Then complete Part II of Schedule PH and line 6 of the worksheet. Generally if line 6 of the worksheet is 60% or more and the stock ownership requirement (decribed in 2 below) is met the corporation must file Schedule PH and pay the PHC tax. See Exceptions below. A corporation is a PHC if both of the following apply: 1. At least 60% of the corporation s adjusted ordinary gross income for the tax year is PHC income. See section 543(b)(2) for the definition of adjusted ordinary gross income and section 543(a) for the definition of PHC income. 2. At any time during the last half of the tax year more than 50% in value of the corporation s outstanding stock is owned directly or indirectly by five or fewer individuals. For purposes of this requirement the following oganizations are considered individuals: a qualified pension profit-sharing or stock bonus plan described in section 401(a) a trust that provides for the payment of supplemental unemployment compensation under certain conditions (section 501(c)(17)) a private foundation (section 509(a)) or a part of a trust permanently set aside or used exclusively for the purpose described in section 642(c). See section 542(a)(2) for details. Exceptions. The term personal holding company does not include the following corporations even if the two requirements above are met: Tax-exempt corporations. Banks. Domestic building and loan associations. Life insurance companies. Surety companies. Foreign personal holding companies (as defined in section 552). Certain lending or finance companies. Foreign corporations that do not have income under section 543(a)(7) if during the last half of the tax year all of the corporation s stock is owned by nonresident alien individuals. Certain small business investment companies operating under the Small Business Investment Act of 1958. Corporations under the jurisdiction of the court in a Title 11 or similar case. Worksheet For Figuring Ordinary Gross Income Adjusted Ordinary Gross Income and the 60% PHC Income Test (See Worksheet Instructions on page 2.) (keep for your records) 1 Gross income. Non-life-insurance companies see section 543(c). ) 2 ( Less: Gains from the sale or disposition of capital assets and section 1231(b) property 3 Ordinary gross income. Combine lines 1 and 2. (Foreign corporations see instructions.) Adjustments a a Adjustments described in section 543(b)(2)(A) b b Adjustments described in section 543(b)(2)(B) c c Interest income excluded under section 543(b)(2)(C) d d Adjustments described in section 543(b)(2)(D) 4e e Total adjustments. Add lines 4a through 4d 5 5. Adjusted ordinary gross income. Subtract line 4e from line 3 6. Complete Part II of Schedule PH. Divide the amount on line 25 Part II by the amount on line 5 above. Enter % 6 the result as a percentage If line 6 is less than 60% the corporation is not a PHC. Do not file Schedule PH. If line 6 is 60% or more and the stock ownership requirements of section 542(a) are met the corporation is a PHC. Complete Part III line 26 and Part IV. File Schedule PH with the corporation s income tax return. 1. 2. 3. 4. Cat. No. 10826K Passive foreign investment companies. See section 542(c) for more information. At-risk and passive activities. A corporation that has an activity subject to the at-risk or passive activity rules (or both) may have deductions and losses suspended under those provisions. Deductions and losses used in any of the computations for PHC tax should not include suspended at-risk and passive activity deductions and losses. Any prior year deductions and losses allowed under the at-risk and passive activity rules are treated as current year deductions and losses in the year they are allowed. Foreign corporations must file a return. If a foreign corporation that is a PHC does not file Schedule PH as required it will be charged a penalty. The penalty is 10% of the corporation s Federal income taxes (including the PHC tax) and is in addition to any other penalties charged the corporation. See section 6683. Worksheet Instructions Lines 1 through 3. Ordinary gross income is gross income as defined in section 61 and the related regulation

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