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2000 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.

Exceptions. The term “personal corporation's Federal income taxes
General Instructions holding company” does not include (including the PHC tax) and is in
the following corporations, even if the addition to any other penalties
Purpose of Schedule two requirements above are met: charged the corporation. See section
Corporations use this schedule to ● Tax-exempt corporations. 6683.
figure the personal holding company ● Banks, domestic building and loan
(PHC) tax. associations, and certain lending or
finance companies. Specific Instructions
Who Must File ● Life insurance and surety Important: To determine if a
A corporation that is a PHC must file companies. corporation is a PHC, follow the steps
● Certain small business investment below to complete Schedule PH and
Schedule PH by attaching it to the
corporation's income tax return. companies operating under the Small the Worksheet on page 3.
Business Investment Act of 1958. 1. Complete Part I of Schedule
Personal Holding ● Corporations under the jurisdiction PH. Then, complete lines 1 through
Company of the court in a title 11 or similar 5 of the Worksheet.
case. 2. Complete Part II of Schedule
Generally, a corporation is a PHC if ● Foreign personal holding PH and then line 6 of the Worksheet.
it meets both of the following companies (as defined in section 3. Generally, if line 6 of the
requirements (see also, Important 552). Worksheet is 60% or more and the
under Specific Instructions) below: ● Foreign corporations that do not Stock Ownership Requirement (Part
1. PHC Income Test. At least have income under section 543(a)(7), IV of Schedule PH and item 2. under
60% of the corporation's adjusted if, during the last half of the tax year, Personal Holding Company, above)
ordinary gross income for the tax year all of the corporation's stock is owned is met, the corporation must file
is PHC income. See section 543(b)(2) by nonresident alien individuals. Schedule PH and pay the PHC tax.
for the definition of adjusted ordinary ● Passive foreign investment However, see Exceptions above.
gross income and section 543(a) for companies (as defined in section 4. If the corporation determines
the definition of PHC income. 1297). that it must file Schedule PH and pay
2. Stock Ownership See section 542(c) for more the PHC tax, it must complete line 26,
Requirement. At any time during the information. Part III to figure the amount of the
last half of the tax year, more than PHC tax.
50% in value of the corporation's At-risk, passive activities, and
outstanding stock is owned, directly earnings stripping rules. A
corporation that has an activity Schedule PH, Part I
or indirectly, by five or fewer
individuals. See section 542(a)(2) for subject to the at-risk or passive
activity rules, or interest expense Additions
details.
subject to the earnings stripping rules Line 1–Taxable income before net
For purposes of this requirement, (or both) may have deductions and operating loss deduction and
the following organizations are losses suspended or limited under special deductions. Enter the
considered individuals: these rules. As a result, do not use amount from Form 1120, line 28,
● A qualified pension, profit-sharing,
deductions and losses limited or page 1. If the income on line 28 was
and stock bonus plan described in suspended in any of the PHC figured using section 443(b) (placing
section 401(a). computations. Treat any prior year the income on an annual basis),
● A trust that provides for the deductions and losses allowed under refigure it without using that section.
payment of supplemental the at-risk, passive activity, and A foreign corporation figures line 1
unemployment compensation under earnings stripping rules as current by including only income derived from
certain conditions (section year deductions and losses. U.S. sources or effectively connected
501(c)(17)). Foreign corporations. If a foreign with a U.S. trade or business,
● A private foundation (section corporation that is a PHC does not file reduced by deductions allowable in
509(a)). Schedule PH as required, it may be determining taxable income before
● A part of a trust permanently set penalized, unless it can show that the the net operating loss deduction and
aside or used exclusively for the failure to file was due to reasonable special deductions.
purpose described in section 642(c). cause. The penalty is 10% of the

Cat. No. 10826K
If all of a foreign corporation's stock claimed when figuring the corporation's outstanding stock. This
is owned during the last half of the tax corporation's income tax. percentage is figured by using the
year by nonresident alien individuals Attach a schedule showing the type greatest percentage in value of its
(directly or indirectly), taxable income of tax, the tax year, and the amount. outstanding stock owned by the U.S.
for section 545(a) is only income For more information, see section persons on any day during the period.
received under a contract for personal 545(b)(1).
services as described in section Line 6–Contributions. Figure the Worksheet Instructions
543(a)(7), reduced by deductions deduction using the limitations under Note: Use the instructions below to
attributable to that income, and sections 170(b)(1)(A), (B), and (D), complete the Worksheet on page 3.
adjusted as provided in section but without sections 170(b)(2) and
545(b) with respect to that income. Line 1–Gross income. Enter gross
(d)(1). When figuring the limitations income as defined in section 61 and
Line 3–Expenses and depreciation. under section 170(b)(1), use taxable the related regulations. Foreign
If the corporation earned rent or other income figured with the adjustments corporations (if not exempt under
compensation for the use of, or right (other than the 10% limitation) section 542(c)(7)) should only include
to use, property and that rent or provided in sections 170(b)(2) and gross income subject to U.S. tax.
compensation was less than the total (d)(1) and without any expenses and
allowable expenses and depreciation, Line 3–Ordinary gross income. A
depreciation disallowed under section
generally complete Part V and enter foreign corporation that is owned
545(b)(6).
the excess on line 3. (directly or indirectly) by nonresident
Line 7–Net operating loss. Section aliens for the last half of the tax year
However, a corporation will not 545(b)(4) provides that instead of the should enter ordinary gross income,
complete Part V if it can establish net operating loss deduction provided reduced by all items of income that
that: in section 172, a deduction is allowed would normally be PHC income,
1. The rent or other compensation for the net operating loss (as defined except for amounts received for
the corporation received was the in section 172(c)) for the preceding personal service contracts or the sale
highest obtainable (if none was tax year figured without the of personal service contracts (Part II,
received, it must show that none was deductions provided in Part VIII line 23). See section 543(b)(1).
obtainable), (except section 248) of subchapter
B. Lines 4a through 4d–Adjustments.
2. The property was held in the
Ordinary gross income on line 3 must
course of a business carried on for Line 8–Net capital gain. Net capital
be adjusted as described below. Each
profit, and gain for a foreign corporation is
type of income (rents, royalties,
3. There was a reasonable determined by taking into account
income from working interests in oil
expectation that the property's only gains and losses that are
and gas wells, and certain excluded
operation would result in a profit, or effectively connected with the conduct
rents) is separately adjusted by the
that the property was necessary to of a trade or business within the
deductions allocable to it. Enter the
conduct the business. United States that are not exempt
allocable deductions on lines 4a, 4b,
If the corporation meets all three of from tax under treaty.
and 4c to the extent of the gross
these requirements, it may attach a Line 10–Total. Include in the total for income (e.g., enter deductions
statement instead of completing Part line 10 any deduction for amounts allocable to royalties on line 4b, but
V. The statement must include: used or irrevocably set aside to pay do not enter more than the gross
● A list of the deductions with the or retire qualified indebtedness under income from royalties).
complete facts, circumstances, and section 545(c) (as in effect before
November 5, 1990). See Regulations Also, in figuring adjusted ordinary
arguments supporting them; and gross income, certain interest income
● The information required by
section 1.545-3. Write the amount
and “Section 545(c)” on the dotted is excluded (see the instructions for
Regulations section 1.545-2(h)(2). line next to line 10. line 4d on page 3).
Line 12–Dividends paid after the See section 543(b)(2) for more
Deductions information.
Line 5–Federal and foreign income, end of the tax year. The corporation
may elect to treat dividends (other Line 4a–Deductions allocable to
war profits, and excess profits rents. Enter deductions (listed
taxes. The corporation can deduct: than deficiency dividends) paid after
the end of the year and before the below) allocable to rents (as defined
● Federal income taxes accrued in section 543(b)(3)):
16th day of the 3rd month following
during the tax year and the end of the tax year, as paid during ● Depreciation and amortization of
● Income, war profits, and excess property (other than certain tangible
the tax year. Enter these dividends
profits taxes accrued (or deemed on line 12 but not in Part VI. personal property not customarily
paid) during the tax year to foreign Line 13–Undistributed personal retained by any lessee for more than
countries and U.S. possessions.* holding company income of certain 3 years):
The corporation cannot deduct: foreign corporations. If 10% or less ● Property taxes.
● The accumulated earnings tax in value of the outstanding stock of a ● Interest.
under section 531 or foreign corporation is owned (see ● Rent.
● The PHC tax under section 541. section 958(a)) during the last half of See section 543(b)(2)(A) for more
*The foreign tax credit is not the tax year by U.S. persons, information.
allowed against PHC tax. But, as undistributed PHC income is Line 4b–Deductions allocable to
described above, the corporation may determined by multiplying the certain royalties and working
take a deduction for taxes paid to undistributed PHC income interests in oil and gas wells. Enter
foreign countries and U.S. (determined without this instruction) deductions (listed below) allocable to
possessions even if a credit was by a percentage in value of the mineral, oil, and gas royalties
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Worksheet for figuring Ordinary Gross Income, Adjusted Ordinary Gross Income, and PHC Income Test
(See Worksheet Instructions on page 2.) (Keep for your records.)

1. Gross income. Insurance companies, other than life insurance companies, see section 543(c). 1
2. Less: Gains from the sale or disposition of capital assets and section 1231(b) property 2 ( )
3. Ordinary gross income. Combine lines 1 and 2. (Foreign corporations, see instructions.) 3
4. Adjustments:
a Deductions allocable to rents 4a
b Deductions allocable to certain royalties and working interests in oil and gas wells 4b
c Deductions allocable to compensation described in section 543(b)(3)(D) 4c
d Certain excluded interest income under section 543(b)(2)(C) 4d
e Total adjustments. Add lines 4a through 4d 4e
5. Adjusted ordinary gross income. Subtract line 4e from line 3 5
6. Complete Part II of Schedule PH. Divide line 25, Part II, by line 5 above. Enter the result as a percentage 6 %

Important: If line 6 is less than 60%, the corporation is not a PHC. Do not file Schedule PH.
Generally, if line 6 is 60% or more and the Stock Ownership Requirement of section 542(a) is met, the corporation is a PHC.
Complete Parts III and IV. For details and exceptions, see Who Must File and Personal Holding Company on page 1.

(including production payments and See section 543(b)(2)(C) for more See sections 543(a)(1) and
overriding royalties) and to gross information. 543(b)(2)(C) for more information.
income from a working interest in an Lines 18a through 18c–Adjusted
oil or gas well: Schedule PH, Part II income from rents. Rents may be
● Depreciation and amortization. excluded from PHC income if both
● Depletion. Personal Holding of the following tests are met:
● Property and severance taxes. Company Income Test 1. The adjusted income from
● Interest. Note: The term “ordinary gross rents (line 18c) is at least 50% of
● Rent. income” (used below) means line 3 adjusted ordinary gross income.
of the Worksheet. The term “adjusted Test 2. The sum of taxable
See section 543(b)(2)(B) for more distributions (Part VI, line 3) and the
information. ordinary gross income” means line 5
of the Worksheet. deduction for dividends paid after the
Line 4c–Deductions allocable to end of the tax year (Part I, line 12) is
compensation described in section A corporation may be subject to the
PHC tax if at least 60% of its adjusted at least equal to:
543(b)(3)(D). Compensation for the ● The excess, if any, of PHC income
use of, or right to use, tangible ordinary gross income for the tax year
is PHC income. Use Part II to figure over
personal property manufactured or
the amount of the corporation's PHC ● 10% of ordinary gross income.
produced by the corporation does not
count as rents if the corporation is income. Then, complete line 6 of the For this purpose, PHC income
engaged in substantial manufacturing Worksheet to determine if the includes copyright royalties and
or production of the same type of corporation is a PHC. adjusted income from mineral, oil,
property during the tax year. Enter Line 15b–Amounts excluded. Enter and gas royalties, but does not
deductions (listed below) allocable to the total of interest excluded on line include the amounts from lines 18c
this type of compensation: 15b. The following interest may be and 22.
● Depreciation and amortization of excluded from PHC income: If both of the above tests are met,
property (other than certain tangible ● Interest constituting rent. rents may be excluded from PHC
personal property). ● Interest on amounts set aside in a income. Do not complete lines 18a
● Property taxes. reserve fund under section 511 or through 18c.
● Interest. 607 of the Merchant Marine Act of If the rents may not be excluded,
● Rent.
1936. enter rents (as defined in section
● Interest received by a broker or 543(b)(3)) on line 18a. Enter the
See section 543(b)(2)(D) and amount from line 4a of the Worksheet
dealer (within the meaning of section
543(b)(3)(D) for more information. on line 18b and complete line 18c.
3(a)(4) or (5) of the Securities
Line 4d–Certain excluded Exchange Act of 1934) in connection See section 543(a)(2) for more
interest income. Include: with (a) any securities or money information.
● Interest on a direct obligation of the
market instruments held as property Lines 19a through 19c–Adjusted
United States held for sale by a described in section 1221(a)(1), (b) income from mineral, oil, and gas
dealer who is making a primary margin accounts, or (c) any financing royalties. Mineral, oil, and gas
market for these obligations and for a customer secured by securities royalties may be excluded from PHC
● Interest on condemnation awards, or money market instruments. income if all three of the tests below
judgments, and tax refunds. ● Interest from line 4d of the are met:
Worksheet. Test 1. The adjusted income from
mineral, oil, and gas royalties (line
19c) is at least 50% of adjusted
ordinary gross income.

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Test 2. PHC income is not more works created in whole or in part by end of the tax year (Part I, line 12), is
than 10% of ordinary gross income. any shareholder owning more than at least equal to the excess, if any,
For this purpose, PHC income 10% of the corporation's stock. of:
includes copyright royalties and the PHC income does not include: ● PHC income (as defined in section
adjusted income from rents, but does ● Copyright royalties (other than 543(d)(5)(B)) over
not include line 19c. stated above) or ● 10% of ordinary gross income.
Test 3. The deductions allowable ● Dividends from any corporation that See section 543(d) for more
under section 162 (other than meets Test 1 above and Test 3 information.
compensation for personal services below, and in which the corporation Line 21–Produced film rents.
rendered by a shareholder and owns at least 50% (by vote and Produced film rents may be excluded
deductions specifically allowable value) of the stock. from PHC income if the rents
under other sections) are 15% or Test 3. Total allocable deductions constitute at least 50% of ordinary
more of adjusted ordinary gross under section 162 (other than gross income. See section 543(a)(5)
income. deductions for compensation for for the definition of produced film
If all of the above tests are met, personal services rendered by rents.
mineral, oil, and gas royalties may be shareholders, deductions for royalties Line 22–Compensation received
excluded from PHC income. Do not paid or accrued, and deductions for the use of corporation property
complete lines 19a through 19c. specifically allowable under sections by a 25% or more shareholder.
If mineral, oil, and gas royalties are other than section 162) are at least This line applies only to a corporation
not excluded, enter the total mineral, 25% of the excess of: with other PHC income in excess of
oil, and gas royalties (including ● Ordinary gross income over 10% of ordinary gross income. For
production payments and overriding ● The sum of royalties paid or purposes of this limitation, other PHC
royalties) on line 19a. Enter the accrued and depreciation for income is defined in section
amount from line 4b of the Worksheet copyright royalties. 543(a)(6)(C).
on line 19b and complete line 19c. Enter on line 22 amounts received
See section 543(a)(4) for more
See section 543(a)(3) for more information. as compensation for the use of, or
information. Royalties received in connection right to use, tangible property of the
Line 20–Copyright royalties. Note: with the licensing of computer corporation by or for an individual,
For royalties received in connection software. Royalties received in who at any time during the tax year,
with the licensing of computer connection with the licensing of owned, directly or indirectly, at least
software, see below. computer software may be excluded 25% in value of the corporation's
Copyright royalties may be from PHC income if all four of the outstanding stock.
excluded from PHC income if all three tests below are met: Line 23–Amounts received under
of the tests below are met: Test 1. The corporation is engaged personal service contracts and
Test 1. Income from copyright in the active business of developing, from their sale. This line applies only
royalties is at least 50% of ordinary manufacturing, or producing if the individual who has performed,
gross income. For this purpose, computer software. is to perform, or may be designated
copyright royalties do not include Test 2. The royalties are at least to perform such services, owned at
royalties received for the use of, or 50% of ordinary gross income. any time during the tax year 25% or
right to use, copyrights or interests in more in value of the corporation's
Test 3. Total allowable deductions outstanding stock.
copyrights on works created in whole under sections 162, 174, and 195 that
or in part by any shareholder. are allocable to the computer Enter amounts received under a
Test 2. PHC income is not more software business are at least 25% contract that requires the corporation
than 10% of ordinary gross income. of ordinary gross income (or, the to furnish personal services if any
For this purpose, PHC income average of the deductions for the 5 person other than the corporation has
includes: tax years ending with the current tax the right to designate the individual
● The adjusted income from rents year is at least 25% of the average who is to perform the services (or if
(line 18c), ordinary gross income for that the individual who is to perform the
period). services is designated in the
● The adjusted income from mineral,
contract). Also include amounts
oil, and gas royalties (line 19c), and Test 4. The sum of taxable received from the sale or other
● Copyright royalties received for the distributions (Part VI, line 3), and the disposition of such a contract.
use of, or right to use, copyrights on deduction for dividends paid after the

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