26 U.S.C. § 542 — Definition of personal holding company

(a) For this subtitle, “personal holding company” means a corporation^* other than one described in subsection (c) if both conditions apply: (1) At least 60 percent of its adjusted ordinary gross income^* for the taxable year^* is personal holding company income. Section 543(b)(2) defines adjusted ordinary gross income^*, and section 543(a) defines personal holding company income. (2) At some time during the last half of the taxable year, more than 50 percent of the value of its outstanding stock^* is owned directly or indirectly by or for no more than 5 individuals. For this paragraph, an organization described in section 401(a), 501(c)(17), or 509(a), and a part of a trust permanently set aside or used exclusively for the purposes described in section 642(c) or a corresponding prior income-tax provision, is treated as an individual.

(b)(1) For an affiliated group that files or must file a consolidated return under section 1501 for a taxable year, the subsection (a)(1) income test generally applies to the group's consolidated adjusted ordinary gross income and consolidated personal holding company income. A member does not meet that test unless the affiliated group meets it.

(2) Paragraph (1) does not apply if: (A) any group member, including the common parent, received 10 percent or more of its adjusted ordinary gross income from outside the affiliated group; and (B) at least 80 percent of that outside-group amount is personal holding company income under section 543. For this paragraph, section 543 is applied as if that outside-group amount were the corporation's adjusted ordinary gross income.

(3) Paragraph (1) does not apply if any group member, including the common parent, is a corporation excluded from the personal holding company definition under subsection (c).

(4) When applying paragraph (2)(A) and (B), exclude dividends received by a common parent from another corporation from personal holding company income and adjusted ordinary gross income if: (A) the common parent directly or indirectly owns more than 50 percent of the other corporation's outstanding voting stock; and (B) the other corporation is not a personal holding company for the taxable year when the dividends are paid.

(5) For an affiliated group filing or required to file a consolidated return under section 1501, exclude from consolidated personal holding company income and consolidated adjusted ordinary gross income, for this part, dividends received by a member from a life insurance company taxable under section 801 if that company is outside the group only because of section 1504(b)(2).

(c) The subsection (a) definition does not include: (1) a corporation exempt under subchapter F (section 501 and following); (2) a bank defined in section 581 or a domestic building and loan association^* described in section 7701(a)(19); (3) a life insurance company; (4) a surety company; (5) a foreign corporation; (6) a lending or finance company meeting all of these conditions: (A) at least 60 percent of ordinary gross income comes directly from actively and regularly conducting a lending or finance business; (B) the company's personal holding company income for the year, calculated without subsection (d)(3) income and income directly from that business, but including all gross income from rents^*, royalties, produced-film rents, and compensation for shareholders' use of corporate property, is no more than 20 percent of ordinary gross income; (C) deductions directly allocable to that business equal or exceed 15 percent of business ordinary gross income up to $500,000, plus 5 percent of the amount over $500,000; and (D) loans outstanding at any time during the year to a shareholder^* who owns, directly or indirectly, or for whom at least 10 percent of the stock value is owned, do not exceed $5,000 principal. For an individual, family stock under section 544(a)(2) counts; (7) a Small Business Administration-licensed small business investment company operating under the Small Business Investment Act of 1958 and actively providing funds to small businesses under that Act. This exception does not apply if a shareholder, directly or indirectly, has at any time during the year at least a 5-percent proprietary interest in a funded small business or at least 5 percent of its stock value; or (8) a corporation under the court's jurisdiction in a title 11 or similar case under section 368(a)(3)(A), unless avoiding the tax under section 541 is a major purpose of starting or continuing the case.

(d)(1)(A) For subsection (c)(6), “lending or finance business” means: (i) making loans; (ii) buying or discounting accounts receivable, notes, or installment obligations; (iii) providing services or facilities connected with those activities when the corporation providing them conducts the activities; or (iv) providing related services or facilities to another corporation engaged in a lending or finance business when both corporations are in the same affiliated group under section 1504.

(B) That term does not include: (i) making, buying, or discounting loans, accounts receivable, notes, or installment obligations whose remaining maturity at the transaction date exceeds 144 months, unless (I) they are evidenced or secured by conditional-sale contracts, chattel mortgages, or chattel leases arising from the borrower's or transferor's business sale of goods or services, or (II) the taxpayer^* makes or acquires them and they meet subparagraph (C); or (ii) making loans evidenced by, or buying, certificates of indebtedness issued in a series under a trust indenture and registered or carrying interest coupons. For clause (i), remaining maturity includes any renewal or extension period available under a borrower option.

(C) A loan, note, or installment obligation meets this rule if made under an agreement where the creditor agrees, on request, to make loans or advances up to an agreed maximum from time to time for the debtor's account, and the debtor may repay each loan or advance in full or in installments.

(2) For subsection (c)(6)(C), count only: (A) deductions allowed solely under section 162 or 404, excluding deductions for shareholders' personal-service compensation, including compensation of family members described in section 544(a)(2); and (B) deductions under section 167 and real-property-tax deductions under section 164, but only to the extent the related property is used directly in the active and regular lending or finance business.

(3) For subsection (c)(6)(B), a lending or finance company that meets the requirements of subsection (c)(6)(A) does not treat as personal holding company income lawful income received from a corporation that meets subsection (c)(6) and is in the same affiliated group under section 1504. Terms used here that this section does not define, including “adjusted ordinary gross income,” “personal holding company income,” “ordinary gross income,” and “lending or finance business,” are defined or further specified only by the cross-referenced provisions and rules stated here.