U.S. Personal Holding Company (PHC) Tax

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Instructions for Schedule PH (Form 1120)

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2008

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.

General Instructions
Purpose of Schedule
Use Schedule PH to figure the
personal holding company (PHC) tax.

Who Must File
A corporation that is a PHC must file
Schedule PH by attaching it to its
income tax return.

Personal Holding
Company
Generally, a corporation is a PHC if it
meets both of the following
requirements.
1. PHC income test. At least 60%
of the corporation’s adjusted ordinary
gross income for the tax year is PHC
income. See the instructions for Part
II and the Worksheet on page 4. Also,
see Important under Specific
Instructions below.
2. Stock ownership
requirement. At any time during the
last half of the tax year, more than
50% in value of the corporation’s
outstanding stock is directly or
indirectly owned by five or fewer
individuals.
For purposes of this requirement,
the following organizations are
considered individuals.
• A 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).
• A part of a trust permanently set
aside or exclusively used for the
purpose described in section 642(c).
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, and certain lending or
finance companies.
• Life insurance and surety
companies.
• 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.
• Foreign corporations.
At-risk, passive activities, and
earnings stripping rules. A
corporation that has an activity
subject to the at-risk or passive
activity rules or interest expense
subject to the earnings stripping rules
(or both) may have deductions and
losses suspended or limited under
these rules. As a result, do not use
deductions and losses limited or
suspended in any of the PHC
computations. Treat any prior year
deductions and losses allowed under
the at-risk, passive activity, and
earnings stripping rules as current
year deductions and losses.

Specific Instructions
Important: To determine if a
corporation is a PHC, follow the steps
below to complete Schedule PH and
the Worksheet on page 4.
1. Complete Part I of Schedule
PH. Then, complete lines 1 through 5
of the Worksheet.
2. Complete Part II of Schedule
PH and then line 6 of the Worksheet.
3. Generally, if line 6 of the
Worksheet is 60% or more and the
stock ownership requirement (Part IV
of Schedule PH ) is met, the
corporation must file Schedule PH
and pay the PHC tax. However, see
Exceptions above.
4. If the corporation determines
that it must file Schedule PH and pay
Cat. No. 10826K

the PHC tax, it must complete Part III,
line 26, to figure the amount of the
PHC tax.

Part I. Undistributed
Personal Holding
Company Income
Additions
Line 1. Taxable income before net
operating loss deduction and
special deductions. Enter the
amount from Form 1120, page 1, line
28. If the income on line 28 was
figured using section 443(b) (placing
the income on an annual basis),
refigure it without using that section.
Line 3. Excess expenses and
depreciation. If the corporation
earned rent or other compensation for
the use of, or right to use, property
and that rent or compensation was
less than the total allowable
expenses and depreciation, complete
Part V in most cases and enter the
excess on line 3. However, if the
corporation can establish that it
meets all three of the requirements
listed below, it can attach a statement
instead of completing Part V. The
statement must include:
• A list of the deductions, with the
complete facts, circumstances, and
arguments supporting them, and
• The information required by
Regulations section 1.545-2(h)(2).
To qualify, the corporation must
establish that:
• The rent or other compensation it
received was the highest obtainable
(if none was received, it must show
that none was obtainable),
• The property was held in the
course of a business carried on for
profit, and
• There was a reasonable
expectation that the property’s
operation would result in a profit, or
that the property was necessary to
conduct the business.

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Instructions for Schedule PH (Form 1120)

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Deductions
Line 5. Federal and foreign income,
war profits, and excess profits
taxes not deducted in figuring
line 1. The corporation can deduct:
• Federal income taxes accrued
during the tax year, and
• Income, war profits, and excess
profits taxes accrued (or deemed
paid) during the tax year to foreign
countries and U.S. possessions.*
The corporation cannot deduct:
• The accumulated earnings tax
under section 531, or
• The PHC tax under section 541.
*The foreign tax credit is not
allowed against PHC tax. But, as
described above, the corporation can
take a deduction for taxes paid to
foreign countries and U.S.
possessions even if a credit was
claimed when figuring the
corporation’s income tax.
Attach a schedule showing the
type of tax, the tax year, and the
amount. For more information, see
section 545(b)(1).
Line 6. Contributions. Figure the
deduction using the limitations under
sections 170(b)(1)(A), (B), (D), and
(E), but without sections 170(b)(2)
and (d)(1). When figuring the
limitations under section 170(b)(1),
use taxable income figured with the
adjustments (other than the 10%
limitation) provided in sections
170(b)(2) and (d)(1) and without any
expenses and depreciation
disallowed under section 545(b)(6).
Line 7. Net operating loss. Instead
of the net operating loss deduction
provided in section 172, a deduction
is allowed for the net operating loss
(as defined in section 172(c)) for the
preceding tax year figured without the
special dividends-received
deductions for corporations.
Line 10. Total. Include in the total
for line 10 any deduction for amounts
used or irrevocably set aside to pay
or retire qualified indebtedness under
section 545(c) (as in effect before
November 5, 1990). See Regulations
section 1.545-3. Enter the amount
and “Section 545(c)” on the dotted
line next to line 10.
Line 12. Dividends paid after the
end of the tax year. The
corporation can elect to treat
dividends (other than deficiency
dividends) paid after the end of the
year and before the 16th day of the
3rd month following the end of the tax
year as paid during the tax year.

Enter these dividends on line 12 but
not in Part VI.

Part II. Personal Holding
Company Income
Note. The term “ordinary gross
income” (used below) means line 3 of
the Worksheet on page 4. The term
“adjusted ordinary gross income”
means line 5 of the Worksheet.
A corporation may be subject to
the PHC tax if at least 60% of its
adjusted ordinary gross income for
the tax year is PHC income. Use Part
II to figure the amount of the
corporation’s PHC income. Then,
complete line 6 of the Worksheet to
determine if the corporation is a PHC.
Line 15b. Amounts excluded.
Enter the total of interest excluded on
line 15b. The following interest can be
excluded from PHC income.
1. Interest constituting rent.
2. Interest on amounts set aside in
a reserve fund under section 511 or
607 of the Merchant Marine Act of
1936.
3. Interest received by a broker or
dealer (within the meaning of section
3(a)(4) or (5) of the Securities
Exchange Act of 1934) in connection
with:
a. Any securities or money market
instruments held as property
described in section 1221(a)(1),
b. Margin accounts, or
c. Any financing for a customer
secured by securities or money
market instruments.
4. Interest from line 4d of the
Worksheet.
See sections 543(a)(1) and
543(b)(2)(C) for more information.
Line 18. Rents. Rents can be
excluded from PHC income if both of
the following tests are met.
Test 1. The adjusted income from
rents (line 18c) is at least 50% of
adjusted ordinary gross income.
Test 2. The sum of taxable
distributions (Part VI, line 3) and the
deduction for dividends paid after the
end of the tax year (Part I, line 12) is
at least equal to:
1. The excess, if any, of PHC
income, over
2. 10% of ordinary gross income.
For this purpose, PHC income
includes copyright royalties and
adjusted income from mineral, oil,
and gas royalties, but does not
include the amounts from lines 18c
and 22.
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If both of the above tests are met,
rents can be excluded from PHC
income. Do not complete lines 18a
through 18c.
If the rents cannot be excluded,
enter rents (as defined in section
543(b)(3)) on line 18a. Enter the
amount from line 4a of the Worksheet
on line 18b and complete line 18c.
See section 543(a)(2) for more
information.
Line 19. Mineral, oil, and gas
royalties. Mineral, oil, and gas
royalties can be excluded from PHC
income if all three of the tests below
are met.
Test 1. The adjusted income from
mineral, oil, and gas royalties (line
19c) is at least 50% of adjusted
ordinary gross income.
Test 2. PHC income is not more
than 10% of ordinary gross income.
For this purpose, PHC income
includes copyright royalties and the
adjusted income from rents, but does
not include line 19c.
Test 3. The deductions allowable
under section 162 (other than
compensation for personal services
rendered by a shareholder and
deductions specifically allowable
under other sections) are at least
15% of adjusted ordinary gross
income.
If all of the above tests are met,
mineral, oil, and gas royalties can be
excluded from PHC income. Do not
complete lines 19a through 19c.
If mineral, oil, and gas royalties
are not excluded, enter the total
mineral, oil, and gas royalties
(including production payments and
overriding royalties) on line 19a.
Enter the amount from line 4b of the
Worksheet on line 19b and complete
line 19c.
Line 20. Copyright royalties.
Note. For royalties received in
connection with the licensing of
computer software, see below.
Copyright royalties can be
excluded from PHC income if all three
of the tests below are met.
Test 1. Income from copyright
royalties is at least 50% of ordinary
gross income. For this purpose,
copyright royalties do not include
royalties received for the use of, or
right to use, copyrights or interests in
copyrights on works created in whole
or in part by any shareholder.
Test 2. PHC income is not more
than 10% of ordinary gross income.

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Instructions for Schedule PH (Form 1120)

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For this purpose, PHC income
includes:
• The adjusted income from rents
(line 18c);
• The adjusted income from mineral,
oil, and gas royalties (line 19c); and
• Copyright royalties received for the
use of, or right to use, copyrights on
works created in whole or in part by
any shareholder owning more than
10% of the corporation’s stock.
PHC income does not include:
• Copyright royalties (other than as
stated above), or
• Dividends from any corporation
that meets Test 1 above and Test 3
below, and in which the corporation
owns at least 50% (by vote and
value) of the stock.
Test 3. Total allocable deductions
allowable under section 162 (other
than compensation for personal
services rendered by a shareholder,
deductions for royalties paid or
accrued, and deductions specifically
allowable under other sections) are at
least 25% of the excess of:
1. Ordinary gross income, over
2. The sum of royalties paid or
accrued and depreciation for
copyright royalties.
Royalties received in connection
with the licensing of computer
software. Royalties received in
connection with the licensing of
computer software can be excluded
from PHC income if all four of the
tests below are met.

Test 1. The corporation is
engaged in the active business of
developing, manufacturing, or
producing computer software.
Test 2. The royalties are at least
50% of ordinary gross income.
Test 3. Total allowable
deductions under sections 162, 174,
and 195 that are allocable to the
computer software business are at
least 25% of ordinary gross income
(or, the average of the deductions for
the 5 tax years ending with the
current tax year is at least 25% of the
average ordinary gross income for
that period).
Test 4. The sum of taxable
distributions (Part VI, line 3) and the
deduction for dividends paid after the
end of the tax year (Part I, line 12) is
at least equal to the excess, if any, of:
1. PHC income (as defined in
section 543(d)(5)(B)), over
2. 10% of ordinary gross income.
See section 543(d) for more
information.
Line 21. Produced film rents.
Produced film rents can be excluded
from PHC income if the rents
constitute at least 50% of ordinary
gross income. See section 543(a)(5)
for the definition of produced film
rents.
Line 22. Compensation received
for the use of corporation property

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by a 25% or more shareholder.
This line applies only to a corporation
with other PHC income in excess of
10% of ordinary gross income. For
purposes of this limitation, other PHC
income is defined in section
543(a)(6)(C).
Enter on line 22 amounts received
as compensation for the use of, or
right to use, tangible property of the
corporation by or for an individual,
who at any time during the tax year
directly or indirectly owned at least
25% in value of the corporation’s
outstanding stock.
Line 23. Amounts received under
personal service contracts and
from their sale. This line applies
only if the individual who has
performed, is to perform, or may be
designated to perform such services
owned at any time during the tax year
25% or more in value of the
corporation’s outstanding stock.
Enter amounts received under a
contract that requires the corporation
to furnish personal services if any
person other than the corporation has
the right to designate the individual
who is to perform the services (or if
the individual who is to perform the
services is designated in the
contract). Also include amounts
received from the sale or other
disposition of such a contract.

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Instructions for Schedule PH (Form 1120)

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Worksheet for Figuring Ordinary Gross Income, Adjusted Ordinary Gross Income, and the PHC Income Test
(see instructions below) (keep for your records)
1.
2.
3.
4.

Gross income. Insurance companies, other than life insurance companies, see section 543(c) . . . . . . . .
Less: Gains from the sale or disposition of capital assets and section 1231(b) property . . . . . . . . . . . . .
Ordinary gross income. Combine lines 1 and 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5. Adjusted ordinary gross income. Subtract line 4e from line 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6. Complete Part II of Schedule PH. Divide line 25, Part II, by line 5 above. Enter the result as a percentage

1
2 (
3

4e
5
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.

Worksheet Instructions
Line 1. Gross income. Enter gross
income as defined in section 61 and
the related regulations.
Line 4. Adjustments. Ordinary
gross income on line 3 must be
adjusted as described below. Each
type of income (rents, royalties,
income from working interests in oil
and gas wells, and certain excluded
rents) is separately adjusted by the
deductions allocable to it. Enter the
allocable deductions on lines 4a, 4b,
and 4c to the extent of the gross
income (for example, enter
deductions allocable to royalties on
line 4b, but do not enter more than
the gross income from royalties).
Also, in figuring adjusted ordinary
gross income, certain interest income
is excluded (see the instructions for
line 4d below).
Line 4a. Deductions allocable to
rents. Enter deductions (listed
below) allocable to rents (as defined
in section 543(b)(3)).

• Depreciation and amortization of

property (other than certain tangible
personal property not customarily
retained by any lessee for more than
3 years).
• Property taxes.
• Interest.
• Rent.
Line 4b. Deductions allocable to
certain royalties and working
interests in oil and gas wells.
Enter deductions (listed below)
allocable to mineral, oil, and gas
royalties (including production
payments and overriding royalties)
and to gross income from a working
interest in an oil or gas well.
• Depreciation and amortization.
• Depletion.
• Property and severance taxes.
• Interest.
• Rent.
Line 4c. Deductions allocable to
compensation. Compensation for
the use of, or right to use, tangible

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personal property manufactured or
produced by the corporation does not
count as rents if the corporation is
engaged in substantial manufacturing
or production of the same type of
property during the tax year. Enter
deductions (listed below) allocable to
this type of compensation.
• Depreciation and amortization of
property (other than certain tangible
personal property).
• Property taxes.
• Interest.
• Rent.
Line 4d. Certain excluded
interest income. Include:
• Interest on a direct obligation of the
United States held for sale by a
dealer who is making a primary
market for these obligations, and
• Interest on condemnation awards,
judgments, and tax refunds.